Explained: How to claim credit for income tax paid abroad

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The income-tax liability of a taxpayer is calculated after determining their residential status in India. The global income of a resident person is taxable in India whereas only income earned or received in India is taxable in the hands of a non-resident person. Thus, the total income of a taxpayer cannot be computed unless his residential status is determined as per provisions of the Income-Tax Act.

Residential status

For instance, Indian tax authorities will charge tax on global income (i.e. income earned in all countries) of an individual taxpayer if he is tax resident in India i.e., interest on FDs, salary from foreign employer, capital gains on the sale of shares of foreign companies etc. However, if a person is a non-resident then he shall be charged to tax only in respect of income that has been earned in India.

“Every country has the right to tax the income earned by a foreign national using its resources. Similarly, the country also has the right to tax the income earned by a person who is a resident of that country. This confliction in the rights generally results in double taxation of the same income because the same income may be chargeable to tax in the residence country as well as in the source country,” said Tarun Kumar, chartered accountant and direct tax leader at Coherent Advisors.

DTAAs

India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries to avoid such double taxation, the assessee is allowed to claim credit for the taxes paid outside India in the form of Foreign Tax Credit (FTC).

“If the assessee has earned income in the foreign currency, then it is first converted into Indian Rupees before calculation of income-tax thereon. The salary income or any interest income earned in foreign currency is converted into Indian Rupees according to the TT buying rate of such currency as on the last day of the month immediately preceding the month in which such income is due or is paid, whichever is earlier,” Kumar explained.

An Indian taxpayer is allowed to claim the credit for the amount of any foreign tax paid by him/her in a country or specified territory outside India. The relief, is allowed only against the amount of income tax payable in India, Kumar added. To claim the foreign tax credit in India, the taxpayer is required to submit Form 67 at the e-filing portal. It has to be filed on or before the due date of filing of the Income-tax Return.

Form 67

If a person makes a delay in filing Form 67, the income-tax department denies the claim of their FTC while processing the income tax return. The demand is raised to the extent of the amount of FTC claimed along with interest.

Kumar stated, “The assessee is also required to submit a certificate or statement specifying the nature of income and the amount of tax deducted therefrom or paid by the assessee. This certificate shall be issued by the tax authority of the foreign country or the person who has deducted such taxes outside India.”

Meanwhile, the FTC is allowed in the year in which the income on which tax has been paid is offered to tax or assessed to tax in India. If the income, to which such credit relates, is offered to tax in more than one year, credit for the same shall be allowed in the proportion in which such income is offered to tax or assessed to tax in India in those years.