As globalization advances, an increasing number of Indians are receiving foreign income through multinational firms, remote jobs, or overseas assets. However, along with the thrill of earning money abroad comes the burden of dealing with tax ramifications. Understanding the Foreign Tax Credit (FTC) is critical if you are an Indian resident with foreign income in order to avoid double taxation and make the most of your hard-earned money. This article will go over the notion of Foreign Tax Credit, its rules, and how to claim it.
Foreign Tax Credit (FTC)
Foreign Tax Credit, or FTC, is a mechanism established by the Indian government to alleviate Indian residents of the burden of double taxes. When an individual’s income is taxed in both his or her country of residence (India) and the place where the money was earned (foreign country), this is referred to as double taxation. To avoid this, the Indian Income Tax Act has the FTC provision, which allows taxpayers to claim a credit in their Indian tax return for foreign taxes paid on their international income.
Rule 128 of Income Tax Rules
The provisions for obtaining Foreign Tax Credit in India are outlined in Rule 128 of the Income Tax Rules, 1962. Here are the main rules to remember:
A) Residential Status
Foreign Tax Credit is only available to Indian residents. This benefit is not available to non-residents or Residents Not Ordinarily Resident (RNOR).
B) Foreign Income
According to the Income Tax Act, overseas income must be taxed in India. Income from defined sources, such as agricultural, property income, and so on, which are not taxable in India, cannot be claimed for FTC.
C) Source of Income
Foreign income must be generated in a nation with which India has a Double Taxation Avoidance Agreement (DTAA). If no DTAA exists, the taxpayer may still claim FTC under Income Tax Act Section 91.
D) Proof of Foreign Taxes Paid
To be eligible for the credit, you must produce documentation of payment of foreign taxes. This could include a tax deduction certificate or payment from a foreign tax authority.
E) Foreign Currency Conversion
Foreign taxes paid in foreign currency must be converted to Indian rupees at the current exchange rate on the date of payment.
Documents Required for Foreign Tax Credit Claim
You will need the following documentation to successfully claim Foreign Tax Credit:
Form 67
This form, which is normally issued by the foreign tax authorities, certifies the payment of foreign taxes.This form is available on e-filing portal of income tax. This has to be separately filed along with the income tax return.
Foreign statement of income, Tax deducted
Any certificate or statement which shows the foreign income received, tax paid and tax deducted.
How to Claim Foreign Income Tax Credit
To claim Foreign Tax Credit on your Indian tax return, follow these steps:
A) Determine Indian Tax Liability
Calculate your total income and tax liability in India in accordance with the Income Tax Act.
B) Evaluate FTC Eligibility
Ascertain that your overseas income is eligible for FTC under the regulations outlined above.
C) Calculate FTC Limit
The amount of FTC obtainable is the lesser of the actual foreign tax paid or the Indian tax payable on foreign income.
D) Attach Supporting Documents
Attach all required documentation to your tax return, such as Form 67, proof of foreign tax payment, and DTAA certificate (if applicable).
E) File Tax Return
File your tax return online before the deadline. (For more information: ITR)
Conclusions
Foreign Tax Credit is a substantial benefit for Indian people earning foreign income because it avoids double taxation and promotes international trade and investment. However, filing an FTC claim necessitates following specified criteria and documentation requirements. Indian taxpayers can maximize their tax benefits while remaining compliant with tax regulations by comprehending these guidelines and following the correct process. Tax Vic provides all types of income tax services.
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