Foreign Tax Credit (FTC) is a mechanism to prevent double taxation when Indian residents earn income in foreign countries that has been subjected to tax there. Under the Income Tax Act 2025 (ITA 2025), FTC is available under Section 90 (DTAA countries) and Section 91 (non-DTAA countries), with the procedural rules in Rule 128 of the Income Tax Rules.
Legal Framework
- Section 90/90A ITA 2025: Double Taxation Avoidance Agreement (DTAA) provisions — credit method or exemption method per DTAA
- Section 91 ITA 2025: Unilateral relief for taxes paid in non-DTAA countries
- Rule 128 IT Rules 1962: Procedural rules for FTC claim (Form 67)
- India has DTAA with 90+ countries including USA, UK, UAE, Singapore, Germany, Japan
Methods of Double Taxation Relief
| Method | Mechanism | When Used |
|---|---|---|
| Exemption Method | Income earned abroad exempted from India tax; taxed only in source country | As specified in DTAA articles |
| Credit Method (FTC) | Foreign income taxed in India; credit for foreign tax against India liability | Most DTAA provisions; Section 91 (unilateral) |
| Deduction Method | Foreign tax treated as deduction from Indian income (not credit against tax) | Section 91(2) — limited cases |
FTC Computation (Rule 128)
Step 1: Identify doubly-taxed income
Income that is: (a) included in Indian taxable income AND (b) subject to tax in a foreign country.
Step 2: Compute FTC limit per income item
FTC limit = Indian tax payable on doubly-taxed income
Formula: Indian total tax × (Doubly taxed income / Indian total income)
Step 3: Determine eligible FTC
FTC = Lower of: Foreign tax paid on that income OR Indian tax on that income (the FTC limit). No carryforward of excess FTC.
Form 67 — Mandatory Filing
- Form 67 must be filed before filing ITR (or simultaneously)
- Available on the income tax e-filing portal (under e-File menu)
- Details to furnish: Country, income type, foreign tax paid, exchange rate, computation of FTC
- Attach: Evidence of foreign tax payment (form from foreign revenue authority, bank statement showing TDS withheld, foreign tax return)
- Tax Residency Certificate (TRC) from India (Form 10FA/10FB) may be required by foreign authorities
Section 91 — Unilateral Relief (Non-DTAA Countries)
For countries without DTAA with India, Section 91 provides unilateral relief:
- Available if: tax paid in the other country, income taxable in both countries
- Relief = lower of: Indian tax rate on doubly-taxed income OR foreign country tax rate on the same income
- Net effect: taxed at higher of the two rates (no double-taxation, but no treaty benefit)
Common FTC Scenarios
| Scenario | FTC Treatment |
|---|---|
| NRI returning to India — US 401(k)/retirement distributions | FTC for US federal tax paid; state tax also eligible if income tax |
| Indian IT professional on deputation to Singapore — doubly taxed | India-Singapore DTAA Article 22 — credit method; Form 67 for Singapore tax |
| Indian company receiving dividends from UK subsidiary | UK WHT on dividend + underlying tax credit under India-UK DTAA |
| Freelancer earning from Germany via Upwork | German WHT credit via India-Germany DTAA; 25% German cap vs 30% Indian slab |
Recent Developments
- CBDT Circular on FTC computation for foreign salary income with different tax years (April-March India vs January-December US): mismatch creates complexity
- Mandatory pre-filing of Form 67 confirmed by ITAT — taxpayers who forget to file before ITR cannot claim FTC in assessment
- ITA 2025: FTC provisions consolidated in Chapter XIV, Tax Residency Certificate provisions streamlined
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