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Paid taxes abroad as an Indian resident? Here's how to claim tax credit

If you're an Indian resident earning income overseas and have already paid tax on that income abroad, you may be eligible for a foreign tax credit (FTC) while filing your tax returns in India. However, experts caution that to successfully claim it, careful documentation and timely filing are critical. Who can claim foreign tax credit in India? Any Indian resident, individual or entity, who has paid taxes in a foreign country on income that is also taxable in India, can claim the foreign tax credit. 'FTC can be claimed whether or not there is a Double Taxation Avoidance Agreement (DTAA) between India and the foreign country,' said SR Patnaik, partner (head-taxation), Cyril Amarchand Mangaldas. 'The credit is allowed in the year in which the corresponding income is taxed in India,' he added. According to Abhishek Nangia, senior associate at SKV Law Offices, 'FTC helps avoid double taxation and can be claimed under Section 90 or 91 of the Income Tax Act. The credit is limited to the lower of the foreign tax paid or the Indian tax payable on that income.' Documents needed to claim foreign tax credit The experts suggest that filing Form 67 before submitting your income tax return is a mandatory requirement. This should be accompanied by: A statement of foreign income taxed in India Proof of foreign tax payment (such as bank challans, tax certificates) Nature and amount of income Tax Residency Certificate (TRC) from the foreign country (recommended, especially when claiming DTAA relief) In some cases, Form 10F and a No Permanent Establishment declaration 'A self-declaration along with proof of tax deduction or payment abroad is also necessary,' noted Suresh Surana, chartered accountant. Common mistakes to avoid while claiming foreign tax credit All three experts agree that filing Form 67 late or with incomplete details is a major reason for rejections. Errors in reporting foreign income, mismatches with Form 26AS, or claiming FTC on income that is exempt in India also trigger scrutiny. 'Disputed foreign taxes cannot be claimed unless resolved, and penalties or interest paid overseas are not eligible for credit,' Nangia added. Surana warns that 'claiming more credit than allowed under Indian tax rates or without proper documents may attract notices or disallowance.' How credit is calculated The credit allowed is the lower of the foreign tax paid or Indian tax payable on that same income. 'If the foreign tax is higher, you only get credit up to Indian rates; the rest is your loss,' said Nangia. Patnaik clarified that Rule 128 governs this, and DTAA provisions apply if beneficial to the taxpayer, except where GAAR is invoked. In DTAA cases, Surana said, credit may be given under the exemption or credit method, and if no DTAA exists, unilateral relief is allowed under Section 91 of the Income Tax Act. Bottom line: Claiming foreign tax credit is not difficult, but missing even a single step can cost you. To stay on the right side of the tax department, stick to timelines, maintain thorough documentation, and consult a tax professional if needed.