Foreign Tax Credit (FTC) is a non-refundable tax credit for income tax payments made to a foreign government as a result of foreign income tax withholdings. The assessee may claim relief for taxes paid on income earned in a foreign country that is also taxed in his or her home country.
The objective of this article is to provide a brief understanding of the concept of double taxation relief under Indian Income Tax Laws in the case of an individual.
Where an assessee is a resident and an ordinary resident (ROR) in India, the global income earned shall be taxable in India as per Income Tax rules. That is, in case the assessee is a ROR and has a source of income from another country which is taxed both in the source country and in India, it shall give rise to double taxation.
However, in this case, he will pay the income taxes on the income earned from the source country based on the two basic rules, namely (i) the source rule and (ii) the residence rule. The source rule holds that income is to be taxed in the country in which it originates, irrespective of whether the income accrues to a resident or a non-resident, whereas the residence rule stipulates that the power to tax should rest with the country in which the assessee resides.
In case where both the above said rules apply to an assessee as per the income tax rules, both in the source country and in the country of residence, the income earned in the source country shall also be taxable in the country of residence. (Here, the country of residence is referred to India.) In such cases, rules under DTAA shall be implied for providing double taxation relief.
The relief provided under the DTAA can be of two types: (a) Bilateral Relief; and (b) Unilateral Relief.
Under this method, the Government of both countries enters into an agreement to provide relief against double taxation by mutually working out the basis on which the relief is granted. Bilateral relief may be granted in either one of the following methods:
India provides bilateral relief to its residents u/s 90 and 90A of the Income Tax Act, 1961. Section 90 deals with agreements with foreign countries or specified territories, whereas Section 90A deals with double taxation relief to be extended to agreements (between specified associations) adopted by the Central Government.
This method provides for relief of certain amount by the home country even where no mutual agreement has been entered into by the two countries. India provides unilateral relief to its residents u/s 91 of the Income Tax Act, 1961.
The DTAA provides that where any income of a resident or an ordinary resident of India is taxed in another country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Act.
In this case, based on the DTAA between the foreign country and India, an individual can claim a FTC for such taxes paid abroad in proportion to the income chargeable to tax in India when filing income tax returns.
Section 91 provides that in the case of income derived by a resident and an ordinary resident from countries with which India does not have a DTAA. The FTC eligible for relief under this section is the tax amount calculated on double taxed income at the Indian rate of income tax or the rate of income tax in such country, whichever is lower.
Other important rules for claiming FTC
The following are some rules and regulations concerning the FTC:
Tax credits, in general, are non-refundable in India, including the FTC. Also, in case there exists a refund of foreign taxes withheld by the foreign country as per their tax laws, the refunded tax amount under the foreign income tax laws cannot be claimed as FTC in India.
Documents Required for FTC Claim
In order to claim FTC, the taxpayer is required to file the following documents on or before the due date of the filing of the return:
Form 67 is a mandatory document for claiming FTC. It is a statement that provides the details of income earned in a foreign country. It also furnishes details of the tax either paid by the taxpayer or deducted from their income. Please keep in mind that under Section 139(1) of the Income Tax Act of 1961, Form 67 is provided before or on the due date for submitting an income tax return.
This article has been written by Parkave B, an intern with V Ramaratnam and Company, Chartered Accountants. To know more about claiming Foreign Tax Credit (FTC), you may reach out to V Ramaratnam and Company, Tax Consultants in Chennai.
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