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For Indian residents earning income abroad, foreign tax credit (FTC) provides a critical buffer against double taxation. But while the framework under Sections 90, 91, and Rule 128 of the Income Tax Act is well-defined, practical challenges and legal ambiguities persist. Here’s how to correctly claim FTC in 2025—and what you need to avoid litigation.
1. What Is Foreign Tax Credit (FTC)?
FTC allows a taxpayer who has paid tax on foreign income abroad to claim credit for that amount against their Indian tax liability. This ensures the same income isn’t taxed twice—once in the country where it is earned, and again in India.
FTC can be claimed under:
- Section 90 (bilateral relief): When India has a DTAA with the foreign country
- Section 91 (unilateral relief): If no DTAA exists
2. Bilateral Relief: Exemption vs Credit Method
Under DTAAs, two methods may apply:
- Exemption method: Income taxed abroad is exempt in India
- Credit method: Income is taxed in both countries, but credit is given in India for tax paid abroad
India primarily uses the credit method, which is subject to limitations, particularly under Rule 128, which outlines specific conditions and documentation.
3. Key Conditions to Claim FTC
- FTC applies only to foreign income taxed in India
- It excludes penalties and interest, and covers only tax, surcharge, and cess
- Lower-of-two rule: FTC is capped at the lower of actual foreign tax paid or Indian tax payable on the same income
- FTC must be computed and reported source-wise and country-wise
- Conversion of foreign tax must be at the telegraphic transfer buying rate (TTBR) on the last day of the prior month of payment
- FTC is claimed via Form 67, which must be submitted online before the end of the relevant assessment year
4. Common Pitfalls Leading to Litigation
Missed Form 67 Deadline
If Form 67 is not filed on time, FTC will be disallowed in the summary assessment under Section 143(1)—leading to avoidable disputes.
Higher Foreign Tax than Indian Tax
Excess tax paid abroad cannot be refunded or carried forward—as shown in the “Japan example” from the article (FTC allowed only up to Rs. 1 lakh, not Rs. 1.5 lakh paid abroad).
State Taxes (e.g., U.S. state taxes)
DTAAs don’t usually cover state-level taxes. However, Section 91 may still allow FTC for such taxes where no DTAA exists, though judicial interpretations vary.
Gross vs Net Tax Basis
Foreign income like royalties or interest is often taxed on gross basis abroad. In India, income is taxed after expense deductions, leading to lower Indian tax and reduced FTC eligibility.
Tax-Exempt Income in India
If income is taxable abroad but exempt in India, FTC is not permitted—since there is no “double taxation” in legal terms.
5. Compliance Checklist for Claiming FTC in 2025
Form 67 filed before the assessment year-end
Detailed income and tax certificate from foreign payer or authority
Currency conversion via official TTBR
Proper classification under bilateral or unilateral relief
Maintain supporting evidence for deduction/payment of tax
Expert Commentary (Direct Tax Partners, Tax.News Advisory Board):
“FTC is not just a technical formality—it’s a frontline defense for global Indian taxpayers. But with each DTAA interpreted differently and tax officers focusing increasingly on procedural compliance, even a small mistake can turn into a full-blown audit or dispute.”
“We advise businesses and individuals with cross-border earnings to conduct pre-filing treaty analysis, and seek advance clarity on documentation, especially where state-level or non-conventional foreign taxes are involved.
While India’s FTC framework provides vital relief from double taxation, the burden of documentation and accuracy lies with the taxpayer. With DTAAs evolving and global tax disputes rising, strategic compliance and legal clarity are the only safeguards.
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