When you pay income tax to a foreign government, it can be claimed as a credit against your tax liability in India. You can use the option of foreign tax credit in India to enjoy this benefit.
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In India, an individual’s taxability depends on their residential status and source of income. Not Ordinarily Residents (NOR) and Non-Resident Indians (NRI) are taxed on the income they receive in India. But residents of India and Ordinarily Residents (ROR) are taxed on their income outside the country.
By definition, 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 residence state deducts it from the taxpayer’s total tax liability in their home country.
FTC involves two different states—the residence state, where the taxpayer is originally from, and the source state, the new country, where the taxpayer is working and receiving an income.
Without FTC, the taxpayer would have their income taxed in the source state. Plus, they would also be taxed on their global income in the residence state. Many countries have signed the Double Tax Avoidance Agreement (DTAA) to addresses this issue of double taxation.
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FTC in India is mentioned in Sections 90 and 91 of the Income Tax Act. These sections allow Indian residents to claim a credit of foreign taxes paid by a taxpayer against their total tax liability in India. Section 90 deals with the claiming of FTC in case of countries with which India has inked the DTAA. On the other hand, Section 91 deals with the same in all other cases.
In 2016, Rule 128 was introduced to remove any ambiguities in this regard. It has come into effect since 1 April 2017. Here are the specifics for claiming FTC under Rule 128:
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To claim FTC, in keeping with Rule 128, the taxpayer should furnish the following documents before or on the date of filing the return:
a. Foreign income offered to be taxed
b. Foreign tax paid or deducted on foreign income in Form 67
a. The tax authority of the foreign country
b. The person responsible for the deduction of the tax
c. Signed by the taxpayer
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. Section 139 (1) of the Income Tax Act states that Form 67 should be provided before or on the due date of filing the income tax return.
The Central Board of Direct Taxes (CBDT) provides a procedure for filing Form 67 for FTC in India. It is given in the following:
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To prepare and submit Form 67, the taxpayer should login to their account in the e-filing portal of the income tax department. Next, they must select the option of Form 67 as well as the assessment year from the dropdown menu.
Note that the first four points of the form will include the taxpayer’s basic information. They should be prefilled. It will include the taxpayers’ name, PAN, and address details.
The address details given there may be amended, if required.
Afterwards, the taxpayer should enter the relevant details regarding their income earned from a foreign country or any specified territory outside India. Here the FTC details will also be mentioned.
Given below is a rundown of all the components that the taxpayer has to fill in Form 67:
Once the taxpayer has entered all the fields, they can save it as a draft to review it later. After a thorough review of the submitted details, they may submit Form 67 by clicking on the ‘Submit’ button.
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You do not want to be taxed twice on your hard-earned money. So, it’s crucial to opt for FTC in India for the income earned in another country. It’s important that you keep all the required documents ready at hand. Simply follow the instructions provided above and you’ve saved a sizeable chunk of your income.
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