Foreign Tax Credit is a claim deduction given to an individual on income earned in a source state. As the name suggests, source state is where an individual receives income, indifferent from the resident state (individual’s home country). Since the income is earned in a foreign state, an individual would have to pay taxes on the income as per the prevailing laws of the source state. The resident state will tax the same individual on the basis of global income. This would result in the taxpayer getting taxed on his income twice i.e. once in the source state and once in the residence state. To prevent such a scenario of double taxation, the residence state allows a deduction of taxes paid in the source state from the total tax liability in the residence state.
For an individual taxpayer who seeks to claim Foreign Tax Credit, he/she will be required to furnish Form 67 to do the same. It is important to furnish Form 67 on or before the due date of filing return of income under Section 139(1) of the Income Tax Act, 1961.
The Central Board of Direct Taxation has created a standard procedure for filing Form 67.
Note: The taxpayer needs to submit Form 67 before filing of return of income.
As per the Income Tax Act, 1961, Section 90 and 91 deal with the concept of FTC. Section 90 narrates and initiates discussions in a scenario where India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country and such DTAA provides for claiming of FTC. Section 91 narrates and initiates discussions with claiming of FTC in scenarios where India has not entered into a DTAA with the country where the income arises for a taxpayer. If the taxpayer had paid taxes outside India, he/she can claim a credit of such foreign taxes paid against their tax payable in India.
Here are certain rules and regulations regarding Foreign Tax Credit.
As per Rule 128, a taxpayer is required to furnish the following documents for claiming Foreign Tax Credit:
Ans: A taxpayer is required to submit Form 67 on or before the due date of filing of return.
Ans: Residence state is the home country of the taxpayer, while source state is a foreign country where the taxpayer is employed or receives income from.
Ans: DTAA stands for Double Taxation Avoidance Agreement. As per this agreement, the Indian government allows tax deductions to taxpayers who have earned income in a foreign country.
Ans: Simply visit the official website of income tax department and select the Forms/Downloads section. Search for the respective form in the search engine and then you will be able to download it.
Ans: ROR and RNOR stands for Resident & Ordinarily Resident, while the latter stands for Resident but not Ordinarily Resident.
