The Internet has brought the world closer by providing a means to uninterrupted and constant access to the virtual connection. This has led to people regularly shopping and doing business with citizens of other nations. Income from other countries has become common, and with this comes the responsibility of paying taxes.
In this blog, you will learn about the foreign tax credit and claiming foreign tax credit.
What does Foreign Tax Credit mean?
An eligible tax-paying Indian citizen residing in India who receives income from another country (Source Country) must pay a portion of taxes to the source country. The tax is levied based on the tax laws of the source country for the amount of income received.
Since income from all sources worldwide is considered while filing taxes in India, the individual will pay twice for the same income. To avoid double taxation, the government introduced the Foreign Tax Credit (FTC) concept.
Under FTC, individuals can claim a deduction for the taxes paid in the source country for the income received from the source country. An individual can either claim a deduction or credit for the taxes.
Foreign Tax Credit in India
The laws for Foreign Tax Credit for Individuals in India are defined in Section 90 and Section 91 of the Income Tax Act. An Indian citizen residing in India and paying taxes outside India can claim the credit against his taxable income in India.
As an eligible taxpayer in India, these are the essential things you need to know for claiming Foreign Tax Credit as per Foreign Tax Credit Compliance
- FTC is to be claimed for the aggregate income from all sources from a particular country.
- Any dispute in the foreign tax will not be considered for FTC.
- Total Foreign Tax Credit Limit is Rs.2,50,000 p.a.
- FTC is to be claimed in the corresponding financial year in which it is levied in the source country.
- Foreign Tax Credit for individuals can be claimed for tax, cess and surcharge payable as per the tax laws in India. It is not applicable for fees, interest or penalties.
- Individuals must determine the exact amount by converting it to INR to claim Foreign Tax Credit. Currency conversion must be done on the last day of the month in which tax has been paid to the source country. Telegraphic Transfer Buying Rate is where one needs to head for this.
- One can avail FTC on tax payable as Alternate Minimum Tax under Section 115JB.
Documents to be submitted to claim Foreign Tax Credit for Individuals
Individuals must furnish a few documents to the income tax department to file a claim in India on the foreign tax paid. These documents must be submitted before the due date of filing income tax returns for the financial year. Detailed below is the list of documents
- A statement of deduction or payment of foreign tax in Form 67
- A statement showing the amount of foreign income received and the taxes levied for it
- A statement showing the nature of income and the amount of tax levied on it from a tax authority of the foreign country
- A statement duly signed by the taxpayer that specifies the nature of income and tax levied on it
- A statement stating the nature of income and the amount of tax levied on it received from the source disbursing the income.
- A valid proof of payment of taxes outside India
Steps to file and submit Form 67 to claim FTC
An eligible income tax payer in India must file an original return of income under Section 139(1) before the due date of filing ITR to claim Foreign Tax Credit. The Central Board of Direct Taxes (CBDT) has listed the procedure to file and submit Form 67.
Individuals filing ITR online can log on to the e-filing portal of the IT department. The individual must have either Electronic Verification Code (EVC) or Digital Signature Certificate (DSC) to submit Form 67 on the IT portal. Please note that Form 67 must be submitted before filing the return of income.
These are the steps to be followed
Step 1 – Login to your account on the income tax portal online. Go to ‘E-file-Prepare and submit online forms (other than ITR)’ and click on the link.
Step 2 – From the drop-down, select Form 67.
Step 3 – Fill out the form as per the instructions prescribed in the form online. After confirming that the details are correct, click on ‘submit’ to submit the form to the IT department.
You are now fully equipped to file foreign tax credits online. You have authentic information on the tax laws governing foreign credit in India, the documents to be submitted and the procedure for a claim. To ensure there are no discrepancies, you can get your documents verified by an auditor before filing Form 67 on your IT portal online.