Introduction
For Non-Resident Indians (NRIs) earning income in multiple countries, managing taxes efficiently is crucial. One of the biggest concerns for NRIs is double taxation, where they end up paying taxes in both their country of residence and in India. The Foreign Tax Credit (FTC) serves as a powerful tool to reduce this tax burden, allowing NRIs to claim a credit for taxes paid in a foreign country against their Indian tax liability.
Understanding how FTC works, its eligibility criteria, and how to claim it can help NRIs maximize their tax savings and stay compliant with international tax laws.
What is Foreign Tax Credit (FTC)?
Foreign Tax Credit is a relief mechanism that allows taxpayers to offset taxes paid in a foreign country against the taxes they owe in their home country. This ensures that individuals are not unfairly taxed twice on the same income.
For example, if an NRI residing in the U.S. earns rental income from a property in India, they may be required to pay taxes on this income in both India and the U.S. However, through FTC provisions, they can claim a tax credit in the U.S. for the taxes paid in India, reducing their overall tax liability.
Why is FTC Important for NRIs?
NRIs often have income sources across different countries, including salaries, rental income, dividends, capital gains, and business earnings. Without FTC, they could face excessive taxation, leading to financial strain. FTC helps NRIs by:
- Reducing double taxation – Avoids paying tax on the same income in two different countries.
- Optimizing tax efficiency – Ensures NRIs pay only what is legally required, keeping more of their earnings.
- Enhancing global financial planning – Helps NRIs make better investment and income allocation decisions.
- Ensuring compliance with international tax laws – Prevents unintentional tax evasion by properly reporting income.
Eligibility for Foreign Tax Credit
NRIs can claim FTC under the following conditions:
- The tax must be levied on income and paid to a foreign government.
- The income should be taxable in India as well as the foreign country.
- The taxpayer must provide proof of tax payment in the foreign country (such as tax receipts or Form 26AS in India).
- FTC is applicable only if there is a Double Taxation Avoidance Agreement (DTAA) between India and the foreign country.
How to Claim Foreign Tax Credit in India
Claiming FTC in India requires a systematic approach. Here’s how NRIs can ensure a smooth process:
1. Check DTAA Agreements
India has DTAA agreements with over 85 countries, including the U.S., U.K., Canada, UAE, and Australia. These agreements determine the tax relief methods available—either tax credit (offsetting foreign tax against Indian tax) or tax exemption (exempting income in one country).
Must read: Understanding the Double Taxation Avoidance Agreement (DTAA) and Its Benefits
2. Maintain Proper Documentation
To claim FTC, NRIs must maintain proper documentation, including:
- Tax payment receipts from the foreign country
- Foreign tax return copies
- Form 67, which must be submitted before filing an Indian tax return
- Income statements showing the nature and amount of income earned abroad
3. File Form 67 Before ITR
The Income Tax Department of India mandates Form 67 for claiming FTC. It must be filed before submitting the Income Tax Return (ITR). Key points:
- Form 67 is available online through the Income Tax e-filing portal.
- It should be submitted before the due date of filing ITR.
- Details of foreign income, tax paid, and DTAA provisions must be provided.
4. Report Global Income in Indian Tax Return
NRIs must include their worldwide income while filing Indian taxes. FTC can only be claimed on foreign income taxable in India. Ensure:
- Correct income classification (salary, rent, business, capital gains, etc.).
- Proper application of DTAA provisions.
- Accurate tax computation before claiming FTC.
5. Claim Tax Credit Under the Right Section
The foreign tax paid should be directly related to the taxable income in India. The tax credit is limited to the lower of:
- The tax paid in the foreign country
- The Indian tax liability on the same income
For example, if an NRI earns ₹10 lakh in the U.K. and pays ₹2 lakh in U.K. taxes, but the Indian tax liability on this income is ₹1.5 lakh, they can claim only ₹1.5 lakh as FTC.
Key Challenges in Claiming FTC
While FTC provides relief, NRIs often face challenges, such as:
- Complex Documentation Requirements – Gathering receipts, tax filings, and DTAA references can be tedious.
- Differences in Tax Years – Some countries follow calendar-year taxation (e.g., U.S.), while India follows an April-March financial year, leading to mismatches in tax credits.
- Foreign Tax Paid but Not Allowed as FTC – Some foreign taxes (such as state taxes in the U.S.) may not be eligible for credit in India.
- Incorrect Form 67 Filing – Delays or mistakes in Form 67 submission can result in denied tax credits.
Best Practices to Maximize FTC Benefits
To ensure smooth FTC claims and maximum tax savings, NRIs should:
- Consult a Tax Expert – Seek professional help to navigate DTAA rules and avoid mistakes.
- File Form 67 Timely – Submit the form before the ITR deadline to prevent rejection.
- Maintain Foreign Tax Records – Keep all payment receipts and tax returns for reference.
- Use DTAA Effectively – Understand whether tax credit or tax exemption applies to their case.
- Align Income Reporting – Match foreign and Indian tax filings to avoid discrepancies.
Conclusion
For NRIs earning abroad, Foreign Tax Credit (FTC) is a crucial tax-saving tool that prevents double taxation and enhances financial efficiency. By understanding DTAA provisions, filing Form 67 on time, and maintaining accurate records, NRIs can maximize tax savings and stay compliant with tax laws in both India and their country of residence.
With global tax systems becoming increasingly interconnected, staying proactive in tax planning can help NRIs protect their income and reduce tax burdens effectively.
Need help with NRI tax compliance? Connect with SBNRI for expert tax assistance today!
FAQs
Q1. How can NRIs avoid double taxation on foreign income?
NRIs can avoid double taxation by claiming the Foreign Tax Credit (FTC), which allows them to offset taxes paid in a foreign country against their Indian tax liability. They can also benefit from Double Taxation Avoidance Agreements (DTAA) that India has with several countries.
Q2. What is Form 67, and why is it important for NRIs?
Form 67 is a mandatory document that NRIs must file before submitting their Indian Income Tax Return (ITR) to claim the Foreign Tax Credit (FTC). It provides details of foreign income, taxes paid abroad, and the applicable DTAA provisions.
Q3. Which taxes qualify for Foreign Tax Credit in India?
Only income taxes paid to a foreign government qualify for FTC in India. Other taxes like wealth tax, social security contributions, and penalties are not eligible for credit. The tax must be paid on income that is also taxable in India.
Q4. Can NRIs claim FTC on U.S. state taxes?
No, India allows Foreign Tax Credit only for federal income taxes paid in the U.S., not for state or local taxes. However, NRIs residing in the U.S. can still take advantage of DTAA provisions to avoid double taxation.
Q5. What happens if my foreign tax payment and Indian tax filing years don’t match?
If your foreign tax payment follows a calendar year (e.g., U.S.) but India follows a financial year (April-March), you must match the income periods correctly. You may need to carry forward or adjust the FTC claim based on tax treaties.
Q6. How much Foreign Tax Credit can NRIs claim in India?
The FTC limit is the lower of the tax paid in the foreign country or the Indian tax liability on the same income. If the foreign tax is higher, NRIs cannot claim more than what they owe in India.
Q7. Can NRIs claim Foreign Tax Credit without a DTAA agreement?
Yes, FTC can be claimed even if India doesn’t have a DTAA with a country. However, without a treaty, NRIs must prove that the foreign tax was legally paid and that the income is also taxable in India.
