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The taxation rules on your income may vary depending on the source of your income and your residential status in India. While you may know how to claim your taxes on your income earned in India as a resident Indian, the process differs for a resident Indian whose foreign income is taxable.
This quick guide can help you understand what a foreign tax credit is and how it can be claimed on your income earned abroad.
Meaning of Foreign Tax Credit
If you have paid taxes in one country and your home country has a Double Taxation Avoidance Agreement (DTAA) with that country, you can claim a credit for the tax paid in your home country. Foreign income is the income you earn from sources outside India or your country of residence.
The Foreign Tax Credit operates based on two rules:
Source Rule: This rule states that income is taxed in the country where it is earned. Hence, the earner can be either eligible under the taxation of non-residents or be taxed as a resident.
Resident Rule: This rule asserts that the country of residence can impose taxes.
To address the issue of double taxation, Section 90 of the Indian Income Tax Act is designed to handle situations where India has signed a DTAA with another country.
On the other hand, Section 91 deals with scenarios where India has not entered into such agreements with other countries.
However, it is first important to understand who qualifies as an Indian resident, as given below.
How to Determine Your Status as a Resident?
To determine your residential status in India, the following conditions must be fulfilled:
If you have stayed in India for 182 days or more in the current financial year or
If you have stayed in India for 60 days or more in the previous financial year and 365 days or more in the last four financial years preceding the previous financial year.
To be classified as a resident ordinarily resident (ROR), you must fulfil two additional conditions:
You have been a resident of India in at least 2 out of the last 10 financial years.
You have stayed in India for a total of at least 730 days in the last 7 financial years.
If any of the conditions as mentioned above are not fulfilled, you will be classified as a ‘Resident, Not Ordinarily Resident’ (RNOR). If you do not meet any of the conditions listed, you will be considered a non-resident Indian (NRI).
Once your residential status is determined, the taxability of your income in India is as follows:
For RNORs and NRIs, income tax in India applies only to income earned within India.
However, for residents and resident ordinarily residents (RORs), income tax is applicable on both incomes earned in India and income earned internationally.
What is Rule 128 of the Income Tax Rules?
Rule 128 of the Income Tax Rules provides clear guidelines for obtaining tax credits. Effective from April 1, 2017, this rule governs the Foreign Tax Credit (FTC) in India, and it encompasses the following:
Only resident assesses are eligible to claim FTC if they have paid taxes in a country or defined territory other than India.
FTC can only be granted in the year when the income, subject to the foreign tax, is presented for tax assessment in India.
The foreign tax paid or deducted on the income is considered for taxation, and a credit equivalent to the income tax in that year is provided.
No Foreign Tax Credit is allowed for any interest or penalty amounts payable.
Under a DTAA between India and a foreign country, eligible foreign taxes are those covered by the agreement.
No credit is allowed for any disputed foreign tax or a portion thereof.
The credit for foreign tax is calculated separately for each source of income from a particular country.
The credit amount admissible is the lesser of the tax payable on the income under the Indian Income Tax Act and the foreign tax paid on that income.
However, if the assessee provides evidence of settling the dispute and paying the foreign tax liability within six months after the dispute's final settlement, the credit for the disputed tax will be allowed in the year when the income is assessed or taxed in India.
The assessee must also provide an undertaking that no refund is claimed for that amount.
How to Claim Tax Credit on Foreign Income?
To claim the foreign tax credit, it is important to follow these steps:
Convert the income earned outside India into Indian currency using the applicable reference rates.
The rate of conversion will be based on the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India as on the final day of the month preceding the month of revenue earned.
Include this income in your tax return under the appropriate income head, for instance, under the 'salaries' section.
If any tax has been deducted at source (TDS) from your foreign income, you can claim credit for those taxes.
Obtain a Tax Residency Certificate (TRC) as supporting documentation.
Ensure that the correct DTAA is applied when claiming the credit for foreign tax deductions.
Provide the details of your foreign income, i.e., the income earned outside India, in Schedule FSI (Foreign Source Income) of your Income Tax Return (ITR).
Once the details of foreign income are added to Schedule FSI, the relevant information in Schedule TR (Tax Relief) will automatically populate.
By following these steps, you can properly claim foreign income taxable in India while ensuring compliance with the applicable rules and regulations.
Required Documentation for Claiming Foreign Tax Credit
To claim Foreign Tax Credit (FTC), the assessee must provide the following documents:
Certificate specifying the nature of income and the amount of tax deducted or paid by the assessee, signed by the assessee. Obtain this from the foreign country's tax authority or the entity responsible for deducting the tax.
However, the statement/certificate provided by the assessee will be considered valid if accompanied by:
An acknowledgment of online payment/bank counterfoil/challan of the tax payment made by the assessee.
Proof of deduction if the tax has been deducted.
Form 67 should be completed and submitted through the Income Tax* Portal as part of the FTC claim process.
Additionally, Form No. 67 must be filed if the loss from the current year resulted in a refund of foreign tax for which credit had been claimed in any previous year.
Tax Savings for NRIs with Tata AIA Life Insurance
When it comes to obtaining insurance, Non-Resident Indians can opt for insurance policies that are specifically designed to cater to their needs. An NRI insurance policy provides various types of coverage, including life insurance, health insurance, property insurance, and more. With the help of NRI insurance, one can safeguard their financial interests and protect their family and assets while residing outside of India.
Moreover, an NRI can claim tax benefits as follows:
Tax deductions on the life insurance premiums under Section 80C of the Income Tax Act
Tax deductions on health insurance plans or life insurance health riders under Section 80D.
NRI insurance policies offer similar benefits as regular insurance policies in India but may have certain specific conditions and requirements. These policies are often available for both individual NRIs and those with families. With Tata AIA Life Insurance, you can select your NRI insurance policy that meets your needs.
Conclusion
With the above information, you can claim tax on foreign income if you are a resident Indian. However, having all the correct documents and following the due process is absolutely crucial so that there are no hassles.
