How to Claim Foreign Tax Credit in India
TL;DR
- Foreign Tax Credit (FTC) applies only if you are a tax resident in India and you include that foreign income in your Indian ITR for the same financial year. Rule 128 explains the Foreign Tax credit conditions.
- If you work from India with no PE/fixed base abroad(having a shell LLC does not count), the foreign country has no right to tax your service income. Use the right paperwork (example: W-8BEN for US clients).
- FTC is capped. FTC = lower of (foreign tax paid) or (Indian tax payable on that same income). Excess foreign tax becomes your cost. No carry forward.
- Convert foreign tax using SBI TT buying rate under Rule 128. Use the rate of the last day of the month before the month in which the foreign tax was paid or deducted.
- To claim FTC you must fill Schedule FSI + Schedule TR and file Form 67. Form 67 must be filed before filing the ITR.
Detailed Version:
If you are a tax resident in India for that year, India taxes your global income.
Foreign clients in some countries like Italy might deduct tax before paying you. Now the same income faces tax in two countries. (India and Italy)
Indian tax law allows credit of foreign tax against Indian tax on the same income. This is the Foreign Tax Credit (FTC).
1) Who has the right to tax your income?
You perform the work and deliver services from India.
For remote service work, treaty taxation depends on:
- where you perform the work, and
- whether you have a fixed base or permanent establishment abroad.
India has international tax agreement with most of the countries. A foreign country has a right to tax your service income only if you have:
- a fixed base in that country (under treaties that use this test), or
- a permanent establishment (PE) in that country (business profits cases), or
- physical stay beyond a treaty threshold (example: the India-US Independent Personal Services day test).
- Not Submitted the required form claiming the treaty agreement.
If you work from India and you have:
- no office abroad
- no PE abroad
- no physical stay crossing the treaty threshold
- Have submitted the required form as per the foreign country rules
the foreign country has no treaty right to tax that income.
If the client still deducts taxes, you will have to file Form 67 and claim those in your Indian ITR.
2) Stop foreign withholding before it happens
- Preventing deduction matters.
- FTC has a cap.
- Excess foreign tax becomes your cost.
[For US clients]{.underline}
If you work remotely from India:
- Submit Form W-8BEN to certify foreign status for US withholding purposes.
- Provide an Indian Tax Residency Certificate (TRC) (only if the client insists).
[For UK clients]{.underline}
UK deduction-at-source rules target categories such as royalties and similar payments. A UK payer who deducts tax from a service fee has treated the payment as royalty or a similar category that triggers deduction at source
Your contract must not describe your work as:
- royalty
- IP license
- technical royalty
Use:
- software development services
- consulting services
- professional services
Under the India-UK treaty, business profits are taxable in the UK only if you have a UK permanent establishment.
3) If foreign tax is deducted anyway
If tax is deducted and you cannot reverse it, claim FTC in India. FTC is governed by Rule 128 of the Income Tax Rules.
FTC is allowed only when:
- You are a tax resident in India for that year,
- The income is offered to tax in India in that year,
- The foreign tax is income-tax in nature(social security does not count),
- The foreign tax is not under dispute.
4) The FTC cap
FTC equals the lower of:
- Foreign tax paid or
- Indian tax payable on that foreign income.
You never receive more credit than Indian tax on that income.
[Example]{.underline}
Foreign tax paid: ₹1,00,000\ Indian tax on that income: ₹80,000
FTC allowed: ₹80,000\ Excess foreign tax that lapses: ₹20,000
There is no carry forward of excess FTC.
FTC can offset:
- income tax
- surcharge
- cess
FTC cannot offset:
- interest
- late fees
- penalties
5) Currency conversion
When claiming FTC, convert foreign tax paid or deducted into INR using:
- SBI TT buying rate, on
- the last day of the month preceding the month in which the foreign tax was paid or deducted.
This rule applies even if:
- payment was received,
- the bank converted the receipt,
- income was booked earlier.
FTC conversion depends on the month of foreign tax payment or deduction.
6) Step-by-step: how to claim FTC in India
[Step 1:]{.underline} Build your April--March sheet
India follows 1 April to 31 March.
List:
- all invoices
- all receipts
- all foreign tax deducted or paid
Do not reduce receipts for foreign tax.
[Step 2:]{.underline} Confirm the income is taxed in India in that year
If the income is offered across more than one year, FTC is allowed across those years in the same proportion.
[Step 3:]{.underline} Compute Indian taxable income
If you use Section 44ADA:
- gross receipts = total invoices for the year
- taxable income = 50% of gross receipts
If you use books:
- taxable income = profit after allowed expenses
[Step 4:]{.underline} Compute Indian tax on that income
This number sets your FTC cap base.
[Step 5:]{.underline} Convert foreign tax into INR (Rule 128)
- Convert the foreign tax using SBI TT buying rate.
- Use the last day of the month before the month of foreign tax deduction or payment.
[Step 6:]{.underline} Apply the "lower of" rule
FTC equals the lower of:
- foreign tax (INR), or
- Indian tax payable on that income.
[Step 7:]{.underline} Collect proof documents
You must have one of these:
- certificate from foreign tax authority, or
- withholding statement or certificate from the payer, or
- self-signed statement plus proof of payment or proof of deduction.
Examples:
- USA: Form 1042-S
- UK: payer deduction certificate or written confirmation showing tax deducted
[Step 8:]{.underline} Fill the ITR schedules
Fill:
- Schedule FSI (foreign income)
- Schedule TR (tax relief and FTC)
If you are Resident and Ordinarily Resident and you hold foreign assets, fill Schedule FA.
Do not use ITR forms that do not support these schedules.
[Step 9:]{.underline} File Form 67
Form 67 links your FTC claim with your proofs.
Deadline rule:
- Form 67 must be furnished on or before the ITR for the Assessment Year is filed, and
- The ITR must be filed within time under section 139(1) or 139(4).
- If you file an updated return under section 139(8A), Form 67 must be furnished on or before the updated return filing date.
Example: Income earned in FY 2023--24 falls in Assessment Year 2024--25.
File Form 67 before the ITR. This prevents mismatches during ITR processing.
7) Section 44ADA problem
Many remote IT workers use Section 44ADA.
Under 44ADA:
- India taxes 50% of gross receipts.
- A foreign client may deduct tax on 100% of the gross payment.
FTC cap is based on Indian tax payable. 44ADA lowers Indian taxable income. This lowers the FTC cap.
[Example:]{.underline} Your gross receipts are ₹40,00,000 and foreign tax withheld is ₹4,00,000. Under 44ADA, your taxable income in India is 50% of ₹40,00,000, which is ₹20,00,000. Your maximum FTC equals the Indian tax payable on ₹20,00,000.
8) Final checklist
Before filing, confirm:
- you are resident for that year
- the income is included in that ITR year
- foreign tax is not under dispute
- foreign tax is converted using Rule 128
- FTC is computed using the lower-of rule
- Schedule FSI is filled
- Schedule TR is filled
- Schedule FA is filled when you are ROR and hold foreign assets
- Form 67 is filed by 31 March of the Assessment Year