Foreign Tax Credit Calculator — Rule 128

The Foreign Tax Credit (FTC) mechanism under Rule 128 of the Income Tax Rules is a crucial provision for Indian residents who earn income that is taxed in a foreign country and also taxable in India. Without FTC, such income would suffer double taxation — being taxed once in the source country and again in India on the worldwide income of the resident. Rule 128, which came into effect on 1 April 2017, provides a systematic framework for computing and claiming FTC, bringing clarity to a previously complex area of cross-border taxation.

How FTC Is Computed Under Rule 128

The FTC available in any assessment year is the lower of two amounts: (a) the tax paid in the foreign country on the doubly-taxed income, and (b) the Indian tax attributable to the doubly-taxed income. The Indian tax on the doubly-taxed income is computed using the formula: (Doubly Taxed Income / Total Income) multiplied by Total Indian Tax Liability. This proportional allocation ensures that the FTC does not exceed the Indian tax that would have been payable on the foreign income. If the foreign tax rate is higher than the Indian effective rate, the taxpayer can only claim FTC up to the Indian tax amount.

Filing Requirements: Form 67

To claim FTC, the taxpayer must file Form 67 before the due date of filing the income tax return (typically 31 July for individuals). Form 67 requires details of the foreign income, foreign tax paid, and the country where the tax was paid. The taxpayer must also furnish a certificate or statement from the tax authority of the foreign country, or a certificate from the person responsible for deducting the tax. After a 2022 amendment, Form 67 can be filed even after the due date, up to the end of the assessment year, though it is advisable to file it within the due date.

FTC for Different Income Types

FTC can be claimed on various types of foreign income including salary earned abroad, interest from foreign deposits, dividends from foreign companies, capital gains from sale of foreign assets, and rental income from foreign property. Each income type must be separately classified and the foreign tax attributed to it. The FTC is computed for each source country separately, meaning income from the USA and UK must be treated independently for FTC purposes.

Interplay Between FTC and DTAA

FTC and DTAA (Double Taxation Avoidance Agreement) work together but serve different purposes. DTAA allocates taxing rights between two countries and may reduce the tax rate in the source country. FTC provides the mechanism to claim credit for tax actually paid in the source country against the Indian tax liability. If a DTAA exists, the tax rate applied in the source country should ideally be the DTAA rate (which is lower). The FTC is then claimed in India for the tax paid at the DTAA rate. If no DTAA exists, the domestic rate applies, and FTC is still available under Section 91 of the Income Tax Act.

FTC Under New Tax Regime

FTC under Rule 128 is available under both the old and new tax regimes. The computation methodology remains the same regardless of the chosen regime. However, since the new regime has different slab rates (and no deductions), the Indian tax attributable to the foreign income will differ between regimes, potentially affecting the FTC amount. Taxpayers should compute FTC under both regimes to determine which is more beneficial overall.

Common Issues and Best Practices

Several practical issues arise in FTC claims. Currency conversion should use the SBI telegraphic transfer buying rate (TTBR) on the last day of the month immediately preceding the month in which the tax was paid. Timing differences between when income is recognised in India versus the foreign country can create complications — the FTC is available in the year the income is offered to tax in India, not necessarily the year it was taxed abroad. Maintaining detailed records of foreign tax payments, including tax deduction certificates and self-assessment tax receipts, is essential for substantiating FTC claims during assessment.