Returning NRIs, OCIs, Expatriates, Residents – Double Taxation, Foreign Tax Credit, DTAA, Form 67

Claiming foreign tax credit and filing Form 67 is an important requirement for Returning NRIs and various Residents in India. This helps them reducing tax burden on double taxed income. Here, We assist in understanding of transaction, interpretation of DTAA, accurate and correct claiming of foreign tax credit and filing of Form 67 in all major cities in India.

Background – Taxability of Foreign Income in India

There are circumstances, when a Resident in India have income from foreign sources, such as:

An NRI/OCI returning back to India after working & living outside India for a number of years. In this case, income from his assets abroad (in the form of Shares, Mutual Funds, Retirement Funds, Digital Assets, Immovable Property etc) will be taxable in India once he becomes Ordinary Resident In India (generally after 2 years).
Indian Resident do Investments abroad in shares, crypto currency, immovable property etc under Liberalised Remittance Scheme.
Indian Resident provide services to Foreign Entity e.g. Consultancy Income, Technical Services, Royalty etc.

Taxation Rules – Source Rule Vs Residency Rule

There are two principles of taxation globally, which is also considered in Double Tax Avoidance Agreements between India Vs Other Countries. These rules are as under:

Source Rule: Source rule gives the tax right to the country where source of income exists. This rule prevails even if the person (earning that income) is resident of some other country.
Residency Rule: Residence rule gives right of taxation to the country of which that person is Tax Resident. Hence, despite the income is arising in some other country, this rule gives tax rights to the Tax Resident country.
Example: If Mr X, who returned back to India (3 years back) from US after working 15 years abroad, has earned some dividend on US company shares (shares which he is holding since his returning back to India). Now, US company will deduct TDS on this dividend income as the source is in US. Further, this dividend income is also taxable in India as Mr X is now Ordinary Resident In India (global income taxation in India).

Double Taxation – Foreign Tax Credit Relief - DTAA

Reference to above rules, when a person earn income from other country which is taxed there on the basis of Source rule, a situation arises of double taxation of same income in two countries. To overcome this double tax situation, countries do Double Tax Avoidance Agreements with each other. India has such agreements with all major countries. DTAA provides a relief from double taxation situation as under:

Exemption Method: Here, the source country renounces its right to tax the income, and it give right of taxation to Residence country.
Foreign Tax Credit Method: Here, the source country tax the income, however, the resident country allows the tax credit i.e. Foreign Tax Credit.

Incorporation of Foreign Income In Indian ITR and Claiming Foreign Tax Credit – Indian Tax Rules

To include foreign income in Indian ITR and to claim foreign tax credit on same, there are certain rules provided under Indian Tax Laws. Briefly, these rules are:

Conversion of Foreign Income and Tax In INR: Foreign income needs to be converted into INR at the TT Buying Rate of such currency on the specified date (Rule 115). Specified date is generally last day of preceding month in which income is generated. Similarly, taxes need to be converted in INR.
Data To Be Incorporated As Per Indian Tax Year: Tax year in many countries are calendar year or some other period. Hence, it may be different from what India follows i.e. Financial Year (April 1 to March 31). Hence, incorporation of Income (as well taxes) will be for respective FY which is to be filed in Indian ITR. Hence, data may need to be taken from two tax years of other country tax documents.
Tax Credit Relief – DTAA Countries – Sec 90: Reference to DTAA Article ‘Relief/Elimination from/of Double Taxation’ with respective countries (e.g. Article 25 Indo-US DTAA), full tax credit is allowed in the Indian ITR for taxes paid abroad. This will be subject to tax liability arising in India on that income. There cannot be refund claim in Indian ITR for taxes paid abroad.
Tax Credit Relief – No DTAA Countries – Sec 91: Double tax relief is also available in relation to countries where India does not have a DTAA. Here, relief will be average income tax in India subject to taxes paid abroad (Sec 91 of Income Tax Act).
Taxes Covered: Taxes which are covered for double tax relief is as mentioned in the Taxes definition of respective DTAAs. Sometimes, DTAAs are not providing clear definition. In those cases, decisions by various Courts/Tribunals in India is considered. E.g. In Indo-US Treaty, Federal Taxes are clearly covered, however, there is no mention of State Taxes. Reference to judicial pronouncements in this regard (Tata Sons – Mumbai Tribunal 2011) , courts have held that when the similar benefit is allowed u/s 91 where there is no DTAA then DTAA country cannot deprived of the same benefit when it is not excluded. Hence, State Taxes credit is also allowed in Indian ITR. However, other type of taxes are not allowed for credit relief e.g. social security taxes. Similarly, no foreign tax credit shall be allowed for Interest or penalty paid outside India.
Credit Not Allowed For Excess Tax Deduction In Source Country: If source country has deducted excess tax than what is provided in DTAA then taxes deducted over and above the Treaty rate will not be allowed in Indian ITR. E.g. India-Australia DTAA gives taxation right of 15% to Source Country. Hence, e.g. if taxes are deducted @20% in Australia (source country) then in Indian ITR (Resident country) foreign tax credit shall be allowed for 15% only and 5% shall be ignored.
Form 67 Filing – Before The End Of Relevant Assessment Year: Rule 128 of Income Tax Rules provide for detailed methodology for claiming of Foreign Tax Credit. One of its main requirement is filing of Form 67 where details of foreign income, country, taxes need to be provided in detail. Form 67 was supposed to be filed on or before due date of ITR filing. However, as per latest amendments (Notification No 100 of 2022 dated Aug 18, 2022), now Form 67 can be filed anytime during the relevant assessment year. Hence, for example, for FY 2021-22 ITR, now Form 67 can be filed up to March 31, 2023. Also, in relation to Updated ITRs {Sec 139 (8A) ITRs}, Form 67 can be filed before the filing of Updated ITR. Hence, a big relief in filing of Form 67. Further, if Form 67 is not filed then foreign tax credit cannot be claimed (Income Tax Law). However, in certain judicial pronouncements, it has been held that foreign tax credit benefit cannot denied if Form 67 is not filed by due date {Bangalore ITAT – Ms Brinda Ramakrishna V Income Tax Officer (2022)}.
Documentation: Taxpayer need to keep full record of income and taxes paid abroad to claim foreign tax credit in India. Form 67 also require to enclose Tax payment Acknowledgement, TDS Deduction Proof etc while filing Form 67. Also, to plug any tax enquiry later on, tax payer should keep all the records such as TDS Certificate, ITR copy, Pay Slips, Income generating document etc. Also, the tax payer should take Tax Residency Certificate (TRC) from the source country, so that the same can be submitted with Tax Authorities in case of any question arise. TRC helps to make sure that correct DTAA has been applied for elimination of double taxation as well other provisions of DTAA.

FAQs – Foreign Tax Credit Relief, Sec 90/91, DTAA, Form 67 etc

Q: I am an NRI, presently living and working in a tech company in USA since last 4 years (before that I was in India). In the current FY (in August), I am planning to return back to India. I will join employment in India wef September. What will be my status. What will be taxability of my USA Salary Income I earned till August? Will I get tax credit relief for taxes paid in USA?

Ans: On returning back to India, in the current year you will be categorised as Resident in India. And you will also be categorised as Ordinary Resident (as you qualify conditions of Resident in 2 years out of last 10 preceding years, and 730 days stay in India in 7 preceding years. As Ordinary Resident your global income is taxable in India in current year. Hence, US Salary (April to Aug) will be taxable and be incorporated in Indian ITR. Taxes paid on US Salary would be eligible for Foreign Tax Credit in Indian ITR (Ref clause 25 India – USA DTAA).

Q: To Claim Foreign Tax Credit, Can Form 67 be filed after Due Date of ITR?

Ans: Earlier, Form 67 was supposed to be filed by Due dare of ITR. Else foreign tax credit was not allowed. Now, reference Notification 100 of 2022 Dated Aug 18, 2022, amendment has been made in Rule 128 of Income Tax Rules. Hence, Form 67 can now be filed up to the end of assessment year in which ITR filing is due. Hence, Form 67 can be filed even after the Due date. Even for Updated ITR, which can be filed up to 2 years from the end of relevant assessment year, Form 67 can be filed before the filing of Updated ITR.

Q: Can I Claim Refund In India For Taxes Paid Abroad?

Ans: No. In India (Resident Country), tax credit shall be allowed for taxes paid in foreign country (source country) only to the extent of tax liability arising in India. If taxes paid in foreign country exceed the effective tax on that Income in India, then Foreign Tax Credit in Indian ITR shall be limited to the extent of taxes arising in India. Excess taxes paid in source country shall be ignored.

Q: I Worked For Some Period In Nigeria During Last Financial Year. However, I am A Ordinary Tax Resident In India. Since, There Is No Tax Treaty Between India and Nigeria, Whether TDS Paid In Nigeria Is Eligible For Tax Credit In India?

Ans: Yes. Where India does not have a Tax Treaty with a country e.g. Nigeria in present case, Foreign Tax Credit is allowed under section 91 of the Income Tax Act. Hence, Taxes paid in Nigeria on salary income are eligible for Foreign Tax Credit in India. Form 67 shall be submitted in this case also.