Foreign Tax Credit in India: Claim Relief on Foreign Salary, ESOPs, Dividends & Rent
Riya Thawani
Riya Thawani is a Chartered Accountant and the founder of CA Riya Thawani & Company. With strong expertise in taxation, GST compliance, and business advisory, she assists individuals and startups with financial planning and legal compliance. She is passionate about simplifying tax laws for professionals and entrepreneurs through insightful articles and workshops.
With the globalization of careers and investments, many Indian residents are earning income from abroad, be it through foreign salaries, stock options like ESOPs, overseas dividends, or rental income. However, this global income often comes with the burden of double taxation: once in the foreign country where the income originates and again in India, where the individual is a tax resident. We frequently encounter questions such as: Can foreign tax be claimed on dividends? How are foreign ESOPs taxed in India? How is foreign tax calculated in India?
To relieve taxpayers from this dual tax liability, the concept of Foreign Tax Credit (FTC) plays a crucial role. This article explores how the FTC applies to various types of foreign income, such as salary, ESOPs, dividends, and rental earnings, and what individuals must keep in mind when claiming it under Indian tax laws.
What is Foreign Tax Credit (FTC)?
Foreign Tax Credit is a provision that allows an Indian resident to claim credit for taxes paid in a foreign country on income that is also taxable in India. The credit essentially reduces the Indian tax liability by the amount of foreign tax already paid, subject to certain limitations and compliance requirements laid down by Indian tax authorities.
This is especially relevant for:
1. Indian citizens working abroad and earning a salary overseas.
2. NRIs who return to India but continue to receive income from foreign sources.
3. Individuals with foreign investments that yield dividends or rental income.
4. Employees of multinational companies whose ESOPs are taxed in the country of origin.
Legal Framework: The FTC under Indian Tax Law
Under the Income Tax Act, 1961, Sections 90 and 91 deal with the mechanisms to avoid double taxation. Section 90 applies when India has signed a Double Taxation Avoidance Agreement (DTAA) with a foreign country. Section 91 is for cases where no DTAA exists.
In both situations, the Indian government allows a tax credit, but only under the following conditions:
1. The taxpayer must be a resident of India.
2. The income must be taxed in both the foreign country and India.
3. Proof of foreign tax paid (like Form 67) must be submitted before the due date of filing the return.
4. The credit is available only to the extent of the Indian tax payable on that income.
1. FTC on Foreign Salary
Indian residents working abroad for short stints or on deputation often earn a foreign salary, which is taxed in the host country. At the same time, if the individual qualifies as a tax resident of India during that financial year (by meeting stay criteria), the foreign salary becomes taxable in India too.
To avoid paying taxes twice, the individual can claim the FTC:
a. Income should be included in the Indian return.
b. Taxes paid in the foreign country should be supported by pay slips, tax return acknowledgments, or withholding certificates.
c. The foreign tax must be of the nature of “income tax” as per Indian rules.
For example, if a person earns USD 50,000 in the U.S. and pays 20% tax there, the Indian tax on the same salary (as per the slab) is calculated. FTC is allowed to be the lower of the two amounts.
2. FTC on ESOPs (Employee Stock Option Plans)
Multinational companies often grant ESOPs to employees across borders. When these ESOPs vest or are exercised, the income becomes taxable. If the shares belong to a foreign parent company, the gain is generally taxed in the country where the company is based.
In such cases:
a. The perquisite value (difference between market value and exercise price) is taxed abroad.
b. If the employee is an Indian tax resident in the year of exercise, the same amount becomes taxable in India as a perquisite.
To claim FTC:
a. Get the tax paid certificate from the employer or the foreign tax authority.
b. Include the perquisite income in your Indian income tax return.
c. Submit Form 67 before filing ITR.
Additionally, if capital gains arise from the eventual sale of ESOP shares, the FTC may also be applicable depending on the country of sale and tax treaty terms.
3. FTC on Foreign Dividends
Residents holding shares in foreign companies may receive dividends that are taxed in the source country. Countries such as the U.S. typically impose a withholding tax on such income, often ranging from 15% to 30%, depending on applicable tax treaties.
In India, dividend income is taxable under the head “Income from Other Sources”. Hence, a taxpayer may face double taxation unless the FTC is claimed.
Key points:
a. The withholding tax certificate is essential.
b. Indian tax on dividends is based on slab rates.
c. FTC can be claimed to the extent of tax paid abroad or tax payable in India, whichever is lower.
For example, if you receive USD 1,000 and 25% is deducted as tax in the U.S., and your Indian slab rate results in 20% tax, you can claim FTC of 20%.
4. FTC on Foreign Rental Income
Suppose an Indian resident owns a flat in the U.K. and earns rental income, which is subject to local taxation. This income must also be disclosed and taxed in India, making FTC essential to avoid being taxed twice.
What to keep in mind:
a. Rental agreements, tax deduction documents, and payment receipts help establish foreign tax paid.
b. The Indian tax on rental income is computed after claiming standard deductions.
c. Foreign municipal or local taxes are not eligible for FTC; only income-type taxes
Once again, the credit is limited to the amount of Indian tax payable on the foreign rental income. If the tax paid abroad exceeds the Indian tax, the excess is not refundable or carried forward.
How to Claim FTC: Documentation and Form 67
To claim Foreign Tax Credit, you must file Form 67 on the income tax portal before the due date of filing your ITR. This is mandatory even if you’ve already paid foreign taxes.
Documents required include:
a. Proof of income (salary slips, dividend vouchers, rent receipts).
b. Foreign tax paid certificate or withholding tax documents.
c. Tax return filed in the foreign country (if applicable).
d. Copy of DTAA, if available.
Failure to file Form 67 disqualifies a taxpayer from claiming FTC, even if all other conditions are satisfied.
Conclusion
As Indian residents increasingly earn income from global sources, understanding and utilizing the Foreign Tax Credit provisions becomes essential to avoid unnecessary tax burdens. Whether it is foreign salary, ESOPs, dividends, or rental income, FTC ensures that you are not unfairly taxed twice on the same income.
However, the process requires careful documentation, timely filing, and accurate reporting. Seeking professional help or staying up to date with international tax laws and treaties is advisable to ensure compliance and maximize benefits.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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