Foreign tax credit (FTC) prevents the same foreign-source income from bearing tax twice to the extent permitted by Indian law. For an Indian resident who has paid or suffered foreign income tax on income also offered to tax in India, the operational rule is contained in Rule 128 of the Income-tax Rules, 1962 and the reporting mechanism is Form 67.
The Income Tax Department's current Rule 128 text says that a resident assessee can claim credit for foreign tax paid in a country or specified territory outside India in the year in which the corresponding income is offered to or assessed to tax in India. If that income is taxed in India across more than one year, the foreign tax credit is allocated across those years in the same proportion.
Who can claim foreign tax credit?
FTC under Rule 128 is available to a resident assessee. For a country or territory with which India has a tax treaty under section 90 or 90A, foreign tax means tax covered by that agreement. For another country or territory, the rule refers to tax payable there that is in the nature of income tax contemplated by section 91.
The Department's Form 67 page also describes Form 67 as the form filed by a resident assessee claiming FTC under Rule 128 where foreign tax has been paid or deducted on income earned abroad and that income is offered to tax in India.
How much FTC is allowed?
The credit is computed separately for each source of income arising from a particular foreign country or specified territory. Rule 128 limits the credit to the lower of the Indian tax payable on that income and the foreign tax paid on that income. Where foreign tax exceeds the amount payable in accordance with an applicable double-taxation agreement, the excess is ignored for this calculation.
The rule allows FTC against Indian tax, surcharge and cess, but not against interest, fee or penalty. Foreign currency tax is converted using the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted.
Simple FTC example
Assume an Indian resident earns foreign consulting income that is also taxable in India. Foreign tax equivalent to ₹70,000 is deducted, while the Indian tax attributable to that same source of income works out to ₹55,000. Subject to the applicable treaty and Rule 128 conditions, the FTC is capped at ₹55,000 because the credit is the lower of the two amounts. If the foreign tax were ₹40,000 and the Indian tax on that income ₹55,000, the credit would ordinarily be limited to ₹40,000.
This lower-of calculation should be performed source-by-source and country-by-country rather than by simply comparing total foreign tax with the taxpayer's overall Indian tax liability.
What happens when foreign tax is disputed?
Rule 128 does not allow credit for an amount of foreign tax that is disputed by the assessee. However, the rule provides a route to claim the credit after the dispute is finally settled if the prescribed evidence and undertaking are furnished within the specified six-month period and the foreign-tax liability has been discharged.
Finance teams should therefore maintain disputed foreign tax separately from undisputed tax in the FTC working instead of claiming the entire foreign withholding mechanically.
What is Form 67?
Form 67 is the statement of foreign income and foreign tax credit. The Department's Form 67 user manual explains that the form is filed online through the e-Filing portal and contains Part A, Part B, verification and attachments. Part A captures the foreign income and FTC details; Part B deals with matters including refund of foreign tax arising from carry-back of losses and disputed foreign tax.
Documents required for FTC
Rule 128 requires Form 67 together with evidence specifying the nature of income and the foreign tax deducted or paid. The supporting evidence may be a certificate or statement from the foreign tax authority, from the person responsible for deduction, or a statement signed by the assessee when accompanied by prescribed proof of payment or deduction.
A practical FTC file should normally preserve the foreign income statement, withholding certificate or foreign tax assessment, proof of tax payment where relevant, exchange-rate working, treaty analysis where applicable, Indian tax computation and the filed Form 67 acknowledgement.
When should Form 67 be filed?
The Department's updated Form 67 information states that Form 67 can be furnished on or before the end of the relevant assessment year where the return has been furnished under section 139(1) or section 139(4). For an updated return under section 139(8A), Form 67 must be furnished on or before the date of furnishing that updated return. Because older portal guidance may still display the earlier return-due-date wording, taxpayers should follow the current Rule 128 and current filing-year portal instructions when preparing the claim.
Practical FTC checklist
- Confirm Indian residential status: Rule 128 FTC is a resident-assessee mechanism.
- Match foreign income to the Indian return: identify the year and head under which the corresponding income is offered to tax in India.
- Identify the country and source: compute credit separately for each source from each country or specified territory.
- Check treaty coverage: where a DTAA applies, confirm that the foreign levy is a covered tax and apply the treaty limitation.
- Compute the lower amount: compare foreign tax with Indian tax attributable to the same income.
- Convert currency correctly: apply the Rule 128 telegraphic-transfer buying-rate convention.
- Separate disputed tax: do not include disputed foreign tax in the normal claim until the rule's settlement conditions are met.
- Prepare Form 67 and evidence: reconcile the form to the return, tax computation and supporting foreign-tax documents.
Common mistakes to avoid
- Claiming the entire foreign withholding without applying the lower-of-foreign-tax-and-Indian-tax cap.
- Netting unrelated countries or income sources together instead of computing credit source-by-source and country-by-country.
- Claiming FTC against interest, fee or penalty rather than tax, surcharge and cess.
- Using a convenient year-end exchange rate instead of the conversion rule prescribed by Rule 128.
- Claiming disputed foreign tax before satisfying the settlement requirements.
- Filing Form 67 figures that do not reconcile to the foreign income reported in the Indian return.
Practical takeaway
Foreign tax credit is not simply a refund of whatever tax was deducted overseas. For an Indian resident, Rule 128 links the credit to foreign income that is also taxed in India, caps it source-by-source at the lower of eligible foreign tax and Indian tax, and requires Form 67 with supporting evidence. A strong FTC working therefore starts with income reconciliation, treaty and tax identification, the prescribed currency conversion and a documented lower-of calculation before the form is filed.
