How recent Foreign Tax Credit changes impact salaried taxpayers earning from abroad
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How recent Foreign Tax Credit changes impact salaried taxpayers earning from abroad
FTC allows individual taxpayers to claim a credit in India for taxes paid in a foreign jurisdiction on the same income. (AI image)

With the rise in global workforce mobility, an increasing number of Indian professionals are earning income across multiple jurisdictions. Employees of multinational companies undertaking overseas assignments, or cross-border roles receive regular salaries along with various forms of compensation such as allowances, performance-linked variable pay, stock-based incentives, and benefits-in-kind arising from employment outside India. In such cases, the same income may be taxed in the foreign country where it arises and in India, if the individual taxpayer qualifies as a Resident and Ordinarily Resident (ROR) under the Indian tax system. To mitigate double taxation, the Indian tax framework provides relief through Double Taxation Avoidance Agreement (DTAA) or tax treaty either by way of exemption or foreign tax credit (FTC). Tax treaties allocate taxing rights between countries based on factors such as place of employment, duration of stay, entity bearing the cost, etc. While exemption applies where one country has the primary taxing right, FTC allows credit of foreign taxes where income is taxed in both jurisdictions. This article focuses on FTC, its impact on salaried taxpayers and recent developments.FTC allows individual taxpayers to claim a credit in India for taxes paid in a foreign jurisdiction on the same income, thereby reducing the tax payable in India. The statutory foundation for this relief is provided under the Income-tax Act, 1961 (โ€˜the Actโ€™), while the procedural aspects are governed by the Income-tax Rules, 1962. In recent years, administrative amendments and judicial pronouncements have significantly shaped the manner in which FTC claims are filed and processed, particularly for salaried taxpayers.India is also progressing towards a comprehensive overhaul of its direct tax framework through the newly proposed Income-tax Act, 2025 and the draft Income-tax Rules, 2026. These proposed reforms seek to simplify the tax law, enhance ease of compliance, and modernise tax administration, which could also influence the procedural framework governing FTC claims.Current framework In addition to the provisions of the existing Act, DTAA between India and foreign countries generally determine the manner in which relief from double taxation may be sought. In most cases, India adopts the credit method, as per which taxes paid in the foreign jurisdiction are allowed as a credit against the Indian tax payable on the same income. In simple terms, the credit available in India is typically restricted to the lower of foreign tax paid or Indian tax attributable to the doubly taxed income. In situations where โ€˜noโ€™ treaty exists between India and the relevant country, unilateral relief is enshrined in Section 91 of the Act allowing Resident taxpayers to claim credit for foreign taxes paid, subject to specified conditions.Also, under treaty scenarios, the mechanism for granting relief may vary depending on the method prescribed in the DTAA with the specific country. To illustrate, the table below provides an indicative mapping of how these methods apply in practice:

FTC mechanism

Accordingly, ROR taxpayers must carefully examine the provisions of the relevant DTAA to determine the extent of FTC can be claimed in India.Illustration 1: Payroll shift case – ROR is on assignment to a country with which India has a DTAA and receives salary in a foreign country, which is subject to tax in both jurisdictions.

Payroll shift case

Illustration 2: Payroll continues in India – ROR is on assignment to a country with which India has a DTAA, continues to receive salary (after TDS) in India and also liable to tax in foreign country.

Payroll continues in India

Form 67 and Compliance requirementsTaxpayers claiming FTC must comply with certain procedural requirements when filing their personal Income tax return (ITR) in India. A key compliance requirement is filing of Form 67 as prescribed in Rule 128, electronically through the Income tax e-filing account. It requires detailed information of โ€“

  • Country where income is earned
  • Source and nature of income, such as โ€“ salary, capital gains, dividend, interest etc.
  • Amount of income earned outside India
  • Amount of income offered to tax in India
  • Details of foreign taxes paid
  • Tax identification number in the foreign country
  • Relevant treaty provisions relied upon
  • Supporting documents evidencing payment of foreign taxes.

Taxpayers are required to upload documentary evidence such as foreign tax returns or tax payment confirmations. In situations where foreign tax returns are not available, employer-issued withholding certificates may be relied upon, for instance Form W-2 in the US, P60 statements in the UK or PAYG income statements in Australia.As a last milestone, the taxpayer must provide a self-declaration confirming the accuracy of information furnished digitally and electronically verify the Form 67 using digital signature or electronic verification code.Failure to file Form 67 or inadequate reporting may lead to denial of FTC claims or queries raised during assessment proceedings. In practice, FTC claims are frequently examined by tax authorities, and disputes may arise where documentation is incomplete or where the timing of the foreign tax payment does not align with the India reporting year. Recent judicial rulings have also shaped the interpretation of FTC provisions. In a taxpayer-friendly ruling delivered in December 2025, the Income Tax Appellate Tribunal, Delhi clarified that mere delay in filing Form 67 should not automatically lead to denial of FTC, provided other conditions for claiming the credit are satisfied. Such rulings emphasize that procedural lapses should not override substantive tax relief.Over the past few years, several changes have been introduced by the tax authorities to simplify FTC compliance and address practical difficulties faced by taxpayers. Earlier, taxpayers were required to file Form 67 before the due date of filing the ITR. Missing this deadline resulted in disallowance of FTC claims. In 2022, the tax authorities amended Rule 128, whereby Form 67 can now be filed on or before the end of the relevant assessment year. This change provided significant relief to taxpayers who had missed the original deadline.Practical challenges in FTC claimsOne of the most common challenges for salaried taxpayers arises due to differences between Indiaโ€™s financial year reporting system and varying tax years for example calendar-year tax systems followed in many other countries. Many countries follow a different tax year, as a result final tax assessments (covering 12-month India fiscal period of April 1 to March 31) may not be available when the ITR is due in India, requiring reliance on estimated or withheld taxes. This often necessitates subsequent revision of FTC claims once final numbers are available, which may not always be straightforward.

Country Tax Year Due date for filing
US January 1 to December 31 April 15 (extended filing deadline: October 15)
UK April 6 to April 5 January 31
Germany January 1 to December 31 July 31
Australia July 1 to June 30 October 31
Singapore January 1 to December 31 April 18

In several foreign jurisdictions, the tax liability is crystallized only after the tax return is lodged or notice of assessment is issued (for example, Singapore). As a result, the final foreign tax liability may not be available when the ITR is due for filing in India and taxpayers heavily rely on estimated foreign taxes or withholding amounts, which may later differ from the final liability. In summary, the challenge in FTC claims arises from timing mismatches between foreign and India tax years, which affects the availability of tax information, filing of Form 67, and accurate computation of the credit. Proper documentation and careful reconciliation of income and taxes across jurisdictions are therefore essential.An Updated ITR option is also available for taxpayers (if the timeline to revise the ITR has lapsed), where computation of FTC can be revisited with a tax liability scenario.In practice, taxpayers claiming FTC often face challenges in electronically verifying Form 67, despite multiple e-verification options (such as Aadhaar OTP, EVC, DSC etc.). These issues are especially common for Non-Residents or expatriates whose Aadhaar, mobile numbers, or bank accounts may no longer be active after leaving India, leading to delays in completing Form 67 compliance.Revised ITR considerationsAs per the provisions of the existing Act, a taxpayer can file a Revised ITR within 9 months from the end of the relevant financial year to rectify any omission or mistake in the Original ITR. However, this timeline often proved restrictive, especially for FTC claims, because foreign tax assessments and final tax figures from calendar-year jurisdictions may not be available before the Original ITR is filed. In addition, taxpayers could miss the opportunity to claim FTC if foreign tax details were finalized later. To address the above, the Finance Bill, 2026 proposes extending the timeline for filing Revised ITR to provide greater flexibility by extending the deadline from 9 to 12 months. This extended timeline gives taxpayers additional time to finalise foreign tax computations, including accurate FTC claims in the Revised ITR and avoid double taxation that may occur if FTC was omitted in the Original ITR. A nominal fee applies for late revisions within this extended period: INR 5,000 for income above INR 5 lakhs or INR 1,000 for income up to INR 5 lakh.The above change is intended to balance flexibility with a modest compliance cost, while giving taxpayers a reasonable window to amend returns for accurate FTC reporting.Transition to – Income tax Act, 2025 & Draft Income tax Rules, 2026 While the fundamental principle of granting FTC under the Income-tax Act, 2025 remains largely unchanged from the previous regime, the accompanying proposed Rules introduce significant clarifications and procedural updates that influence how FTC claims are made under DTAAs. These updates are primarily administrative and reporting-focused, without altering the underlying treaty-based credit mechanism.The provisions corresponding to Section 90 or 90A (relief under DTAA) in the old Act, re-codified under Section 159 or 160 in the new Income-tax Act, 2025. These sections will continue to govern how relief is granted where India enters into an agreement with another country for avoidance of double taxation, including FTC claims.The draft Income-tax Rules, 2026 replace Form 67 with Form 44 for claiming FTC that requires more detailed disclosure, including net income by source and country, foreign tax identification number, and the relevant DTAA Article for each credit claimed. Where foreign tax paid exceeds INR 1 lakh, the form must be certified by a Chartered Accountant, adding a significant compliance requirement.The draft rules also introduce Form 45 to report disputed foreign taxes, allowing credit only when the dispute is resolved and tax is finally paid. Additionally, they clarify how FTC should be apportioned when income taxed abroad spans across multiple India tax years, providing guidance for calendar-year jurisdictions.While the fundamental principle of FTC, lower of India tax or foreign tax paid remains unchanged, these procedural enhancements aim to improve transparency, reduce disputes, and align Indiaโ€™s framework with global standards. Accurate documentation and careful compliance will be critical for taxpayers to fully benefit from FTC and avoid double taxation.The road aheadFor cross-border employees, claiming FTC remains one of the most complex aspects of personal taxation due to differing tax years, varying documentation standards, and evolving compliance requirements. Ahead of FY 2025-26 ITR filing cycle, taxpayers should ensure all foreign income and taxes paid are accurately documented and reported, including employer withholding certificates, foreign tax returns, proof of payment etc.Those earning in calendar-year jurisdictions should aim to finalise foreign tax filings before the Revised ITR deadline to reflect the correct credit. Meticulous record-keeping, proactive planning, and timely compliance will be crucial to fully leverage legitimate FTC and avoid double taxation.(Ravi Jain, is Tax Partner at Vialto Partners. Vikas Narang, Director and Pawan Digga, Manager at Vialto Partners have also contributed to the article. Views are personal.)

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