(Applicable for Assessment Year 2025–26 onwards)
By- CA Surekha Ahuja
Introduction
Tax residency and the interplay between Indian and foreign tax systems often create significant challenges for individuals who relocate abroad during the financial year. A common example is an individual moving from India to the United States in December 2024, beginning employment in the United States in January 2025, and receiving salary income from a U.S. employer thereafter.
India taxes global income for resident and ordinarily resident individuals. Therefore, even though the United States follows the calendar year (January to December), any income earned between January and March 2025 is liable to tax in India for the financial year 2024–25, relevant to Assessment Year 2025–26.
This guide explains the manner of claiming Foreign Tax Credit (FTC) for such foreign income, the role of Form 67, the applicable provisions under the Income-tax Act, 1961, the Double Taxation Avoidance Agreement (DTAA), and the Income-tax Rules, 1962, including practical compliance procedures.
Legal Framework Governing Foreign Tax Credit
1. Scope of Taxation under Section 5
Section 5(1)(c) of the Income-tax Act provides that in the case of a resident and ordinarily resident, total income includes all income accruing or arising outside India, regardless of whether it is received in India.
Thus, where an individual continues to qualify as resident and ordinarily resident for FY 2024–25, income earned in the United States from January to March 2025 is taxable in India.
2. Relief under Section 90 – Double Taxation Avoidance Agreement
Section 90(1) empowers the Central Government to enter into agreements with foreign countries to avoid double taxation. Section 90(2) further provides that where such an agreement exists, the provisions of the Act shall apply only to the extent they are more beneficial to the taxpayer.
The India–U.S. DTAA provides relief by the credit method, under which taxes paid in the United States on income that is also taxable in India can be claimed as a deduction from Indian tax payable on such income.
3. Rule 128 – Foreign Tax Credit Mechanism
Rule 128 of the Income-tax Rules, 1962 lays down the following essential conditions for availing FTC:
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Credit is allowed only for foreign tax paid on income which is doubly taxed (i.e., also offered to tax in India).
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FTC is available to the extent of lower of the foreign tax paid or Indian tax payable on such income.
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FTC can be claimed only if tax has been paid or deducted in the foreign country.
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FTC is not available in respect of any amount that is disputed in the foreign country, unless it is finally settled.
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Form 67 must be filed electronically on or before the due date of filing the return of income under Section 139(1).
Rule 128(9) further allows credit in a subsequent year if the foreign tax was paid after filing the Indian return for the relevant assessment year.
Practical Situation: Indian Resident Moves to U.S. in December 2024
Let us assume the following factual matrix:
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The assessee moved to the United States on 10 December 2024 and started employment there.
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Salary was received from a U.S. employer from January to March 2025.
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U.S. tax was withheld by the employer (TDS equivalent), but the U.S. tax return (Form 1040) for 2025 will only be filed in 2026.
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The assessee remains a tax resident in India for FY 2024–25.
Indian Tax Treatment
The salary income from January to March 2025 is taxable in India in FY 2024–25. Accordingly, the assessee must:
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Offer such income to tax in India in the return for Assessment Year 2025–26.
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Claim Foreign Tax Credit under Section 90 read with Rule 128.
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File Form 67 on or before the due date under Section 139(1).
Working Illustration – FTC Computation
Particulars of Income and Tax
| Description | Value |
|---|---|
| Salary received in the U.S. (Jan–Mar 2025) | USD 15,000 |
| U.S. tax withheld on salary (TDS) | USD 3,000 |
| Exchange rate (SBI TT Buying rate as on 31 March 2025) | INR 83 per USD |
| Salary in INR | INR 12,45,000 |
| U.S. tax withheld in INR | INR 2,49,000 |
| Indian tax payable on foreign salary | INR 3,85,000 |
| FTC allowable under Rule 128(2) | INR 2,49,000 (lower of foreign tax and Indian tax) |
The foreign tax credit of INR 2,49,000 can be claimed in the Indian return if:
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Salary is disclosed in full.
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Foreign tax has actually been deducted or paid.
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Documentary evidence is available.
Acceptable Proofs of Foreign Tax Deduction
Rule 128(4) specifies that the assessee shall furnish:
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A certificate or statement specifying the nature of income and foreign tax deducted, issued by the foreign tax authority, or
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A certificate issued by the person responsible for deduction (e.g., employer), or
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A signed declaration by the assessee, supported by evidence such as payslips, where the foreign return is not yet filed.
In practice, payslips showing U.S. federal withholding, or an employer's withholding certificate, may be accepted for claiming FTC in the absence of Form 1040 or Form W-2.
Filing of Form 67 – Content and Procedure
Form 67 must be submitted online through the income tax e-filing portal before filing the return. It must contain the following:
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Country (e.g., United States)
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Foreign TIN (e.g., Social Security Number)
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Head of income (e.g., salary)
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Income period (e.g., Jan to Mar 2025)
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Amount of income in foreign currency and equivalent INR
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Amount of foreign tax paid in foreign currency and equivalent INR
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Indian tax liability on such income
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FTC claimed (being lower of foreign tax paid or Indian tax payable)
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Details of supporting documents
Form 67 is mandatory. The Supreme Court in Wipro Limited v. DCIT (2022) affirmed that non-filing of Form 67 before the due date would disqualify the FTC claim for that year.
Treatment Where U.S. Return is Filed Later
If only TDS has been deducted but the actual return is yet to be filed in the U.S., the taxpayer may still claim FTC based on evidence of deduction. If further U.S. tax is paid after filing the Indian return, Rule 128(9) allows the taxpayer to file Form 67 and claim the balance credit in the subsequent assessment year.
Frequently Asked Questions
Is Form 67 compulsory for FTC?
Yes. Form 67 must be filed before filing the income tax return to claim FTC.
Can FTC be claimed if Form 1040 or W-2 is not yet available?
Yes, if there is documentary proof that tax was deducted in the foreign country. Payslips or employer withholding letters are acceptable under Rule 128(4).
What exchange rate is used?
The SBI TT Buying rate on the last day of the previous year (31 March) is used for conversion.
Can FTC be claimed for taxes paid later?
Yes. If tax is paid in the subsequent year, FTC can be claimed under Rule 128(9) in that year.
Is foreign income exempt from tax in India if tax is paid in the U.S.?
No. Indian residents are taxed on global income. FTC provides relief from double taxation but does not exempt foreign income.
Compliance Checklist for AY 2025–26
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Determine residential status based on stay in India.
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Disclose global income in the ITR, including U.S. salary from Jan–Mar 2025.
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Ensure evidence of U.S. tax withholding is obtained.
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Convert foreign income and tax to INR using appropriate rate.
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File Form 67 electronically before filing ITR.
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Claim FTC limited to lower of foreign or Indian tax on such income.
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Retain all supporting documents for at least six years.
Conclusion
Navigating dual tax jurisdictions requires careful alignment between income tax laws, DTAA provisions, and procedural rules. Indian residents moving abroad mid-year must be cautious to include foreign income in their Indian return and secure FTC through proper documentation and timely filing of Form 67.
Understanding the law, applying the correct rate conversions, and tracking foreign tax deductions carefully ensures not only compliance but also optimal tax efficiency. In this transitional phase of international employment, Form 67 is not merely a formality but a vital statutory mechanism for protecting taxpayers against double taxation.
