While the earlier parts of this series have dealt with the foundational aspects of claiming Foreign Tax Credit (FTC) under Indian tax law, this fourth and concluding part addresses advanced issues frequently encountered by high-income taxpayers, NRIs, professionals, and CAs dealing with foreign income disclosures in ITR-2 or ITR-3.
This article focuses on lesser-known legal situations including FTC under MAT or AMT, treatment of foreign taxes later refunded, foreign income received through LLPs or pass-through structures, denial of FTC due to losses in India, and the intricacies of currency conversion errors.
All scenarios are explained with legal interpretation and practical illustrations under Rule 128 and Section 90 of the Income Tax Act, 1961.
Foreign Tax Credit in Cases of MAT or AMT Liability
One common doubt relates to whether FTC is allowed when the assessee is governed by Minimum Alternate Tax (Section 115JB) or Alternate Minimum Tax (Section 115JC). Although Section 90 does not explicitly reference MAT, Circular No. 2 of 2021 (dated March 3, 2021), issued by the CBDT, clarifies the position.
Clarification:
FTC is allowed even where tax is paid under MAT or AMT, provided the foreign-sourced income is included in book profits or adjusted total income. This allows eligible assessees to reduce MAT/AMT liability by the amount of foreign tax paid on that income.
Illustration:
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A taxpayer earns Rs. 10 lakh dividend income from a foreign subsidiary and pays tax of Rs. 1.5 lakh in that jurisdiction.
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The entire dividend is included in the book profit under Section 115JB.
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MAT liability in India amounts to Rs. 3 lakh.
In this case, the FTC of Rs. 1.5 lakh is allowable against MAT.
Note: The benefit cannot exceed the Indian tax payable on such foreign income.
FTC When Foreign Tax is Refunded or Reduced in Appeal
Rule 128(10) of the Income Tax Rules, 1962 addresses a critical situation: what happens when foreign tax originally paid and claimed as FTC is subsequently refunded or reversed?
Legal Provision:
Where any foreign tax, in respect of which FTC has been claimed and allowed in India, is refunded or credited back to the taxpayer in the foreign jurisdiction, such refunded amount shall be deemed to be tax payable by the assessee in the year in which the refund is received.
Practical Implication:
In the year of refund, the taxpayer must offer the earlier claimed FTC amount as additional tax liability. There is no need to revise the earlier return. Interest under Section 234B or 234C may also apply.
Illustration:
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A taxpayer claims FTC of Rs. 80,000 in AY 2024–25 on UK rental income.
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In the following year, Rs. 20,000 is refunded by HMRC due to rectification.
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In AY 2025–26, Rs. 20,000 will be added to the Indian tax payable, without revising AY 2024–25 return.
Proper documentation of the refund and tracking of the original credit is essential for audit compliance.
FTC for Income from LLPs, Trusts, and Tiered Foreign Entities
A complex scenario arises when foreign income is earned indirectly via LLPs, partnerships, or trusts—particularly when tax is paid at the entity level in the foreign jurisdiction. The issue is whether the Indian taxpayer can claim FTC on such taxes paid indirectly.
General Principle:
FTC is allowed only if:
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The income is included in the total income of the taxpayer in India, and
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The foreign tax is borne by the taxpayer or attributable to such income.
In cases where tax is paid by a pass-through foreign entity and income is credited to an Indian resident, Indian tax authorities require clear documentation tracing the income and the tax paid.
Illustration:
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A taxpayer is a 25% partner in a UK LLP which pays UK tax on the entire income.
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The partner receives Rs. 10 lakh share of profit and the LLP has paid Rs. 2 lakh on the same.
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The partner includes Rs. 10 lakh in Indian return.
The partner can claim FTC of Rs. 2 lakh, if the LLP provides a tax certificate showing the tax paid attributable to the partner’s share and the taxpayer files Form 67 with supporting documentation.
Note: FTC may be denied if the tax is considered borne by the LLP and not passed on to the partner in substance.
Denial of FTC When Indian Return Shows Loss
Another overlooked issue is when the taxpayer has foreign income on which tax has been paid abroad, but the Indian return shows loss due to business, capital, or other set-offs. Can FTC be claimed?
Legal Interpretation:
Rule 128(5) states that the amount of FTC shall not exceed the proportionate Indian tax attributable to the foreign income included in the total income.
If the total income after set-offs is nil or negative, there is no Indian tax liability. Consequently, no FTC can be claimed.
Illustration:
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Foreign income: Rs. 20 lakh (tax paid abroad: Rs. 3 lakh)
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Indian business loss: Rs. 25 lakh
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Total income in ITR: Nil
In this case, since there is no Indian tax liability, FTC cannot be claimed, and there is no provision to carry it forward.
Recommendation:
Taxpayers should consider whether postponing the set-off of losses or restructuring income recognition may allow actual FTC utilization.
Currency Conversion and Incorrect FTC Denial
Many claims are denied or reduced due to improper currency conversion methods while computing FTC. Rule 128(8) provides that foreign tax should be converted into Indian rupees at the telegraphic transfer buying rate (TTBR) of the Reserve Bank of India on the last day of the month preceding the month in which the tax was paid.
Common Mistakes:
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Using average annual exchange rates
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Using the exchange rate on the date of filing Form 67
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Not retaining TTBR evidence from RBI/SBI
Correct Approach:
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Determine the exact date when foreign tax was paid (e.g., date of deduction or remittance)
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Identify the preceding month
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Use TTBR from RBI for the last day of that preceding month
Illustration:
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Foreign tax paid on 15 September 2024
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Use TTBR as on 31 August 2024
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Convert to INR for FTC claim
Attach RBI printout or bank statement as supporting evidence in Form 67 documentation.
Final Summary: Common Complex Scenarios and Their FTC Treatment
| Situation | FTC Eligibility | Key Consideration |
|---|---|---|
| MAT or AMT taxpayer | Allowed | Foreign income must be part of book profit |
| Refund of foreign tax | Reversal required | Reversal in year of refund |
| Tax paid by LLP or foreign trust | Conditional | Requires attribution and proper documentation |
| Indian return shows net loss | Not allowed | No carry forward of FTC under Rule 128 |
| Wrong currency conversion | Denied | Use TTBR of previous month-end per Rule 128(8) |
Conclusion
Claiming Foreign Tax Credit under DTAA goes well beyond matching foreign tax paid with Indian tax payable. Taxpayers and professionals must be alert to the nuances of MAT liability, entity-level income structures, refunds, timing mismatches, and procedural pitfalls like incorrect currency conversion.
This final part of the series equips you to handle complex FTC claims with precision and confidence. Every element—from foreign tax documentation to Form 67 to computation of eligible FTC—must be carefully aligned with Indian tax rules to avoid future scrutiny or denial of credit.