In India, the tax liability of a resident individual with worldwide income is determined based on the provisions of the Income Tax Act, 1961. According to the Act, a resident individual is taxed on their worldwide income, including all income earned or received in India and any income earned or received outside India.
Income earned or received in India is taxed at the applicable slab rate, which varies depending on the individual’s total income. The current slab rates [As per mostly used Old Tax regime] for the financial year 2021-22 (the assessment year 2022-23) are as follows:
- Up to INR 2,50,000: Nil
- INR 2,50,001 to INR 5,00,000: 5%
- INR 5,00,001 to INR 10,00,000: 20%
- Above INR 10,00,000: 30%
Income earned or received outside India is taxed at the applicable slab rate, after allowing for certain deductions and exemptions. In certain cases, foreign income may also be taxed at special rates or may be exempt from tax altogether.
It is important to note that resident individuals are required to disclose their worldwide income in their tax returns, and pay tax on any income that is taxable in India.
Provisions to avoid double taxation on Income from outside India
As discussed above, a resident individual is taxed on their worldwide income, regardless of where it is earned. However, certain provisions are made to avoid double taxation of the same income.
If an individual is a resident of India and has income from sources outside India, they are required to disclose their worldwide income in their income tax return in India. The income earned outside India is first converted into Indian Rupees using the exchange rate on the last day of the relevant tax year.
If the individual has paid taxes on the same income in a foreign country, they may be eligible for a credit for foreign taxes paid, subject to certain conditions. This credit is allowed to the extent that the tax paid in the foreign country is not less than the tax payable on the same income in India as per the applicable double taxation avoidance agreement (DTAA) between the country where the income is earned and the resident’s home country. This is known as the foreign tax credit.
It is important for resident individuals with worldwide income to properly report and pay taxes on their worldwide income in India, as failure to do so can result in penalties and interest. Further, it is also important to note that there are several exemptions and deductions available under the Indian tax laws that can help reduce an individual’s tax liability. Hence It is advisable to consult with a tax professional or refer to the Indian tax laws to determine your tax liability and ensure compliance with the relevant tax rules and regulations.
Key points to check in DTAA for claiming foreign tax credit by resident
There are several key points to check when claiming foreign tax credit (FTC) through a double taxation avoidance agreement (DTAA) as a resident:
1. Eligibility: The first and foremost point to check is whether you are eligible to claim a foreign tax credit under DTAA or not. This will depend on your status as a resident and the terms of the DTAA between your country and the country in which you have paid taxes.
2. Nature of Income: The nature of the income earned and whether it falls under the scope of the DTAA.
3. Double Taxation Relief: The DTAA should specify the relief available to you in terms of double taxation. The availability of foreign tax credits and the rules for claiming them, including any limitations or exclusions.
4. Maximum Credit Limit: Some DTAA’s may have a maximum limit on the amount of foreign tax credit that can be claimed. It is important to check this limit to ensure that you are not overclaiming.
5. Type of Taxes Covered: DTAA’s typically specify the types of taxes that are covered under the agreement. It is important to check if the taxes you have paid are covered under the DTAA.
6. Claim Methods: The potential for claiming treaty benefits or relief from double taxation through methods such as the credit method or the exemption method.
7. Documentation: You will need to provide proper documentation to support your claim for the foreign tax credit. This could include proof of payment of taxes in the foreign country, as well as any other relevant documents as required by the DTAA.
8. Filing Deadline: DTAA’s may have specific deadlines for filing a claim for the foreign tax credit. It is important to check and ensure that you meet these deadlines.
Documents required for taking foreign tax credits by residents in India
The following documents will be required before claiming FTC.
1. Proof of foreign income: This can include copies of salary slips, bank statements, or other documents showing the income earned abroad.
2. Proof of tax paid abroad: This can include copies of tax returns filed in the foreign country or tax certificates issued by the foreign government.
3. Proof of Indian residence: This can include a copy of the individual’s Indian passport, or other documents showing their Indian citizenship.
4. Documents relating to the foreign tax credit claim: This can include a copy of the foreign tax credit form (Form 67), along with any supporting documents or evidence required to support the claim.
What is Form No. 67
Form 67 is a required form for claiming foreign tax credit by a resident in India. To claim the foreign tax credit, the individual must:
i. Have paid foreign taxes on income earned abroad
ii. Have received income from sources outside India
ii. Have filed their income tax return in India
i. Informations to be provided in Form 67
To claim the foreign tax credit, the individual must provide the following information in Form 67:
- Details of foreign income and taxes paid on such income
- Details of the foreign tax credit claimed in previous years
- Details of the tax treaty between India and the foreign country
- Proof of payment of foreign taxes
ii. Documents and information required to be attached with Form N0. 67
The following documents and information are required to be attached along with the form:
1. Proof of foreign tax payment: This could be a copy of the tax return filed in the foreign country or a certificate of tax paid issued by the foreign tax authorities.
2. Details of the income earned in the foreign country: This includes the nature and source of the income, and the tax rate applicable to the income.
3. Details of the tax credit claimed: This includes the amount of foreign tax paid, and the amount of credit claimed against it.
4. Other relevant documents: This could include documents such as bank statements, proof of residence in the foreign country, and any other supporting documents that may be required by the tax authorities.
Form 67 should be filed along with the income tax return for the relevant assessment year, and the foreign tax credit claimed can be set off against the tax liability of the individual in India.
iii. Process of filing form no. 67 online:
1. Go to the Income Tax Department’s e-filing website (www.incometax.gov.in).
2. Login to your account using your user ID and password.
3. Click on the “e-file” tab and then select “Income Tax Forms”.
4. Select “Form 67 – Statement of Foreign Assets and Income” and the relevant assessment year for which you want to claim the foreign tax credit.
5. Click on the “Continue” button to proceed to the next page.
6. Fill out the form with details about the foreign income & tax paid, any documents or certificates from the foreign tax authorities, and any other relevant information.
7. Review the information provided and ensure that it is correct.
8. Click on the “Submit” button to complete the process. You will receive a confirmation message indicating that the form has been successfully submitted.