FTC helps Indian businesses avoid double taxation by allowing them to credit taxes paid on overseas income against their Indian tax liability, subject to prescribed conditions. This reduces the tax burden on international operations and supports efficient cross-border tax planning.
As more Indian businesses expand through exports, overseas clients and foreign subsidiaries, claiming FTC under a Double Taxation Avoidance Agreement (DTAA) or Section 91 of the Income-tax Act has become an important part of managing global tax obligations.
What is a foreign tax credit?
FTC allows an Indian resident taxpayer, including companies, to claim a credit for income taxes paid in a foreign country against the Indian income tax payable on the same income. It helps prevent double taxation, reduces the tax burden on overseas income and supports cross-border business operations.
The provisions governing the FTC were contained in Sections 90, 90A and 91 of the Income-tax Act, 1961, read with Rule 128 of the Income-tax Rules, 1962. From 1 April 2026, the Income-tax Act, 2025 and the Income-tax Rules, 2026 apply. Although the statutory numbering has changed, the mechanism for claiming FTC remains substantially similar.
Why does double taxation happen in the first place?
Double taxation occurs when the same income is taxed in both the country where it is earned and the country where the taxpayer is a resident. This happens because most countries, including India, tax residents on their global income. At the same time, the source country may also tax that income under its domestic tax laws or through withholding tax. This commonly applies to royalties, fees for technical services, interest, dividends and business profits.
For example, an Indian company earning consultancy income from a client in Germany may have tax withheld in Germany and also pay tax in India when the same income is included in its total taxable income. Without relief under a DTAA or the unilateral relief provisions, the income could be taxed twice.
How does the foreign tax credit work?
FTC allows eligible foreign taxes paid to be set off against the Indian income tax payable on the same foreign income, subject to prescribed conditions. Under Rule 128, FTC is computed separately for each source of income from each country, and the eligible credit is then aggregated.
The computation follows these steps:
- Only against Indian income tax liability: FTC is available only against the Indian income tax liability, including applicable surcharge and cess, attributable to the foreign income. It cannot be claimed against interest, late fees or penalties.
- Lower of Indian tax or foreign tax: FTC is restricted to the lower of the foreign income tax paid or the Indian income tax payable on that income. Excess foreign tax generally cannot be carried forward, refunded or claimed unless permitted under the applicable law or treaty.
- Currency conversion: Foreign tax must be converted into Indian rupees using the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India (SBI) on the prescribed date.
- FTC against Minimum Alternate Tax (MAT): FTC is also available against tax computed under Section 115JB relating to Minimum Alternate Tax (MAT), where applicable.
- Disputed foreign tax: Credit cannot be claimed until the foreign tax dispute is resolved. The taxpayer must then furnish the prescribed evidence and confirm that no refund of the foreign tax has been claimed.
What are the filing requirements for claiming FTC?
To claim FTC, taxpayers must file the prescribed statement containing details of the foreign income earned and the foreign tax paid or deducted. This statement must be furnished on or before the due date for filing the income tax return under the applicable provisions, including a belated return where permitted.
Under the Income-tax Act, 1961, this statement was filed in Form 67. Following the implementation of the Income-tax Act, 2025 and the Income-tax Rules, 2026, with effect from 1 April 2026, the corresponding statement has been renumbered as Form 44.
The claim should also be supported by:
- A certificate or statement specifying the nature of the foreign income and the amount of foreign tax paid or deducted, issued by:
- the foreign tax authority;
- the person responsible for deducting the foreign tax; or
- The taxpayer has attached proof of payment.
- Proof of payment of the foreign tax, such as:
- a tax payment challan;
- bank advice or a bank statement; or
- any other acceptable documentary evidence showing that the foreign tax has been paid.
What is the difference between DTAA benefits and Section 91 relief?
DTAA and Section 91 both provide relief from double taxation, but they apply in different situations. Relief is generally claimed under Section 90 (or Section 90A, where applicable) when India has a DTAA with the country where the income arises. The relevant DTAA determines how the income is taxed, the maximum tax rate the source country may levy and the method of relief available in India, which may be through the credit method or, in certain cases, the exemption method.
Where India does not have a DTAA with the foreign country, relief may still be available under Section 91, provided the foreign levy is substantially similar to Indian income tax and the prescribed conditions are satisfied.
Businesses earning income from countries without a DTAA should verify whether the foreign tax qualifies for unilateral relief under Section 91, as not every foreign levy or statutory charge qualifies as an income tax for FTC purposes. As a result, the relief available under Section 91 may differ from the benefits available under a DTAA.
Conclusion
FTC can significantly reduce the tax burden on overseas income when businesses understand the applicable rules, maintain proper documentation and file the prescribed forms on time. Reviewing foreign tax positions country-wise and claiming relief under the relevant DTAA or Section 91 helps maximise eligible tax relief while ensuring compliance.
TallyPrime simplifies this process by helping businesses organise foreign income, tax records and financial reports, making FTC reporting and year-end tax compliance more accurate and efficient as international operations grow.
