What Is Foreign Tax Credit?
Foreign Tax Credit (FTC) is the mechanism that lets a person who is a tax resident of India set off, against their Indian income-tax liability, tax they have already paid on the same income to a foreign government. Without it, income earned abroad — a salary, dividend, royalty, or business profit — could be taxed twice: once by the country where it arose, and again by India, which taxes its residents on worldwide income. FTC is claimed by furnishing a prescribed statement of the foreign income and the tax paid on it, commonly identified as Form 67, in support of the credit claimed on the taxpayer's Indian income-tax return.
How Foreign Tax Credit Works Under Indian Law
Two Routes: Treaty Relief and Unilateral Relief
Indian law gives a resident taxpayer two distinct routes to relief, depending on whether India has a tax treaty with the country where the income was taxed.
- Bilateral relief — where a Double Taxation Avoidance Agreement (DTAA) is in force with that country, under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961).
- Unilateral relief — where no such agreement exists, under section 160 of the Income-tax Act, 2025 (section 91 of the Income-tax Act, 1961).
Bilateral Relief — Section 159
Section 159 empowers the Central Government to enter into an agreement with another country or specified territory for granting relief on income taxed in both India and that country, or for avoiding double taxation of income outright. Where such an agreement is in force, section 159(4) directs that the provisions of Indian tax law apply to the assessee "to the extent they are more beneficial" — so a taxpayer covered by a DTAA can rely on whichever of the treaty or the domestic Act treats their income more favourably.
Two limits apply even where a treaty is more generous. First, section 159(6) preserves India's General Anti-Avoidance Rule, found in Chapter XI of the Act: GAAR applies to the assessee even where its provisions are not beneficial to them, irrespective of the more-beneficial rule in section 159(4) — so an arrangement structured mainly to access a treaty benefit can still be tested against GAAR. Second, a non-resident claiming relief under an Indian DTAA must, under section 159(8), hold a certificate of tax residency issued by their own country's government, and must furnish any further documents the rules prescribe.
The actual credit mechanics — the method of computation and how the credit is capped against a specific head of income — sit in the relevant DTAA's own credit article rather than in section 159 itself. The India-USA DTAA, for example, sets this out in Article 25 ("Relief from Double Taxation"): the United States allows its citizens and residents a credit for "the income-tax paid to India," and India allows its residents a deduction from Indian tax "equal to the income-tax paid in the United States," which "shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States."
Unilateral Relief — Section 160
Where India has no DTAA with the country concerned, section 160 gives relief directly, without needing a treaty. An Indian resident who proves that income which arose outside India (and is not deemed to arise in India) was taxed, by deduction or otherwise, in a country with no section 159 agreement is entitled to deduct from the Indian income-tax payable an amount calculated on that doubly taxed income at the Indian rate of tax or the foreign country's rate of tax, whichever is lower; where the two rates are equal, the deduction is at that rate. Section 160(3) defines the "Indian rate of tax" as Indian income-tax (after relief under other provisions of the Act but before relief under this Part) divided by total income, and the "rate of tax of the said country" as the foreign income-tax and super-tax actually paid there, after domestic relief, divided by the income assessed in that country. The same rule extends to a non-resident partner's share of a resident firm's foreign-sourced income.
Because section 160 fixes the credit at the lower of the two rates, it can never fully eliminate double taxation where the foreign rate exceeds the Indian rate — the excess foreign tax is simply not creditable. This is the same "ordinary credit" ceiling that DTAA credit articles typically apply, including Article 25 of the India-USA treaty described above.
Claiming the Credit: Form 67
Both routes require the credit to be substantiated. Rule 128(8)(i) of the Income-tax Rules, 1962 requires the claimant to furnish "a statement of income from the country or specified territory outside India offered for tax for the previous year and of foreign tax deducted or paid on such income in Form No.67 and verified in the manner specified therein", and Rule 128(8)(ii) requires a certificate or statement of the tax deducted or paid, from the foreign tax authority, from the person who deducted it, or signed by the assessee with proof of payment or deduction. That rule text governs tax years before 1 April 2026; the Income-tax Rules, 2026 took effect on that date and the number they give this rule is not confirmed here, so check the rule and its time limit in force for the year concerned. The underlying rule-making power sits in section 533(2)(q) of the Income-tax Act, 2025, which lets the rules prescribe "the procedure for granting of relief or deduction, of any income-tax paid in any country or specified territory outside India, under section 159 or 160, against the income-tax payable under this Act." A credit claimed without the required statement, or without evidence that the foreign tax was actually paid, risks being disallowed on assessment.
Why Foreign Tax Credit Matters for Foreign Companies and Investors
FTC matters directly to two groups Beacon Filing works with. Indian-resident promoters, directors, and executives connected to an overseas parent or affiliate — who receive salary, consulting fees, dividends, or director's fees from abroad — are taxed on that income in India on a worldwide basis, and typically also face withholding at source in the foreign country; FTC prevents that foreign withholding from becoming a second, uncredited layer of tax on top of the Indian liability. So do returning non-resident Indians whose foreign income still carries tax deducted abroad in the year they become Indian residents. Second, an Indian subsidiary or LLP that itself earns foreign-sourced income — royalty from a foreign group company, interest on an overseas deposit, or profit attributable to a foreign branch — files its own income-tax return as an Indian resident and needs the same credit to avoid taxing that income twice at the entity level.
Because the credit is capped at the lower of the Indian and foreign rates, whether under section 160 or under a DTAA's credit article, the benefit only ever limits double taxation — it does not guarantee its complete elimination. A taxpayer facing a foreign rate higher than the applicable Indian rate on that income cannot recover the excess through FTC. Establishing the correct tax residency, source country, and treaty status before the Indian return is filed therefore has a direct bearing on how much of the foreign tax actually comes back as an Indian credit.
A Worked Example
Consider an Indian-resident consultant who earns advisory fees from a client in a country with which India has a DTAA on the model of the India-USA agreement described above. The foreign country withholds tax on the fee before payment, and the consultant separately declares the same fee as income on their Indian return. Applying the treaty's credit article, the consultant deducts from the Indian tax payable an amount equal to the foreign tax withheld, capped at whichever is lower: the actual foreign tax withheld, or the portion of Indian tax attributable to that fee income. If the foreign withholding rate is higher than the effective Indian rate on that income, only the Indian-rate portion is creditable — the balance of the foreign tax is not recovered through the Indian return. The consultant substantiates the claim with the required statement of foreign income and tax paid when filing the Indian return.
A Compliance Checklist
- Confirm whether India has a DTAA with the country where the foreign tax was paid — this decides whether section 159 or section 160 governs the claim.
- Identify the specific credit article in the DTAA (where one applies) and check its cap — most articles limit the credit to the Indian tax attributable to the foreign-sourced income.
- Where no DTAA exists, compute the section 160 credit at the lower of the Indian rate of tax and the foreign country's rate of tax on the doubly taxed income.
- Prepare the statement of foreign income and foreign tax in Form 67, with the supporting certificate or statement of that tax, before finalising the Indian return — and confirm the rule and time limit in force for the year concerned.
- For a non-resident claiming relief under an Indian DTAA, keep a valid tax residency certificate from the home country's government on file, as section 159(8) requires.
Frequently Asked Questions
Do I need a tax treaty with the foreign country to claim a foreign tax credit in India?
No. If India has a DTAA with that country, the credit is claimed under section 159 of the Income-tax Act, 2025 (section 90 of the Income-tax Act, 1961) and the treaty's own credit article. If there is no DTAA, an Indian resident can still claim relief under section 160 (section 91 of the Income-tax Act, 1961), which gives a credit at the lower of the Indian or foreign tax rate on the same doubly taxed income.
Can a foreign tax credit exceed the Indian tax on the same income?
No. Both the treaty route and the unilateral route under section 160 cap the credit at the lower of the Indian rate of tax and the foreign country's rate, applied to the doubly taxed income. If the foreign tax paid is higher than the Indian tax attributable to that income, the excess is simply not creditable against the Indian tax on that income.
Does India's General Anti-Avoidance Rule override a treaty-based foreign tax credit claim?
Yes, in principle. Section 159(6) of the Income-tax Act, 2025 provides that the General Anti-Avoidance Rule in Chapter XI applies to an assessee even where its provisions are not beneficial to them, irrespective of the more-beneficial treaty rule in section 159(4). An arrangement structured mainly to access a treaty's credit provision can therefore still be tested against GAAR.
What proof do I need to furnish to claim a foreign tax credit?
The credit must be substantiated with a statement of the foreign income and the foreign tax deducted or paid on it, in Form 67, together with a certificate or statement of that tax — the two documents Rule 128(8) of the Income-tax Rules, 1962 lists. Section 533(2)(q) of the Income-tax Act, 2025 is the rule-making power under which this procedure is prescribed for both the treaty route under section 159 and the unilateral route under section 160.
Does a non-resident need anything extra to claim relief under an Indian DTAA?
Yes. Under section 159(8) of the Income-tax Act, 2025 (section 90(4) of the Income-tax Act, 1961), a non-resident claiming relief under an Indian DTAA must hold a certificate of their tax residency issued by their own country's government, and must furnish any other documents or information the rules prescribe.
See also: Double Taxation Relief, Double Taxation Avoidance Agreement (DTAA), and Income Tax Return.
Earning income abroad, or receiving foreign-sourced income through an Indian entity? Beacon Filing helps foreign-invested companies and their Indian principals compute and substantiate foreign tax credit claims.