How to Claim DTAA Benefits & Foreign Tax Credit: A Guide for Indian Residents with US Income
How to Claim DTAA Benefits & Foreign Tax Credit: A Guide for Indian Residents with US Income
Double Taxation Avoidance Agreement (DTAA) is a relief mechanism that prevents taxpayers from being taxed on the same income in two different countries. If you are an Indian resident earning income abroad or a Non-Resident Indian (NRI) earning income in India, you can claim DTAA benefits to avoid double taxation. This requires obtaining a Tax Residency Certificate (TRC) via Form 10FA and claiming Foreign Tax Credit (FTC) through Form 67.
1. Understanding DTAA and Its Benefits
DTAA is an agreement between two countries to provide relief to taxpayers by either exempting the income in one country or providing a tax credit for taxes paid in another country. India has DTAA agreements with multiple countries, ensuring that an individual or business does not pay tax twice on the same income.
Types of DTAA Relief
Exemption Method: Income is taxed only in one country.
Tax Credit Method: Tax paid in a foreign country is allowed as a credit in India.
2. How to Obtain a Tax Residency Certificate (TRC) – Filing Form 10FA
A Tax Residency Certificate (TRC) is essential to claim DTAA benefits. It serves as proof that you are a resident of India for tax purposes.
Documents Required for TRC Application (Form 10FA):
PAN Card
Address Proof
Income Details
Tax Return Copy (if available)
Upon verification, the Assessing Officer (AO) will issue Form 10FB, which serves as the TRC.
3. Claiming Foreign Tax Credit (FTC) – Filing Form 67
If you have already paid tax in a foreign country and need to claim a tax credit in India, you must file Form 67.
Documents Required for Form 67:
Proof of foreign tax payment (Tax receipt, Form 16, etc.)
TRC obtained via Form 10FA/10FB
Relevant DTAA agreement (if required)
Due Date: Form 67 must be filed before submitting the Income Tax Return (ITR) for that financial year.
Example: Indian Resident Earning Dividend & Interest from a US Broker
Let’s say an Indian resident earns dividend and interest income from a US-based broker such as Charles Schwab, Fidelity, or TD Ameritrade. Here’s what needs to be done:
The US broker will deduct withholding tax (typically 25% to 30%) on dividends and may also withhold tax on interest income.
The broker will provide Form 1042-S at the end of the financial year, which shows the amount of tax withheld.
The Indian resident should collect Form 1042-S from the broker as proof of tax paid in the US.
This tax can be claimed as a foreign tax credit (FTC) in India by filing Form 67 before the due date of the ITR.
The individual must also report this foreign income in their Schedule FSI (Foreign Source Income) of the ITR.
Foreign Tax Credit (FTC) - FY vs Calendar Year
Foreign Tax Credit in India is available based on the Financial Year (FY) (April 1 - March 31), even if the foreign country follows a Calendar Year (CY) (January 1 - December 31) for tax reporting.
How to Align FTC Claims with Different Tax Years?
If foreign tax is paid based on CY, but you need to claim FTC in India for FY, taxes must be proportionately allocated.
Example:
Suppose an Indian resident earns dividend income from the US in CY 2024 (Jan-Dec), and tax is deducted at source by the US broker.
However, for ITR filing in India for FY 2024-25 (April 1, 2024 – March 31, 2025), only the portion of income earned from April 1, 2024, to Dec 31, 2024, and Jan 1, 2025, to March 31, 2025, should be reported in respective years.
The foreign tax paid (shown in Form 1042-S for the US) must be allocated accordingly to match the Indian FY before claiming FTC.
Important Considerations:
Credit is claimed in the FY in which the foreign income is offered to tax in India.
Proportionate allocation is needed if the foreign tax period does not match the Indian FY.
Foreign Tax Credit (FTC) is available only on income taxable in India.
Exchange rate conversion should be based on the last day of the month preceding the foreign tax payment, as per RBI rates.
4. Key Deadlines & Compliance Requirements
Form 10FA (TRC Application): Apply as early as possible before claiming DTAA benefits.
Form 67 (FTC Claim): Must be filed before the due date of ITR submission.
ITR Filing: Ensure all necessary forms are filed before the ITR due date (usually July 31 for individuals).
Conclusion
If you are earning income in multiple countries, understanding DTAA provisions, obtaining a TRC via Form 10FA, and filing Form 67 for FTC is essential to minimize tax liabilities. Timely compliance with these procedures ensures that you do not pay double taxes and take full advantage of tax treaties between India and other nations.
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