Income-tax 18th Amendment Rules 2016 introduced Rule 128 into the Income-tax Rules 1962, establishing a formal statutory framework for Indian residents to claim Foreign Tax Credit on doubly taxed overseas income. The notification provides clear computation methods, documentation requirements, and mandatory Form 67 filing procedures to obtain relief under Section 90, Section 90A, and Section 91 of the Income-tax Act 1961.
Statutory Framework of Rule 128 and Foreign Tax Credit
Before the insertion of Rule 128 through CBDT Notification S.O. 2213(E), the Income-tax Act allowed relief from double taxation under Section 90 and Section 91, but taxpayers lacked detailed administrative rules explaining how credit should be calculated, apportioned, and claimed. The 18th Amendment Rules came into force on April 1, 2017, applicable from Assessment Year 2017-18 onward. Under this rule, an assessee who is a resident of India is entitled to claim credit for any foreign tax paid by way of deduction or direct payment in a foreign country or specified territory.
Credit is available only in the financial year in which the foreign income corresponding to such tax is offered to tax or assessed to tax in India. When foreign income is offered to tax across multiple years, the foreign tax credit is distributed across those respective years in the exact proportion in which the income is subjected to tax in India. For companies managing international transactions and compliance, aligning cross-border records with standard filing guidelines such as Annual Income Tax Returns Filling for LLP helps maintain accurate reconciliation between domestic tax computations and foreign withholding statements.
Taxes Eligible for Foreign Tax Credit Relief
Rule 128 categorizes foreign taxes into two distinct categories depending on whether India maintains a Double Taxation Avoidance Agreement (DTAA) with the source nation:
- Agreement Countries (Section 90 and Section 90A): In countries or territories where India has entered into a bilateral tax treaty, the foreign tax covered under that specific agreement qualifies for credit against Indian tax liability.
- Non-Agreement Countries (Section 91): In countries where no double tax treaty exists, credit is allowed for foreign taxes payable in the nature of income tax, matching the explanation in Section 91.
Foreign tax credit is granted against the basic income tax liability, surcharge, and education cess payable in India. The credit cannot be utilized to offset interest, fees, or penalties levied under Indian income tax provisions. Furthermore, the credit is strictly restricted to the lower of the Indian tax payable on the foreign income or the actual foreign tax paid.
Mandatory Documentation and Form 67 Requirements
To claim Foreign Tax Credit under Rule 128, resident taxpayers must submit specific supporting documentation electronically on the official income tax portal before or alongside the return of income under Section 139(1). The primary requirements include:
- Form 67 Submission: Form 67 is the formal statement of foreign income offered to tax and foreign tax paid or deducted during the year. It must be verified using a digital signature certificate or electronic verification code.
- Tax Certificate or Withholding Statement: A formal certificate from the tax authority of the foreign country, or a withholding certificate from the foreign payer, specifying the nature of income and tax deducted.
- Proof of Tax Payment: An official acknowledgment or bank challan indicating payment of foreign taxes, especially where taxes were paid directly rather than deducted at source.
- Tax Residency Certificate: A valid certificate of residency establishing Indian tax resident status during the relevant assessment year.
Taxpayers engaged in cross-border operations or related party dealings should also review regulations governing Domestic Transfer Pricing to ensure that inter-company pricing, management fees, and international revenue allocations are properly documented.
Computation Methodology for Foreign Tax Credit
The computation of Foreign Tax Credit under Rule 128 follows a source-by-source and head-by-head aggregation model. Credit is determined separately for each country and for each stream of income.
| Step Number | Computation Step | Methodology & Regulatory Rule |
|---|---|---|
| Step 1 | Identify Foreign Income Streams | Classify overseas income into respective heads (Salary, House Property, Business, Capital Gains, Other Sources) by country of origin. |
| Step 2 | Calculate Indian Tax on Foreign Income | Apply the Indian effective tax rate (including surcharge and cess) to the doubly taxed foreign income. |
| Step 3 | Convert Foreign Tax into Indian Rupees | Use the Telegraphic Transfer (TT) buying rate on the specified conversion date under Rule 115. |
| Step 4 | Determine Allowable Credit Limit | Take the lower of the Indian tax payable or actual foreign tax paid per source stream. |
Foreign Exchange Conversion Under Rule 115
Foreign currency conversion plays a central role in FTC claims. Under Rule 115 of the Income-tax Rules, foreign tax paid or deducted must be converted into Indian Rupees at the Telegraphic Transfer buying rate of the specified currency as adopted by the State Bank of India. The conversion date corresponds to the last day of the month immediately preceding the month in which the tax was paid or deducted. Applying the correct historical exchange rate ensures that credit claims match statutory computations during scrutiny assessments.
Disputed Foreign Taxes and Rule 128 Adjustments
Rule 128 contains explicit provisions addressing situations where the foreign tax liability is under dispute with foreign tax authorities. No credit is allowed for disputed foreign taxes in the initial assessment year. However, if the taxpayer subsequently resolves the dispute and furnishes proof of settlement along with an indemnity bond within six months from the end of the month in which the dispute is decided, the credit can be claimed through revised assessment procedures.
Taxpayers claiming treaty benefits must confirm that foreign tax payments are not refundable or eligible for total exemption under the relevant bilateral treaty provisions. Official guidelines, forms, and filing utilities are available directly on the Income Tax Department portal.
Summary of Taxpayer Compliance Steps
To ensure smooth processing of foreign tax relief, resident assessees should maintain chronological records of overseas earnings, exchange conversion slips, and foreign tax payment receipts. Preparing Form 67 well in advance of the return filing deadline prevents last-minute technical delays and protects the taxpayer from losing valid foreign tax deductions.