For an Indian freelancer, working with a foreign client can create a major tax problem: the same income can be taxed in two different countries. This is called double taxation. The good news is that you don’t have to pay tax twice. You can get a credit for the tax you have already paid abroad when you file your Indian income tax return. This is called a Foreign Tax Credit (FTC).

While it may seem complicated, understanding the process ensures you stay compliant and avoid losing money. Here’s a detailed guide on how to claim it.

The Problem: When Double Taxation Happens

As a tax resident of India, you are required to pay tax on your global income, which includes money earned from foreign clients. However, some countries may also have a rule that requires tax to be withheld on payments made from within their borders.

For example, a US-based client may withhold tax on a payment they make to you. When you file your return in India, this same income is again subject to tax. Without a way to account for the tax already paid, you would end up being taxed twice on the same income.

The Solution: Claiming Foreign Tax Credit

India has signed Double Taxation Avoidance Agreements (DTAA) with many countries to prevent this exact problem. The DTAA allows you to claim a credit for the tax paid in the foreign country.

In simple terms, a Foreign Tax Credit is a reduction in your Indian tax liability equal to the tax you paid abroad. The credit amount is generally limited to the lower of the tax paid in the foreign country or the tax you would have to pay on that same income in India. This ensures you only get a credit for a reasonable amount of tax.

This credit is claimed in one of two ways:

• Under a DTAA (Section 90): If India has a DTAA with the country where your client is, you will claim the credit under this section.
• Without a DTAA (Section 91): If there is no DTAA, you can still claim a foreign tax credit for the taxes paid abroad under Section 91, but with slightly different rules.

Your Key Document: Form 67

To claim a Foreign Tax Credit, you must file a specific form on the Indian Income Tax portal: Form 67. This is a mandatory step. Even if you mention the foreign tax in your tax return (ITR), your claim can be rejected if you do not file Form 67.

Form 67 is a statement where you provide details of your foreign income and the tax paid on that income. It is divided into two parts:

• Part A details the income earned abroad and the tax paid on it.
• Part B is for specific situations, like when a foreign tax is under dispute.

It is crucial to file Form 67 before or on the same day as your Income Tax Return (ITR) for the same financial year. Failing to do so could result in your tax credit claim being rejected. The Income Tax Department has been strict about this deadline.

The Step-by-Step Process to Claim Your Credit

Here is a clear process you can follow to successfully claim your Foreign Tax Credit:

1. Gather Your Documents

You need clear evidence that you have paid tax in a foreign country. This includes:

• A certificate or statement from the foreign tax authority or from the client who withheld the tax. This must mention the nature of the income and the tax amount.
• Proof of payment, such as a tax challan or a receipt from the foreign tax authority.
• A self-declaration confirming the details of the foreign tax and income.

2. Convert Your Income to INR

All foreign income and tax amounts must be converted to Indian Rupees (INR). You should use the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India (SBI) on the last day of the month before the month in which the tax was paid. For example, if tax was paid in August, you would use the rate on July 31st.

3. File Form 67

Log in to the Indian Income Tax e-filing portal and file Form 67 online. You will need to fill in details such as the country name, the source of income (business or profession), the amount of foreign income, and the foreign tax paid.

4. File Your ITR

After filing Form 67, you will file your Income Tax Return (ITR), which will be either ITR-3 or ITR-4 depending on your filing method. Your foreign income must be reported in the Schedule FSI (Foreign Source Income) and the tax credit claimed in Schedule TR (Tax Relief) of your ITR. The details you provide in your ITR must exactly match the information in your Form 67.

By taking these steps, you can successfully claim the foreign tax credit you are entitled to, preventing double taxation and ensuring you only pay tax once.

Conclusion

Navigating the complexities of global income and tax laws as a freelancer can seem overwhelming. From understanding foreign tax credits to ensuring every payment is accounted for, the financial side of your business requires as much attention as your craft. However, the right tools can make these challenges simple. By choosing a platform that streamlines your payments and helps you stay compliant, you can take control of your finances and focus on what you do best.

Take the Next Step with BRISKPE

Don’t let the hassle of international payments slow you down. Briskpe is designed to simplify how you get paid, so you can receive your hard-earned money faster and more affordably. With low fees, instant e-FIRA for compliance, and a user-friendly platform, we take the complexity out of cross-border transactions.

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