Whalesbook
India's Foreign Tax Credit (FTC) aims to protect its residents from paying tax twice on the same income in different countries. However, for a growing number of Indian professionals working abroad, applying this relief is becoming harder due to complex compliance rules and constantly changing international tax laws. This is made worse by the increasing number of cross-border professionals and the upcoming changes to India's direct tax system.
Navigating the Global Tax Labyrinth
India prevents double taxation mainly through Double Taxation Avoidance Agreements (DTAAs) with over 94 countries. For nations without these agreements, unilateral relief is available under Section 91 of the Income-tax Act, 1961. The standard approach is a credit system, where foreign taxes paid reduce the Indian tax owed on that income, up to the amount of foreign tax paid or the Indian tax due. This system is crucial for the estimated 18.5 to 34.3 million Indians living abroad, whose combined annual earnings are between $650 billion and over $1 trillion, contributing significantly through remittances. However, the rise of remote and cross-border work models presents a major challenge for tax authorities and expatriate workers, stretching current tax compliance systems.
The Evolving Compliance Maze
Complying with India's FTC rules is not simple. A key difficulty is the difference between India's fiscal year (April 1 to March 31) and the calendar tax year used in many other countries. This timing difference means foreign tax assessments are often not final when Indian Income Tax Returns (ITRs) are due. Taxpayers must then rely on estimates, which might require adjustments to claims later. The deadline for filing Form 67, the main document for FTC claims, was historically the same as the ITR filing date. However, changes in 2022 extended this deadline to the end of the relevant assessment year, providing some flexibility. Still, practical issues persist, especially for non-residents who may find electronic verification methods linked to Indian credentials difficult. Other major economies like the US, UK, and Germany also have FTC systems, typically using credit or exemption methods, but India's specific procedures are becoming a significant point of concern.
Key Challenges and Risks
The complexity of cross-border taxation naturally leads to errors and disputes. Tax authorities often review FTC claims closely, and incomplete or mismatched documentation is a common reason for inquiries. The upcoming transition to the Income-tax Act, 2025, and its Draft Rules, 2026, adds another layer of difficulty. Form 67 will be replaced by Form 44, which requires more detailed disclosures. Importantly, for FTC claims over INR 1 lakh, a Chartered Accountant's certification will likely become mandatory. While this aims to improve scrutiny, it could increase compliance costs and create delays for individuals with significant foreign tax liabilities. Furthermore, employers often cannot factor FTC into their monthly Tax Deducted at Source (TDS) calculations. This frequently results in excessive tax withholding, causing cash flow problems for employees until they receive refunds after filing their ITRs. This procedural gap highlights a systemic inefficiency that the new rules may not fully address, potentially increasing risks for expatriate professionals.
The Future Outlook
The planned Income-tax Act, 2025, and its associated Rules, 2026, are intended to modernize India's tax framework. The Finance Bill, 2026, also proposes extending the period for filing Revised ITRs from nine to twelve months, giving individuals more time to include final foreign tax computations. While these changes suggest a move toward simplification, the introduction of stricter documentation requirements, such as CA certification for significant claims, indicates a greater emphasis on audits and verification. For cross-border earners, maintaining accurate records, working closely with tax professionals, and understanding the evolving regulations will be essential to effectively use FTC and avoid issues related to double taxation and compliance disputes in the coming years.