Furnish Form 67 to claim foreign tax credit in India tax return
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If a person lives in India for more than 182 days and in the remaining period works outside India, and gets a salary for that work, how should we compute the tax liability of the person? To compute tax liability of that person, how should I convert the amount of the salary to India rupees from dollars? How should I decide what exchange rate to consider for this purpose?
Based on the information available, the person will most likely qualify as ‘Resident and Ordinarily Resident’ (ROR) in India. However, the person may qualify as ‘Resident but Not Ordinarily Resident’ (RNOR) if he satisfies any one of the below mentioned conditions:
(a) Physical presence in India is less than 730 days in 7 financial years immediately preceding the relevant financial year; or
(b) The person qualified as non-resident in 9 out of 10 financial years immediately preceding the relevant financial year.
If the person qualifies as ROR in India, he would be taxed on global income in India. In such a case, salary income from employment exercised in India and salary income from employment exercised outside India will be taxable in India.
The employer is required to withhold tax on your total salary income (both for India and abroad) on a monthly basis. If the employer is not withholding tax, you are personally liable to deposit income tax in India.
To avoid double taxation of salary income from employment exercised in India, you may consider the following:
(a) Check whether there is a Double Taxation Avoidance Agreement (DTAA) between India and the other country;
(b) If yes, claim foreign tax credit for taxes paid outside India against India income-tax payable on doubly taxed salary income as per the relevant article of the DTAA;
(c) Maintain proof of taxes paid outside India (return, challan or any other documentary evidence);
(d) Prepare and file Form 67 along with the income-tax return.
Form 67 is a new requirement effective financial year 2016-17. Under the Income-tax Rules, 1962, foreign tax credit claimed in the India tax return will be allowed only upon furnishing Form 67. This form is in addition to the income-tax return to be filed.
In case there isn’t any DTAA with the other country, foreign tax credit may be claimed under the income-tax law (Section 91).
If the person qualifies as RNOR in India, he would be taxable only on income sourced in India or received in India. In such a case, if the salary income from employment exercised outside India is received outside India, it will not be taxable in India.
As per the Income-tax Rules, 1962, rate of exchange for conversion of foreign currency into Indian currency will be the telegraphic transfer buying rate adopted by the State Bank of India for such currency as on the specified date. The specified date in respect of income chargeable under the head “Salaries” can be either of the following:
(a) Date of payment of salary (if withholding tax provisions are applicable); or
(b) Last day of the month immediately preceding the month in which the salary is due, or is paid in advance or in arrears.
In the above case, if the salary income is taxable in India, the withholding tax provisions will be applicable. Accordingly, the telegraphic transfer buying rate as on date of payment of salary needs to be considered.
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Sonu Iyer is tax partner & people advisory services leader, EY India.