Foreign Tax Credit Rules explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Rule 128 lets an Indian resident credit tax paid abroad against Indian tax on the same income. The credit is the lower of the foreign tax and the Indian tax on that income, computed source-by-source, converted at the prescribed exchange rate, and claimed by filing Form 67.
Overview
Rule 128 of the Income-tax Rules operationalises the relief promised by Sections 90, 90A and 91 of the Income-tax Act 2025. It tells a resident exactly how much foreign tax credit he can take, how to compute it, what exchange rate to use, and what documents to file. It applies whether relief flows from a treaty or is unilateral.
Who Can Claim
Only a resident of India can claim FTC under Rule 128, in the year the corresponding foreign income is offered to tax in India. A non-resident does not claim FTC in India; he instead seeks a beneficial source rate under the treaty.
How the Credit Is Computed
| Element | Rule 128 treatment |
|---|---|
| Credit limit | Lower of foreign tax paid and Indian tax on that income |
| Granularity | Computed separately for each source and each country |
| Exchange rate | TT buying rate on the last day of the month before the tax was paid/deducted |
| Disallowed items | Foreign interest, penalty, disputed tax (until settled) |
| Against MAT/AMT | Allowed, with excess-over-normal-tax adjustment |
Disputed Foreign Tax
Where foreign tax is under dispute, credit is not immediately allowed. It becomes available in the year the underlying income is taxed in India, once the dispute is settled and the taxpayer furnishes, within six months of the settlement, evidence of settlement and a declaration that no refund of that tax is due.
Documentation
The resident must file Form 67 with a certificate or statement of the foreign income and the foreign tax — issued by the foreign tax authority, by the person deducting the tax, or self-signed with proof of payment. Form 67 must be furnished on or before the return, per the amended timeline.
Worked Example
A resident earns ₹12,00,000 consultancy income from Germany and pays ₹3,60,000 (30%) German tax. Indian tax on that income at 30% is ₹3,60,000. The FTC equals the lower figure, ₹3,60,000, fully offsetting the Indian liability on that income. Had German tax been ₹4,20,000 (35%), FTC would still cap at the Indian ₹3,60,000, and the extra ₹60,000 would not be creditable or refundable in India.
Common Pitfalls
Aggregating credit across sources instead of computing per-source, using the wrong exchange rate, and claiming credit for foreign penalties are frequent errors. Match each foreign income stream to its own tax certificate.