Mr. X is Resident and ordinarily resident in India for the PY 2012-13.
Upto December 2012 he was having salary income in indian company in indian currency.
In january he left to UK and therefore there is salary income in british pound for the month of jan, feb and march 2013. Also Tax was deducted at source on foreign income.
My question
How to take credit of tax deducted in foreign currency ?
08 November 2014
as per DTAA, the avrage rate of tax is to be calculated and the difference to be paid. Normally UK average tax rate is more than India.
28 July 2024
To claim credit for taxes deducted on salary income earned in the UK while you are a resident and ordinarily resident in India, you need to follow certain procedures and understand the concepts involved. Here’s how you can do it:
### 1. **Understand the Tax Credit Process**
India allows taxpayers to claim a credit for taxes paid or deducted in foreign countries against their Indian tax liability. This is done under Section 91 of the Income Tax Act, which provides relief for taxes paid in foreign countries.
### 2. **Calculate Foreign Income in Indian Rupees**
You need to convert the foreign income and tax paid into Indian Rupees (INR). This requires calculating the average rate of exchange for the financial year. For the UK salary income, here’s how you can proceed:
#### a. **Convert Foreign Income to INR**
1. **Determine the Salary Income in Foreign Currency:** - Let’s say Mr. X earned GBP 1,000 each in January, February, and March 2013. - Total foreign income = GBP 1,000 * 3 = GBP 3,000
2. **Convert Foreign Income to INR:** - You need to use the exchange rates for the months in which the income was earned or use the average exchange rate for the year. In this case, it might be simpler to use the average rate.
3. **Find the Average Rate of Exchange:** - **Average Exchange Rate** is calculated based on the exchange rates for each month of the financial year or the rate published by the Reserve Bank of India (RBI) for the financial year.
#### Example Calculation:
For the Financial Year 2012-13, if the average exchange rate is 1 GBP = 90 INR, then:
- Total Foreign Income in INR = GBP 3,000 * 90 INR/GBP = INR 270,000
#### b. **Convert Foreign Taxes Paid to INR**
1. **Determine Foreign Taxes Paid:** - Assume Mr. X had GBP 300 deducted as tax in the UK.
2. **Convert Foreign Taxes Paid to INR:** - Using the same exchange rate (1 GBP = 90 INR), - Foreign Taxes in INR = GBP 300 * 90 INR/GBP = INR 27,000
### 3. **Claiming Tax Credit in India**
#### a. **Fill Out the Tax Return**
1. **Include Foreign Income in Your Indian Income Tax Return:** - Report the foreign income (converted to INR) under the appropriate section in your income tax return.
2. **Claim Credit for Foreign Taxes Paid:** - Under the section for foreign tax credit, provide the details of the tax deducted in the UK. - Mention the amount of foreign tax paid and convert it to INR.
#### b. **Supporting Documentation**
- **Foreign Tax Credit Details:** Attach a certificate or proof of tax deducted from the UK, showing the amount of tax deducted and the exchange rate used. - **Income Details:** Provide documentation of the foreign income earned and its conversion to INR. - **Bank Statements:** Include any statements showing the payment of taxes in the UK.
### 4. **Example Calculation Summary**
Suppose Mr. X had: - Foreign Salary Income: GBP 3,000 - Average Exchange Rate: 1 GBP = 90 INR - Foreign Tax Paid: GBP 300
**Foreign Income in INR:** - GBP 3,000 * 90 INR/GBP = INR 270,000
**Claim Foreign Tax Credit:** - Claim INR 27,000 as a credit against your Indian tax liability.
### 5. **Additional Tips**
- **Consult a Tax Professional:** For accurate calculations and filing, consult a tax advisor or professional who can help ensure compliance with all tax laws. - **Exchange Rate Sources:** Use official sources like the RBI for exchange rates or annual reports for the most accurate rates.
By following these steps, Mr. X can claim a credit for the tax deducted on his UK salary income while ensuring proper documentation and compliance with Indian tax regulations.
CAclubindia
