I was NRI for FY 22-23. I reported the interest income earned in India for Jan -Dec 22 in USA, TDS has already been deducted here, I need to claim Foreign Tax Credit in USA for the taxes I have paid in India. Question is how to calculate tax for the interest income. Shall it be the marginal tax rate after all the standard deductions or the flat 30%?
I should have asked this question long before as US tax filling date was 14th April, but I applied for extension to file my USA returns.
Hey Saurabh!
About calculating Foreign Tax Credit (FTC) in the USA for Indian interest income you reported:
FTC is a dollar-for-dollar credit for foreign taxes paid on income also taxed by the US.
For interest income earned in India, which is taxed in India and reported in the US, you can claim credit for the Indian tax paid (TDS).
How to calculate US tax on that interest income (to limit FTC):
The US computes FTC based on the US tax liability attributable to the foreign income.
This means you calculate your marginal tax rate on the interest income after applying all deductions and exemptions applicable.
You do NOT apply the flat 30% rate; that’s India’s TDS rate, but the US calculates its own tax on that income.
FTC limit = Lesser of:
Foreign tax paid (India TDS amount), or
US tax liability on the foreign income.
Calculate your total US taxable income, including foreign interest income.
Apply the US tax brackets to find marginal tax rate on that interest income.
Calculate US tax on that portion (after deductions).
Claim FTC limited to the lower of Indian tax paid or US tax on that income.
Use Form 1116 (Foreign Tax Credit) when filing US taxes.
Since you filed an extension, you have time to accurately prepare this.
Keep all Indian TDS certificates handy for proof.
CAclubindia
