How can you claim foreign tax credit on interest income in India on US tax return?
Being a US citizen, you will have to disclose your global income on your US tax return. This includes interest income earned in India. In order to avoid double taxation, you can avail the “Foreign Tax Credit (FTC)” by filling out Form 1116.
When can you claim foreign tax credit:
- You should have paid tax on interest income in India.
- This income should be taxable in India as well as in the US.
- You can only use the amount of tax paid in India to offset tax payable in the US
Let me give you an example:
Say that you earned an interest income of Rs.50,000 in India on which you paid a tax of Rs.10,000 in India (say approx $150). Now, while filing your UA taxes, you can only claim a credit of $150. If you owe any additional taxes on this income in the US because your US tax rate is higher than in India, you will have to pay the balance amount to the IRS.
A common mistake which a lot of tax payers make is that they consider the tax deducted at source (TDS) as the amount of tax paid on interest income. It is essential to note that the TDS deducted does not determine your tax rate. TDS is merely a withholding tax which is done as per the statutory requirements. Your India tax return will be a better indicator to determine the correct rate at which you have paid your Indian income tax. Use this rate to calculate your foreign tax credit.
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Any un-utilized tax credit can be carried back or forward for 10 years and used for the set off.