The landscape of international taxation in India is set for a significant shift with the introduction of the Income Tax Act, 2025, effective from April 1, 2026. The new framework, along with the Draft Income Tax Rules, 2026, brings greater clarity and structure to the mechanism of claiming Foreign Tax Credit (FTC). This article breaks down the key provisions governing FTC under the new regime.
The new Act bifurcates the relief mechanism into two distinct categories: relief under tax treaties (Section 159) and unilateral relief (Section 160). The procedural backbone for these claims is detailed in Rule 76 of the Draft Rules.
1. Relief Under Tax Treaties: Section 159
(Corresponding to Sections 90 and 90A of the Income Tax Act, 1961)
Section 159 lays down the framework for claiming relief under a Double Taxation Avoidance Agreement (DTAA). It dictates how foreign tax credit is allowed when India has a formal tax treaty with another country. A key feature of this section is that it explicitly mandates the Central Government to notify the tax treaties to which it applies.
A critical compliance requirement for Non-Resident taxpayers is embedded in Section 159(8) . To claim the benefits of a treaty, a non-resident must furnish a Tax Residency Certificate (TRC). This certificate, obtained from the government of the country or specified territory where they claim to be a resident, serves as the primary evidence of their residential status for treaty purposes.
2. Unilateral Relief: Section 160
(Corresponding to Section 91 of the Income Tax Act, 1961)
Section 160 provides for unilateral relief in scenarios where India does not have a DTAA with the foreign country. This provision allows a resident taxpayer to claim relief for taxes paid on income that has been taxed in a foreign jurisdiction and is also taxable in India. This prevents double taxation in the absence of a bilateral treaty, ensuring that Indian residents are not unfairly penalized for earning income in non-treaty countries.
3. Procedural Compliance: Rule 76 of the Draft Income Tax Rules, 2026
Rule 76 serves as the detailed procedural guide, outlining the conditions, methods, and computational rules for claiming the FTC. It introduces a significant compliance layer by mandating a certification from a Chartered Accountant (CA). This certification is compulsory if the taxpayer is either:
A company, or
An individual or entity where the foreign tax paid outside India equals or exceeds INR 1,00,000 (One Lakh).
The role of the Chartered Accountant is to verify the following key elements:
i) Accuracy of Records: Examination of the books of accounts and other relevant documents to substantiate the foreign income.
ii) Proof of Payment: Verification of the evidence of foreign tax paid, ensuring that the tax has indeed been discharged in the foreign jurisdiction.
iii) Legal Compliance: Confirmation that the FTC claim is in strict accordance with the provisions of the Income Tax Act, 2025, and the applicable DTAA.
In conclusion, the Income Tax Act, 2025, streamlines the foreign tax credit provisions while significantly tightening the compliance requirements. By distinguishing between treaty-based and unilateral relief, and by enforcing a mandatory CA certification for high-value claims, the new regime aims to ensure that tax credits are claimed accurately and only by the taxpayers entitled to them. Taxpayers and professionals must prepare for these changes well before the April 1, 2026, effective date
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