Picture this: you’ve built a life in the US, maybe on an H-1B, earning in dollars, paying your bills in dollars — and then one fine day, you open your inbox to find your old apartment in Bangalore has sent you a lovely little reminder. Rent’s in. Tax’s due.
You sigh, pay the Indian tax, and move on. Until April rolls around and your US accountant says, “Oh, by the way, that rental income? We’re taxing it here too.”
Double taxation. Two governments. One wallet.
That’s where the Foreign Tax Credit (FTC) comes in — your legal, 100% IRS-approved “no-double-dipping” pass. And if you’re an Indian national living in the US with income from both countries, understanding how to claim it could literally save you thousands.
Why This Credit Exists (and Why You Need It)
The US believes in taxing worldwide income. So if you live here, you owe the IRS tax on every rupee and dollar you earn. India, on the other hand, taxes income earned or received in India. So if you have a rental property, dividends, or interest back home, the Indian government takes its share too.
Without coordination, you’d pay tax twice on the same money. The Foreign Tax Credit fixes that. It lets you deduct the taxes you’ve already paid to India from your US tax bill (and vice versa, using Form 67 on the Indian side).
Think of it as tax karma. You pay once. You get credit twice.
The First Step: Are You Even Eligible?
Before you file anything, make sure you actually qualify. The IRS has specific rules on what counts as a “foreign tax.”
According to IRS guidance, the tax must:
- Be imposed by a foreign country (India qualifies, obviously)
- Be a real, legally owed tax on income, not a fee or surcharge
- Already be paid or accrued (you can’t claim taxes you haven’t paid yet)
- Apply to income that is also taxable in the US
On the Indian side, under Rule 128 of the Income Tax Rules, 1962, you can claim a foreign tax credit if you pay tax abroad on income that’s also taxed in India, as long as you file Form 67 before filing your ITR.
If any of that sounds like paperwork hell — that’s because it is. But handled right, it’s worth it.
How to Actually Claim the Credit (US Side)
Let’s get tactical. Here’s how you claim the FTC on your US return:
Step 1: Identify Your Foreign Income
List every rupee earned in India — rent, interest, dividends, or capital gains. Gather Form 26AS, TDS certificates, and challans to prove the Indian tax you’ve paid.
Convert everything to dollars using the Treasury’s yearly average exchange rate.
Step 2: Report It in Your US Return
Include this income in your Form 1040, since as a US resident (based on the Substantial Presence Test) you must report global income.
Step 3: File Form 1116
Form 1116 is where the magic happens. Here’s what goes in it:
- Country: India
- Income type: passive (interest, dividends) or general (salary, rent, business)
- Tax paid: converted to USD
- Limit: the credit can’t exceed the portion of US tax that applies to that same income
If you can’t use the full credit this year, don’t worry. You can carry it forward for 10 years or back for one.
Step 4: Keep Everything
Save proof of Indian taxes paid, exchange rate calculations, and your filed forms. The IRS may ask for it later — and you’ll thank yourself for being organized.
Real Life Example: Meet Priya
Priya lives in Texas, earns $120,000 from her US job, and rents out her Gurgaon apartment for ₹60,000 a month.
She pays about ₹1.2 lakh in Indian tax on that rent (roughly $1,440).
When she files her US return, she reports that rental income in dollars, then files Form 1116 to claim a $1,440 credit.
Her US tax bill drops by the same amount.
No double tax. No drama.
Meanwhile, if she had US dividends that were taxed in the US, and she reported them in India, she’d claim relief there using Form 67.
The Most Common Mistakes (And How to Avoid Them)
Claiming the wrong taxes
You can’t claim credit for fees, surcharges, or GST — only real income taxes. (IRS list of qualified taxes)
Missing Form 67
India is strict about this. If you forget to file it before your ITR, you lose the credit. Period.
Ignoring exchange rates
Use the Treasury’s official rate. Not Google.
Assuming states follow the same rules
They don’t. States like California and New Jersey often don’t allow foreign tax credits. Check before you celebrate.
Not keeping evidence
No receipts, no credits. Save every TDS, challan, or tax receipt like it’s gold.
Quick Checklist for Smooth Filing
- Gather your Indian tax documents early (Form 26AS, TDS, rent receipts)
- Convert income and taxes using official rates
- File US Form 1116 and Form 1040
- File Form 67 with your Indian ITR (if you’re claiming the reverse)
- Review state rules for conformity
- Store all proofs digitally for at least 7 years
When You Should Get Help
If you have:
- Multiple income sources (like Indian business + US job)
- Large foreign tax payments
- Missed credits in previous years
- Conflicting residency or treaty questions
…it’s time to talk to a cross-border tax expert. At MyTaxFiler, we specialise in these complex cases — and we make the forms, math, and madness simple.
Final Thoughts
Taxes across two countries don’t have to mean twice the stress. The Foreign Tax Credit is proof that with the right strategy, you can be completely compliant and still keep more of what you earn.
Because when you’ve worked this hard — across continents, currencies, and time zones — you deserve to pay fair tax, not extra tax.
Ready to optimise your finance and maximise your savings? Book a Tax Planning Consultation with MyTaxFiler today.