How do I get credit for US taxes in India?

I returned to India for retirement after Covid and now qualify as a resident for FY25. Most of my investments are in long-term US stocks. In the past calendar year, I realized capital gains of about $4,000 (approximately ₹3.5 lakh) from selling US stocks and earned dividend income of $3,000 (approximately ₹2.6 lakh).

The US did not withhold tax on the capital gains, but 25% was withheld on the dividends. I also earned ₹50,000 in interest income in India. If I opt for the new tax regime in India, how can I claim credit for taxes paid in the US.

– Name withheld on request

Since you are now a resident and ordinarily resident (ROR) in India, your global income is taxable here. However, you can claim foreign tax credit (FTC) for taxes paid in the US—but only up to the lower of the actual US tax paid or the Indian tax payable on the same income.

If you opt for the new tax regime, you are eligible for a rebate under Section 87A if your total income does not exceed ₹7 lakh. There’s ongoing debate on whether this rebate applies to income taxed at special rates (like capital gains).

Read this | Mint Explainer: Can capital gains make you ineligible for a tax rebate?

If the rebate does apply to capital gains, you may not owe any tax in India at all.

However, if it doesn’t apply, your foreign capital gains will be taxed in India—at 12.5% (plus cess, without indexation) for gains realized on or after 23 July 2024, or at 20% (plus cess, with indexation) for gains made before that date. In that case, you can claim a foreign tax credit against the Indian tax on these gains, provided you submit the necessary documentation.

To claim FTC, you must file Form 67 along with supporting documents like the Form 1042-S from the US, which reflects the tax withheld. This must be submitted on or before 31 March 2026 for FY25.

Since the US follows the calendar year (January–December) and India uses a fiscal year (Apr–Mar), you’ll need to align the tax periods. That means isolating US income and taxes paid from April 2024 to March 2025 to match with Indian income for FY25.

Importantly, FTC can only be claimed against tax payable on the same type of income. Since your dividend income falls within the ₹7 lakh rebate limit, it is effectively not taxable in India. As a result, the 25% US tax withheld on dividends cannot be offset against Indian tax payable on capital gains.

So, if your capital gains are taxable, you can claim FTC only for US taxes on capital gains (if any)—not on dividends, as that income isn’t taxed in India under the new regime.

Harshal Bhuta, partner, P. R. Bhuta & Co. CAs