Claiming foreign tax credit on US dividends: Form 67, FSI and TR

Every US dividend an Indian resident receives is taxed twice by default: the US withholds tax before the cash even lands, and India then taxes the same dividend at your slab rate — on the gross amount, as if the US had taken nothing. The India–US tax treaty undoes the double taxation through a foreign tax credit, but only if you claim it correctly — across two schedules and one separate form, in the right order.

The double taxation, concretely

Take a $1,000 gross dividend. The US withholds $250 (the 25% treaty rate — or $300 at the 30% statutory rate if your W-8BEN isn't in order). You receive $750. India taxes the full $1,000 at your slab: at 30%, roughly $300 of Indian tax on income you only 75% received. Without a credit you'd pay $550 of combined tax on a $1,000 dividend. The DTAA lets the US withholding offset your Indian tax on that same income.

How much credit you actually get

The credit is the lower of the foreign tax paid and the Indian tax payable on that same income. Two caps follow:

• If your Indian slab rate is below the US withholding rate, the credit is limited to your Indian tax — the excess US tax is not refundable by India.
• The credit is generally capped at the treaty rate (25% for US dividends). If the US withheld 30% because of missing W-8BEN paperwork, the extra 5% is recoverable from the US side, not from India.

The three filings that make up the claim

1. Schedule FSI — foreign source income, per country and per income head: the gross dividend, the foreign tax on it, the Indian tax payable on it, and the credit claimed (the lower of the two).
2. Schedule TR — tax relief: the per-country totals of foreign tax and the relief claimed, referencing the treaty article.
3. Form 67 — a separate form on the e-filing portal, filed with proof of the withholding (your broker's statements). This is the legal gate for the credit under Rule 128.

Note what feeds all three: the same per-payment record of gross dividend and withholding — which is also what Schedule OS needs (gross, at slab) and what Schedule FA's income column needs. One clean dividend ledger, converted under Rule 115, serves all of them — which is also why the numbers must agree across schedules.

What to hand over as proof

Rule 128 asks only for a statement showing the nature of income and the tax withheld — not a full account statement. For a US broker the strongest document is Form 1042-S, the US's own information return showing your gross dividend and the tax withheld. The catch: 1042-S is issued per US calendar year, while Form 67 runs on the Indian financial year — so one financial year straddles two 1042-S forms. There's no prescribed method for bridging that gap, but a common practical approach is to pair the 1042-S with a dividend statement cut for April–March, so the withholding can be mapped to the year you're filing — your CA is best placed to decide what to attach. On IBKR, both the 1042-S and a Dividend Report live under Performance & Reports → Tax Documents. Since US withholding is deducted at source, the statement showing the tax withheld is your proof of payment — there's no separate challan to produce.

File Form 67 first

Form 67 is not part of the ITR — it is its own filing, and sequence matters. The rules currently allow furnishing it up to the end of the assessment year, but return processing checks for it mechanically: if Form 67 isn't on record when your return is processed, the credit is denied regardless of a perfect FSI and TR. The safe practice is simple: Form 67 first (or at latest alongside the return), then the ITR.

A worked shape of the claim

The "Indian tax on that income" line is the one no broker export can produce — it depends on your total income and slab, which is exactly where your CA steps in. What the broker data can produce is everything else: per-country gross income, withholding, and effective rates, ready to drop into FSI, TR and Form 67.