Foreign Exchange rate Conversion for getting credit of Federal Tax paid in Foreign currency- Foreign Tax Credit u/s.90

[PRIYAM KHAMBHATA]

Dear Sir

My client residential status is Not Ordinary Resident for the FY 2025-26 and he has earned foreign salary income and also tax deducted as federal tax on such foreign income. Now, such foreign Income are offered for taxation in India as service rendered in India and receipts credit in US Bank Account.

As per Income tax Rule 115, the rate of exchange for the calculation of the value in rupees of Salary income received in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date means - in respect of income chargeable under the head "Salaries", the last day of the month immediately preceding the month in which the salary is paid. My question is that we will conversion of Salary Income in foreign currency as per above rule, but at what rate of exchange would be applied for conversion of federal tax deducted in foreign currency.

Please guide me.

[Sanjeev Agarwal]

The salary income and the foreign tax need not necessarily be converted using the same exchange rate. The applicable rules are different.

1. Conversion of Salary Income

You are correct that Rule 115 applies for conversion of salary income.

• Rule:Rule 115(c)
• Exchange Rate: Telegraphic Transfer Buying Rate (TTBR)
• Relevant Date: The last day of the month immediately preceding the month in which the salary is paid.

2. Conversion of Federal Tax Deducted (Foreign Tax Credit)

For the foreign federal tax deducted, the applicable provision is Rule 128, which governs Foreign Tax Credit (FTC), not Rule 115.

Under Rule 128(9), the foreign tax shall be converted into Indian Rupees at the TTBR on the last day of the month immediately preceding the month in which such foreign tax was paid or deducted, as the case may be.

Accordingly:

• If the US federal tax is withheld from salary each month, convert the tax deducted using the TTBR on the last day of the month immediately preceding the month in which the tax was deducted.
• If additional federal tax is paid later (e.g., on filing the US tax return), such payment should be converted using the TTBR on the last day of the month immediately preceding the month in which the payment was made.

Practical Illustration

Particulars	Applicable Rule	TTBR Date
Salary received in April 2025	Rule 115	31 March 2025
US federal tax withheld from April 2025 salary	Rule 128(9)	31 March 2025
Additional US tax paid in October 2026	Rule 128(9)	30 September 2026

Practical Note

Where salary is paid and federal tax is simultaneously withheld each month (as is common in the US payroll system), the TTBR date under Rule 115 and Rule 128(9) will generally coincide. However, where there are subsequent tax payments or refunds upon filing the US return, the conversion date for those amounts will differ.

Therefore, for claiming FTC in India, the foreign tax should be converted in accordance with Rule 128(9), using the TTBR on the last day of the month immediately preceding the month in which the foreign tax was paid or deducted, and not necessarily using the exchange rate adopted for conversion of the salary income.

AI Summary

Foreign tax credit conversion uses Rule 128(9) separately from salary conversion under Rule 115.
Foreign salary income is converted under Rule 115 at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which salary is paid. Foreign tax credit is converted separately under Rule 128(9) at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which the foreign tax was deducted or paid, so the two conversions need not use the same exchange rate.