Understanding the Foreign Income Tax Offset (FITO)
As an NRI in Australia, you face a real challenge: you may owe taxes in both India and Australia on the same income. The Foreign Income Tax Offset (FITO) exists to solve this problem. It lets you claim a credit against your Australian tax bill for taxes you have already paid to India.
The FITO applies to almost any income you earn abroad—salaries, pensions, superannuation, interest, dividends, and even capital gains from selling property or shares. The key rule is simple: you can only claim a credit for foreign taxes you actually paid, and the credit cannot exceed the Australian tax you owe on that same foreign income.
Who Can Claim FITO?
If you are an Australian tax resident (which includes most NRIs who have lived in Australia for more than 183 days in a year or have established a permanent home there), you must declare all your worldwide income to the Australian Tax Office (ATO). This includes every rupee you earn in India. In return, you become eligible to claim FITO for Indian taxes paid.
You qualify for FITO if you meet all three conditions:
1. You are an Australian resident for tax purposes during the 2025 income year (or the portion of the year you were resident) 2. You earned foreign income that is assessable in Australia 3. You paid foreign income tax on that income (for example, Indian withholding tax on dividends, Indian capital gains tax on share sales, or Indian tax on rental income)
The rules changed effective for the 2025 income year (covering returns filed in 2025 for the 2024–25 financial year). Non-residents face stricter rules and can only claim FITO in rare cases, such as under specific treaty provisions.
How Australian Tax Residency Is Determined
This is the foundation of everything. As an Australian tax resident, you pay tax on your worldwide income, including all Indian sourced income. As a foreign resident of Australia, you only pay Australian tax on Australian sourced income.
The ATO uses four tests to determine residency:
1. Resides test — based on ordinary concepts like where you physically live, where your family is, and whether you maintain a home in Australia 2. Domicile test — if your permanent home is in Australia, you are generally a resident unless the ATO accepts your permanent place of abode is overseas 3. 183 day test — if you are physically present in Australia for 183 days or more in the income year, you are treated as a resident unless your usual place of abode is overseas and you have no intention of residing in Australia 4. Superannuation test — members of certain Commonwealth superannuation schemes are treated as residents
If you fail all four tests, you are a foreign resident and only Australian sourced income goes on your return. Foreign sourced income like Indian dividends or capital gains becomes exempt from Australian tax.
The Treaty Tie Breaker Under Article 4
Here is where it gets interesting for NRIs. If both India and Australia consider you a tax resident, the Australia-India DTA resolves the conflict using a priority order:
1. Where is your permanent home? 2. Where is your centre of vital interests (closer personal and economic ties)? 3. Where is your habitual abode? 4. Your nationality 5. Mutual agreement between the two tax authorities
This tie breaker overrides the ATO's domestic tests. So if you spend significant time in both countries, the treaty decides which country gets to tax you as a resident and which treats you as a non resident.
If you have a permanent home in both countries, the treaty uses tie-breaker rules (Article 4) to determine your tax residency:
1. Permanent Home: Where is your home available to you? If you own or rent a home in Australia and have no home in India, Australia wins. 2. Center of Vital Interests: Where are your family, friends, and economic interests? If your spouse and children live in Australia and your business is there, Australia wins. 3. Habitual Abode: Where do you actually live most of the time? If you spend more than 183 days per year in Australia, Australia likely wins. 4. Nationality: If all else fails, your citizenship determines residency. As an Indian national, India might claim you, but the ATO will apply the 183-day rule or domicile test to determine Australian residency for tax purposes.
The ATO's residency test is strict: you are an Australian resident if you have been in Australia for 183 days or more in a financial year, or if you have established a permanent home there. Once you are a resident, you must declare worldwide income.
How to Calculate Your FITO
The process involves three steps:
Step 1: Convert Everything to Australian Dollars
You must convert all your Indian income, deductions, and taxes paid into AUD. Use the average exchange rate for the financial year or the ATO's currency converter. This is mandatory—you cannot claim FITO using rupee figures.
Step 2: Calculate Your Australian Tax on That Foreign Income
Work out how much Australian tax you would owe on that Indian income if it were your only income. This becomes your FITO limit. The offset cannot exceed this amount.
Step 3: Claim the Lower of the Two Amounts
Your FITO credit is the lower of (a) the Indian tax you actually paid, or (b) the Australian tax on that income. If you paid more tax in India than Australia would charge, you get credit only for the Australian amount. If you paid less in India, you claim what you paid.
The offset limit equals the lesser of:
1. The actual foreign (Indian) tax you paid on that income 2. The Australian tax that would be payable on that same foreign income
This means you never get a refund through FITO if Indian tax exceeds Australian tax on the same income, but you also never pay double.
The Australia-India Tax Treaty: Your Shield Against Double Taxation
The Australia-India Double Taxation Agreement (DTA), signed in 1991 and updated since, is your legal protection. It prevents both countries from taxing the same income at full rates. The ATO published its updated Guide to Foreign Income Tax Offset Rules 2025 on 29 May 2025, covering the 2025 income year (1 July 2024 to 30 June 2025).
Key articles in the treaty:
- Article 4 (Residency): If you are an Australian resident, Australia has the primary right to tax your worldwide income. India agrees not to tax you on Australian-sourced income. However, India retains the right to tax Indian-sourced income, and Australia credits the Indian tax via FITO.
- Article 7 (Business Profits): If you run a business in India, India taxes the profit. Australia credits the Indian tax.
- Articles 10–11 (Dividends and Interest): India can withhold tax on dividends and interest you receive from Indian companies or banks, but the treaty caps these withholding rates. You claim credit for the withheld amount via FITO. Under Article 10 of the DTA, there may be reduced withholding rates on Indian dividends. Whatever Indian tax is withheld, you include the gross dividend in your Australian return and claim FITO for the Indian withholding tax. If you earn interest from Indian fixed deposits, bonds, or debentures, India may withhold tax under Article 11 of the treaty. You declare the gross interest in Australia and claim FITO for the Indian tax.
- Article 13 (Capital Gains): India taxes gains on Indian immovable property and certain shares. Australia credits the Indian tax. Under Article 13 of the Australia India DTA: Immovable property in India — India retains full taxing rights, and Australia gives you FITO for the Indian tax paid. Substantial shareholdings — Article 13(5) addresses capital gains on shares where you hold a substantial interest, and India may tax these gains. Movable property — Article 13 may limit Australia's taxing rights on certain movable property gains.
- Article 18 (Pensions): Your country of residence (Australia) has the primary right to tax pensions. India should not tax your Australian superannuation. However, if India does, you claim credit.
Reporting Your Foreign Income in Australia
For the 2025 income year (2024–25 returns filed in 2025), you must report all foreign income in your Australian tax return. Use the ATO's myTax system or engage a tax agent.
What to Report
- Salaries and wages earned in India (gross amount, before Indian tax)
- Interest from Indian bank accounts, fixed deposits, bonds, or debentures (including NRO accounts)
- Dividends from Indian shares or mutual funds
- Rental income from Indian property (gross rent, less allowable deductions)
- Capital gains from selling Indian property, shares, mutual fund units, ETF units, InvIT units, or REIT units
- Superannuation lump sums or pension payments from Indian funds
- Other income like consulting fees, royalties, or business profits from India
How to Report
1. Convert to AUD: Use the average exchange rate for the financial year or the ATO's daily rate converter. The ATO publishes average rates for each year.
2. Gross Up Your Income: Report the full amount before Indian tax was withheld. Do not net off Indian tax—you will claim that as a credit separately.
3. Claim Deductions: If you have allowable deductions (e.g., interest on a loan to buy an Indian investment property, or professional fees), deduct them from your Indian income. Convert the net amount to AUD.
4. Report Capital Gains: If you sold Indian assets, report the gain (sale price minus cost base) in AUD. The ATO treats capital gains the same as other income for FITO purposes. As an Australian tax resident, you must include net capital gains from selling Indian listed shares, mutual fund units, ETF units, InvIT units, or REIT units in your Australian tax return. India may also tax these gains (short term or long term capital gains tax under Indian law). You claim FITO for whatever Indian capital gains tax you paid, up to the Australian CGT that would apply on the same gain.
5. Claim FITO: In the FITO section of your tax return, enter the Indian tax you paid (converted to AUD). The ATO will calculate your FITO limit and apply the credit.
Records You Must Keep
The ATO requires you to retain:
- Indian tax assessments or notices of assessment
- Proof of tax paid (e.g., bank statements showing tax transfers, or Indian tax receipts)
- Exchange rate documentation (ATO rates or your bank's rates)
- Invoices, contracts, or statements showing foreign income and deductions
- Correspondence with Indian tax authorities
Filing in India: ITR-2 and Form 67 (Foreign Tax Credit)
To get full relief from double taxation, you must also file in India. Here is what you need to do:
File ITR-2 in India
As an NRI earning Indian-sourced income, you must file ITR-2 (Income Tax Return for individuals having income from sources other than salary) in India. In your ITR-2, you report:
- All Indian-sourced income (salary, rental, capital gains, interest, dividends)
- Claim DTAA benefits (e.g., reduced withholding rates on dividends or interest)
- Claim Foreign Tax Credit (FTC) for any Australian taxes paid on the same income
Claim Foreign Tax Credit via Form 67
To claim credit for Australian taxes paid on Indian-sourced income, you must file Form 67 (Foreign Tax Credit) along with your ITR-2. The deadline for filing Form 67 for FY 2024-25 is March 31, 2026.
In Form 67, you provide:
- Details of Australian tax paid on Indian-sourced income
- Proof of Australian tax payment (e.g., Australian tax assessment order)
- Computation showing how the credit is calculated
1. The Australian tax you actually paid on Indian-sourced income 2. The Indian tax that would be payable on that same income
Obtain a Tax Residency Certificate (TRC)
To claim DTAA-reduced withholding rates in India (e.g., 15% instead of 20% on dividends, or 10% instead of 30% on interest), you must obtain a Tax Residency Certificate (TRC) from the Australian Tax Office (ATO). The TRC proves you are an Australian tax resident and entitled to treaty benefits.
You can apply for a TRC online through the ATO's website. The certificate is typically issued within 4-6 weeks. You must provide this TRC to Indian banks, brokers, or companies paying you dividends or interest so they can apply the reduced withholding rate.
Documentary Compliance
Submit Form 67 (India) with:
- Indian tax challan (proof of Indian tax paid)
- Foreign tax receipts (proof of Australian tax paid)
- Computations showing how the credit is calculated
- Before the due date (March 31, 2026 for FY 2024-25)
Special Rules for Superannuation and Pensions
If you receive a lump sum from an Indian superannuation or pension fund, or if you draw a regular pension, the rules depend on whether India withheld tax.
If India withheld tax on your superannuation payout or pension, you can claim FITO for that withholding. However, you must first declare the full amount as income in Australia. Then you claim the Indian withholding as a credit. The Australia-India tax treaty (Article 18) generally says pensions are taxed in your country of residence—which is Australia for you. This means India should not tax your pension, but if it does, you get credit via FITO.
If you have an Indian superannuation or pension fund and you are an Australian resident, the rules are:
1. You must declare the income: Any lump sum withdrawal or pension payment is assessable income in Australia.
2. Convert to AUD: Use the exchange rate on the date of receipt.
3. Claim FITO: If India withheld tax, claim it as FITO. The Australia-India treaty (Article 18) says pensions are taxed in your country of residence (Australia), so India should not tax you. But if it does, you get credit.
4. Australian superannuation: If you contribute to an Australian superannuation fund, India does not tax it. Australia taxes it only when you withdraw it in retirement. You do not claim FITO for Australian superannuation.
Capital Gains and Property Sales
If you sold property or shares in India and paid capital gains tax (CGT) there, FITO can help. However, the Australia-India tax treaty (Article 13) gives India the primary right to tax gains on Indian immovable property (land and buildings). If you sold an apartment or land in India, India taxes the gain first, and Australia gives you credit via FITO.
For shares, the rule is more nuanced. If you owned more than 10% of an Indian company and sold those shares, India may claim taxing rights. Australia will credit the Indian tax via FITO. If you owned less than 10%, Australia generally has the taxing right, but you still report the gain and claim credit for any Indian tax paid.
India taxes gains on Indian assets (e.g., LTCG 20%, STCG 15% on equities); Australia taxes worldwide gains. You claim full credit for Indian tax paid in Australia, up to the Australian CGT liability on that gain.
Practical Example: How FITO Works
Let's say you are an Australian resident NRI. In the 2024–25 financial year:
- You earned a salary in India of 1,000,000 rupees (approximately AUD 18,000 at average rates).
- India withheld 200,000 rupees in income tax (approximately AUD 3,600).
- Your Australian tax rate on AUD 18,000 is 19% (AUD 3,420).
- Indian tax paid (in AUD): AUD 3,600
- Australian tax on Indian income: AUD 3,420
- FITO credit: AUD 3,420 (the lower amount)
You also file ITR-2 in India and claim Foreign Tax Credit via Form 67 for any Australian tax you paid on this income. If you paid no Australian tax (because FITO eliminated it), you claim no FTC in India.
Capital Gains Example: Selling Indian Property
You own an apartment in Mumbai. You bought it for 5,000,000 rupees (AUD 90,000) and sold it for 8,000,000 rupees (AUD 144,000). India charged you capital gains tax of 600,000 rupees (AUD 10,800).
Your FITO calculation:
- Gain in AUD: AUD 144,000 minus AUD 90,000 = AUD 54,000
- Indian CGT paid (in AUD): AUD 10,800
- Australian tax on AUD 54,000 gain (at 37% top rate): AUD 19,980
- FITO credit: AUD 10,800 (the lower amount)
You also file ITR-2 in India and claim Foreign Tax Credit via Form 67 for the AUD 9,180 Australian tax you paid on this gain.
Investment Implications for NRI Investors
Understanding FITO and the Australia-India treaty is crucial if you invest in Indian stocks, mutual funds, ETFs, InvITs, or REITs as an Australian resident.
Dividend Withholding
Dividends from Indian listed companies are now taxable in the hands of shareholders in India (post the abolition of the Dividend Distribution Tax). India typically withholds tax on dividends paid to non residents. When you receive dividends from Indian shares or mutual funds, India withholds tax at the rate specified in the treaty (typically 15% for dividends, but lower rates may apply). You report the gross dividend in Australia and claim FITO for the withholding. This prevents double taxation.
To claim the reduced 15% withholding rate (instead of 20%), you must provide your Tax Residency Certificate (TRC) to the Indian company or your broker.
Capital Gains on Shares
If you sell Indian shares and realize a capital gain, India may tax the gain (depending on your holding period and residency status in India). You report the gain in Australia and claim FITO for Indian tax paid. The treaty generally allows India to tax gains on Indian shares, and Australia credits the Indian tax via FITO.
Rental Income from Indian Property
Rental income from property in India is taxable in both countries. You report the net rental income in your Australian return (gross rent minus allowable deductions like mortgage interest, property management fees, and depreciation). India also taxes the net rental income. You claim FITO for Indian tax paid on the rental income.
Interest Income
If you hold NRO (Non-Resident Ordinary) accounts in India, interest earned is taxable in India at 30% (or lower if you claim DTAA benefits). If you hold NRE (Non-Resident External) or FCNR (Foreign Currency Non-Resident) accounts, interest is tax-free in India. You report all interest income in Australia and claim FITO for any Indian tax withheld on NRO interest.
Non-Residents: Limited FITO Rights
If you are not an Australian tax resident (e.g., you have returned to India or are on a temporary visa), FITO is generally not available. However, rare exceptions exist under the Australia-India treaty.
As a non-resident, you report only Australian-sourced income. If you have Indian-sourced income, you do not report it in Australia unless it is taxed in Australia (e.g., via a controlled foreign company or CFC). You cannot claim FITO for Indian taxes paid on non-Australian income.
Note: Australia is not a tax-free jurisdiction, so deemed residency (for ₹15 lakh+ Indian income) does not apply. Standard rules apply: if you are in India for more than 120 days in a financial year and have Indian income of ₹15 lakh or more, you may be treated as a Resident Not Ordinarily Resident (RNOR) in India, taxing only Indian income. However, for Australian tax purposes, you must meet the ATO's residency tests to be treated as an Australian resident.
Income Tax Slabs and Rates (FY 2026-27)
For planning purposes, the Indian income tax slabs for FY 2026-27 (under both old and new regimes) are:
- Up to ₹2.5 lakh: Nil
- ₹2.5 lakh to ₹5 lakh: 5% (old regime) or Nil (new regime)
- ₹5 lakh to ₹10 lakh: 20% (old regime) or 10% (new regime)
- Above ₹10 lakh: 30% (old regime) or 15% (new regime)
Key Takeaways for NRIs
1. You must be an Australian tax resident to claim FITO. If you meet the 183-day test or have a permanent home in Australia, you are likely a resident.
2. Report all Indian-sourced income in Australia and claim FITO for Indian taxes paid. The credit is limited to the lower of Indian tax paid or Australian tax on that income.
3. File ITR-2 in India and claim Foreign Tax Credit via Form 67 by March 31, 2026 (for FY 2024-25) to get relief from double taxation in India as well.
4. Obtain a Tax Residency Certificate (TRC) from the ATO to claim reduced withholding rates in India (e.g., 15% on dividends instead of 20%).
5. Keep detailed records of all Indian income, taxes paid, and exchange rates. The ATO requires records for at least five years.
6. Convert all amounts to AUD using the average exchange rate for the financial year or the ATO's daily rate converter.
7. Understand the treaty tie-breaker rules if you have ties to both countries. The treaty determines which country gets to tax you as a resident.
8. File promptly to avoid penalties. Consult a tax agent or chartered accountant in both countries for personalized advice, as DTAA credits are limited to the lower of Indian tax paid or Australian liability on that income.
9. For dividends and interest, provide your TRC to Indian companies or banks to claim reduced withholding rates under the treaty.
10. For capital gains on Indian property, India has primary taxing rights, and Australia credits the Indian tax via FITO. For shares, the treaty may limit Australia's taxing rights depending on your shareholding percentage.