What should an Indian exporter do when a foreign client withholds tax?

Most foreign clients pay Indian freelancers, agencies and IT firms in full. Sometimes, though, less arrives than was invoiced, with a note that part of the fee was withheld for tax in the client's country. This guide explains why that happens, how tax treaties limit it, and what an Indian exporter can do about it. The filing steps for the credit are in foreign tax credit with Form 67 and Form 44.

Examples use the India-US and India-UK treaties.¹² Each country's own law decides whether its payers must withhold, so ask the client which rule they are applying, and confirm the treatment with a chartered accountant (CA) before writing off any amount.

What is foreign withholding tax?

Foreign withholding tax is income tax that the payer in another country deducts from a payment to you and pays to its own tax authority, under that country's law. The US, for example, taxes foreign persons at a 30% rate on certain US-source income such as royalties and compensation for services performed, collected by withholding on the gross amount.⁵

A tax treaty does not create the tax; it limits how much the source country may charge a resident of the other country.¹²

Who does foreign withholding tax apply to?

Foreign withholding tax applies to an Indian exporter when the payment is a royalty or technical fee, the work was done in the client's country, the payer has no valid form, or no treaty is applied.¹²⁵⁶

Licensing, or technical services that "make available" know-how, can fall within the royalty articles.¹² See W-8BEN for freelancers and W-8BEN-E for companies.

How do you prevent and recover foreign withholding tax?

You prevent foreign withholding tax by dealing with it before the first invoice, and you recover it by asking the payer to correct it or by claiming credit in India.³⁵

1. Give the payer its own tax form: for US payers, Form W-8BEN (individuals) or W-8BEN-E (entities), given to the payer before payment; without it, the payer may have to withhold at 30%.⁵
2. Prove you are resident in India: some payers or tax authorities ask for a tax residency certificate (TRC). An Indian resident applies in Form No. 42 and the Assessing Officer issues the certificate in Form No. 43 under rule 75 of the Income-tax Rules, 2026.⁷ See tax residency certificate.
3. Describe the service accurately: whether a fee is business profits or a technical service fee depends on the treaty definition, for example "make available technical knowledge, experience, skill, know-how, or processes" in Article 12(4) of the India-US treaty.¹
4. Ask the payer to correct excess withholding: once it has the right form, or reclaim the excess from the foreign tax authority under that country's procedure.³
5. Claim credit in India: file Form No. 44 with a certificate or statement of the tax deducted within twelve months from the end of the tax year, with your return filed within the time under section 263(1) or (4).³

What treaty rates apply to foreign withholding tax?

The treaty rates for foreign withholding tax cap tax on most royalties and technical fees at 15% of gross under the India-US and India-UK treaties, while business profits without a permanent establishment are taxable only in India.¹²

The 15% figures are the rates for years after the first five years each treaty had effect, as set out in the treaty texts.¹² The country pages for the India-US treaty and the India-UK treaty quote the articles in full.

Keep the documents rule 76 requires and the ones a payer or tax officer may ask for later: the foreign withholding certificate or statement, proof of deduction, the invoice and contract, the bank credit or Foreign Inward Remittance Advice (FIRA) for the net amount, a copy of the tax form you gave the payer, and a note of the treaty article you relied on.³ See FIRC vs FIRA vs e-BRC.

What happens if too much foreign tax is withheld?

If too much foreign tax is withheld, the amount above the treaty rate cannot be credited in India, because rule 76(7)(a) ignores the excess.³

• Excess over treaty rate: reclaim it from the foreign tax authority under that country's procedure, or ask the payer to correct the withholding.³
• Later refund: if a refund later arrives for tax you already claimed as credit in India, rule 76(14) requires Form No. 44 to be furnished again.³
• Late return: the credit depends on the return being filed within the time under section 263(1) or (4).³

How is credit for foreign withholding tax calculated?

Credit for foreign withholding tax is calculated under rule 76 of the Income-tax Rules, 2026, from tax year 2026-27, as the lower of the Indian tax on that income and the foreign tax paid on it, within the treaty rate.³

• Lower of two: the Indian tax on that income or the foreign tax paid on it.³
• Treaty cap: where the foreign tax exceeds the amount payable under the treaty, the excess is ignored.³
• Eligible tax: only tax covered by the treaty counts; for a country with no treaty, only tax in the nature of income-tax.³
• What it offsets: tax, surcharge and cess, not interest, fee or penalty.³
• No treaty: section 160 of the Income-tax Act, 2025 gives a deduction at the Indian rate or the foreign rate, whichever is lower.⁴

For example, a Delhi animation studio licenses a character design to a US toy company for $10,000. The payer withholds 30% because the studio's W-8BEN-E was missing. The India-US treaty caps tax on this royalty at 15%, so in India only $1,500 of the $3,000 can count towards the credit, and only up to the Indian tax on that income.¹³ The other $1,500 has to be reclaimed from the IRS.

What are the common mistakes with foreign withholding tax?

The common mistakes with foreign withholding tax are sending no tax form to the payer, describing a service loosely, and claiming credit for amounts that do not qualify.¹³⁵

• No W-8 form: a US payer may withhold 30% without it.⁵
• Loose service description: the treaty definition decides whether a fee is business profits or a technical fee.¹
• Claiming the excess: tax above the treaty rate is not creditable in India.³
• Claiming non-income taxes: VAT and platform fees are not covered.³
• Writing off too early: ask the client which law they applied, and confirm with a CA before writing off any amount.

Each country's own law decides whether its payers must withhold, so check the treaty with that country before the first invoice.¹²