If a foreign client deducts tax before paying you, that money is not necessarily lost. Indian residents are taxed on worldwide income, and the income-tax framework lets you claim credit for eligible tax paid abroad against your Indian tax on the same income. The claim is supported by Form 67, which you file online with the income-tax department, backed by proof of the foreign tax deducted. Get the paperwork right at the time of payment and the year-end claim becomes straightforward.
Key takeaways
- Some foreign clients withhold tax on payments to Indian service providers. Whether they must, and at what rate, depends on their country's law and any tax treaty with India.
- You report the gross invoice value as income in India, then claim foreign tax credit for eligible tax withheld abroad.
- Form 67 is the statement you file to claim that credit. Confirm the current filing timeline and version with your CA, as forms and rules are updated.
- Collect a withholding certificate or equivalent proof from the client every time.
- For your EDF, the invoice amount stays the gross value. The tax withheld shows up as a gap between the invoice and the money received, which you should explain to your bank.
When foreign clients withhold tax
Not every client withholds. Many pay your invoice in full. Others, depending on their domestic rules, the type of service and whether you have given them treaty paperwork, deduct a percentage and pay it to their tax authority.
Typical moments when this comes up:
- A client's accounts team asks you for a tax residency certificate (TRC) or a treaty form before releasing payment.
- A US client asks for a W-8BEN-E (for a company) or W-8BEN (for an individual).
- The payment arrives short, and a later email explains the deduction.
The country-specific rules are outside our scope and change often. What you can control is the conversation: ask the client early whether they will withhold, under what rule, and what document would reduce or remove it. A tax residency certificate is often the key piece.
How the credit works, in plain terms
India taxes residents on global income. So a Bengaluru firm earning USD 20,000 from a client abroad reports the full USD 20,000 (converted to rupees) as income, even if only USD 18,000 reached its bank.
Without relief, the same income would be taxed twice: once abroad through withholding, once in India. India's tax treaties (DTAAs) and domestic provisions give relief by allowing a credit for eligible foreign tax against Indian tax on that income. The credit is generally capped by the Indian tax attributable to that income, and the exact computation, conversion rate and eligibility rules are where your CA earns their fee.
Form 67 is the statement that tells the income-tax department how much foreign income you earned, which country taxed it and how much tax was paid there. Filing it, along with supporting proof, is what makes the credit claimable. Rules on timing and documents are updated from time to time, so check the current requirements on the income-tax portal or with your CA rather than relying on an old blog post.
Worked example
Pallav Systems Pvt Ltd, Chennai, invoices Orchid Holdings Ltd, a client abroad, for USD 25,000 in December 2026. Orchid withholds 10% under its local rules (a fictional rate for illustration) and pays USD 22,500.
| Item | USD | Approx. INR (at ₹84) |
|---|---|---|
| Invoice value | 25,000 | ₹21,00,000 |
| Tax withheld abroad | 2,500 | ₹2,10,000 |
| Amount received in India | 22,500 | ₹18,90,000 |
What Pallav does:
- Books: records income of ₹21,00,000 and treats ₹2,10,000 as foreign tax paid, pending the credit claim.
- Evidence: obtains Orchid's withholding certificate showing USD 2,500 deducted and paid.
- Year end: its CA computes the eligible credit and files Form 67, then claims the credit in the return.
- FEMA: the December EDF lists the invoice at USD 25,000. When the bank sees USD 22,500 arrive, Pallav explains the shortfall as tax withheld abroad and provides the certificate.
That last point is where tax and FEMA meet.
The EDF angle: explaining the shortfall
Your EDF declares the full export value. The money that arrives will be less, by the amount withheld (and usually by bank charges too). That gap needs an explanation so the EDPMS entry can be closed.
Practical steps:
- Declare the gross invoice value in EDF Part 2B. Use the net realisable value column for the amount you expect to realise after deductions you know about, and explain in remarks if helpful. Ask your bank how it prefers withholding to be shown.
- When payment arrives, send the bank the client's withholding certificate along with your matching instructions.
- For invoices up to ₹10 lakh, the bank may close the entry on your periodic declaration that the money has been realised. Mention known withholding in that declaration.
- Keep the certificate, the FIRA and the invoice together. Your CA needs the same set at year end.
Our piece on net realisable value in the EDF explains how deductions affect that column.
Documents to collect, every time
| Document | From | Used for |
|---|---|---|
| Withholding certificate or tax deduction statement | Foreign client | Form 67 and the bank's EDPMS matching |
| FIRA / FIRC or bank advice | Your AD bank | EDF closure and GST export proof |
| Invoice | You | Everything |
| Tax residency certificate you supplied | Indian tax authorities | Treaty rate claims by the client |
| Client email explaining the deduction | Foreign client | Backup if the certificate is delayed |
Missing certificates are the most common reason credits are not claimed. Ask for them at the time of payment, not ten months later.
This is general information, not legal or tax advice. Foreign tax credit rules have conditions that depend on your facts.
GST is a separate question
Tax withheld abroad is an income-tax matter. Your GST treatment of the export, zero-rated under Section 16 of the IGST Act if the Section 2(6) conditions are met, does not change because a client withheld income tax. Raise your export invoice for the full value with the LUT wording if you are exporting under LUT.
Frequently asked questions
What is Form 67 used for?
Form 67 is the statement Indian taxpayers file to claim credit for tax paid in another country on income that is also taxed in India. It records the foreign income, the country and the tax paid, supported by proof such as a withholding certificate. Confirm the current form and timing with your CA.
Can I claim credit for all tax my client withheld?
Not always. The credit is generally limited by the Indian tax on that same income and depends on eligibility rules and treaty provisions. Your CA will compute the eligible amount.
Do I show the gross or net amount on the EDF?
Declare the full invoice value, which is the gross amount. The tax withheld will appear as a difference between invoice and receipt; explain it to your bank with the withholding certificate, and ask how it wants the net realisable value shown.
My client never sent a withholding certificate. What now?
Ask for it in writing, explaining you need it to claim credit in India. Keep the email trail and bank records. Without proof of foreign tax paid, claiming the credit becomes difficult.
Can a tax residency certificate stop the client withholding?
It can help the client apply a lower treaty rate or no withholding, depending on their country's rules and the treaty. Ask the client exactly which documents they need before you invoice.
Bottom line
Foreign withholding is common, and recoverable, if you collect proof at the time of payment and file Form 67 correctly at year end. Keep your invoices clean from the start with the free export invoice generator, and declare the gross value on your monthly EDF.
This guide is general information for Indian businesses, not legal or tax advice. Rules and bank processes change — confirm specifics with your AD bank or chartered accountant.