An Indian client who holds a US property investment through a US corporation, and received a dividend last year, will have had a Form 1042-S in March. The Central Board of Direct Taxes said in a press release dated 28 September 2026 that returns for tax year 2025-26 from taxpayers whose accounts must be audited are now due on 21 November 2026. The window to revise a return for that year also runs to 31 March 2027. That leaves advisors with a live question about the Form 1042-S foreign tax credit, and how US tax withheld over a calendar year fits into an Indian tax year that runs from April to March.
The form itself is simple. The difficulty is that it answers a US question, how much tax was withheld from a foreign person in a calendar year, while India gives credit tax year by tax year and dividend by dividend, at an exchange rate fixed by Indian rules. An advisor who understands that gap can tell a client exactly what their CA needs, and why the credit is often smaller or later than expected. The guide to US commercial real estate for advisors in India explains the structure that produces the form, and this article follows the form into the Indian return.
What Form 1042-S records and why an Indian client gets one
Offshore investors in US property often invest through a US corporation, known as a blocker, that holds the property interest. The blocker pays US corporate tax on its own income, and anything it later pays out to investors is a dividend. A US payer that pays a dividend to a foreign person must withhold US tax and report the payment on Form 1042-S. According to the IRS instructions for Form 1042-S, the form must be filed with the IRS and furnished to the recipient by 15 March of the following calendar year.
Without a treaty claim, US withholding on dividends paid to a foreign person is 30 per cent of the gross amount. Article 10 of the India-US tax treaty limits it to 25 per cent for an Indian resident individual. The client claims the treaty rate by giving the payer a Form W-8BEN, a short US form in which a foreign person certifies their country of residence. The Form 1042-S then shows an income code, which is 06 for dividends, the rate applied and the US tax withheld. A separate explainer on whether a client receives a K-1 or a Form 1042-S covers the partnership structures that lead to a different form.
Why the US calendar year and the Indian tax year do not line up
Form 1042-S covers a calendar year, January to December. An Indian resident pays tax on the same dividends tax year by tax year, April to March, so a single form spans two Indian tax years. Rule 128 of the Income-tax Rules, 1962, which still governs returns for tax year 2025-26, allows the credit in the year in which the corresponding income “has been offered to tax” in India. The credit follows the dividend, not the form.
In practice the CA needs the payment date of each dividend, not just the annual total. A dividend paid in February 2025 belongs to tax year 2024-25, while one paid in September 2025 belongs to tax year 2025-26, even though both appear on the same 2025 Form 1042-S. If the client's statements show each payment and its withholding, the split takes minutes. If they show only the annual total, the CA has to ask for the detail before claiming anything.
Schedule FA, the part of the return where residents disclose foreign assets, adds a third calendar. As Taxscan's filing guide notes, it runs from 1 January to 31 December, so the return for tax year 2025-26 reports foreign assets held during calendar year 2025. A client can therefore report a holding on one calendar and the dividend from it on another, which is correct but confusing if nobody explains it.
How the Form 1042-S foreign tax credit is worked out in rupees
Rule 128 converts the US tax into rupees at the telegraphic transfer buying rate of the State Bank of India on the last day of the month before the month in which the tax was deducted. That is neither the rate on the day the dividend arrived nor an annual average. The credit is also capped. Article 25 of the treaty lets India allow US tax against Indian tax, but only up to the Indian tax payable on the same income.
For example, a client receives a dividend in September 2025, and the US tax withheld on it converts to ₹42,000 at the State Bank of India rate for 31 August 2025. If Indian tax on that dividend at the client's slab rate is ₹60,000, the credit is ₹42,000 and the client pays the balance of ₹18,000 in India. If the client's Indian tax on the same dividend were ₹30,000, the credit would stop at ₹30,000, and the remaining ₹12,000 of US tax would not be recovered in India. The figures are illustrative.
Form 67 for this year and Form 44 from tax year 2026-27
To claim the credit for tax year 2025-26, the client files Form 67, a statement of foreign income and foreign tax, together with proof that the tax was deducted, which is where the Form 1042-S is used. Rule 128 allows Form 67 to be furnished on or before the end of the assessment year, which for this year is 31 March 2027, provided the return itself was filed on time or as a belated return. According to TaxHeal's summary of the Budget 2026 changes, a 2025-26 return can now be revised until 31 March 2027, with a fee for revisions after 31 December 2026. Clients who filed in July without the claim still have time.
The rules change from the next tax year. Under Rule 76 of the Income-tax Rules, 2026, the statement becomes Form 44 and must be furnished within twelve months from the end of the relevant tax year. An accountant must verify it when foreign tax paid for the year is ₹1 lakh or more. The old number has been reused for a different form under the new rules, so a CA who searches the 2026 rules for Form 67 will find the wrong document. The dividend paid in September 2026 will be claimed on Form 44, while the one paid in February 2026 is still a Form 67 matter.
What the form does not tell a client
A Form 1042-S records tax withheld and nothing more. It says nothing about whether the next dividend will be paid, and in private US real estate it may not be. Property values can fall, tenants can leave, borrowing adds leverage, and an investment of this kind is usually illiquid for several years. The blocker also pays US corporate tax before any dividend, so the withholding on the form is not the only US tax in the structure. Currency movements change the rupee value of the whole holding, a single property concentrates these risks in one asset, and capital can be lost.
What advisors should do before the filing windows close
Most of the work is collecting the right detail early, because each later step depends on it. The steps run in this order.
- Ask each client with US holdings for the 2025 Form 1042-S and the payment-wise statement behind it, and diary the 2026 form for March 2027.
- Split each dividend and its withholding by Indian tax year, using the payment date.
- Convert the US tax at the State Bank of India rate for the last day of the previous month, and cap the credit at the Indian tax on that dividend.
- With the client's CA, file Form 67 for tax year 2025-26 by 31 March 2027, and revise the return if the credit was left out.
- Check that the client's Form W-8BEN is still valid, because without it the payer withholds at the full 30 per cent rate.
Advisors who introduce eligible clients through Raveum's partner page will see the same cycle every year, because a blocker structure produces a Form 1042-S each March and the Indian claim follows months later. The platform handles the KYC, the agreements and the US tax forms, while the Indian tax position stays with the client and their CA.
The form that arrives each March looks like the end of the US paperwork. For an Indian client it is the start of the Indian claim, and that claim is built from dates, exchange rates and caps that the form leaves out. An advisor who asks for payment-wise detail in March, rather than an annual total in November, gives the CA what the rules require and keeps each credit in the right year. The US commercial real estate guide for advisors sets out the structure behind the form.
Frequently asked questions
What is Form 1042-S used for?
Form 1042-S reports US-source income paid to a foreign person and the US tax withheld on it. A US payer, such as a corporation paying dividends, sends it to the recipient and the IRS by 15 March of the following year. Indian residents use it as proof of US tax when they claim foreign tax credit in India.
Can the foreign tax credit for a whole Form 1042-S be claimed in one Indian return?
Usually not. Form 1042-S covers a US calendar year, while India taxes income by tax year from April to March. The US tax on each dividend is credited in the Indian tax year in which that dividend is offered to tax, so the CA needs the payment date of every dividend, not only the annual total.
Which form claims foreign tax credit in India for tax year 2025-26?
For tax year 2025-26, the claim uses Form 67 under Rule 128 of the Income-tax Rules, 1962. It can be furnished until 31 March 2027 if the return was filed on time or as a belated return. From tax year 2026-27, Form 44 under Rule 76 of the Income-tax Rules, 2026 replaces it.
What exchange rate converts US tax withheld into rupees?
Indian rules use the State Bank of India telegraphic transfer buying rate on the last day of the month before the month in which the US tax was deducted. US tax deducted on a dividend paid in September is therefore converted at the rate for 31 August, not at the rate on the payment date or a yearly average.
Is the foreign tax credit always equal to the US tax shown on Form 1042-S?
No. The India-US treaty lets India give relief for US tax only up to the Indian tax payable on the same income. If a client's Indian tax on a dividend is lower than the US tax withheld, the excess is not recovered in India. The 25 per cent treaty rate also depends on a valid Form W-8BEN.
What risks should a client weigh beyond the tax forms?
Private US real estate can lose value, tenants can leave, borrowing adds leverage and dividends may not be paid at all. Such investments are usually illiquid for several years, and currency movements change their rupee value. They suit only some eligible clients, and the decision belongs with the client and their own advisers.
This article is for general education and is not tax, legal or investment advice. Rules change and depend on individual circumstances. All investing involves risk, including loss of capital, illiquidity and currency movements. Offerings on Raveum are available to eligible investors only and are not open to the general public.
