Which should you choose? ( FEIE vs. FTC )
David may also consider the Foreign Earned Income Exclusion (FEIE), which is claimed by filing IRS Form 2555.
For the 2026 tax year, the FEIE allows qualifying U.S. taxpayers to exclude up to $132,900 of foreign-earned income from U.S. federal income tax (up from $130,000 for the 2025 tax year).
Strategic Rule of Thumb: The FEIE applies strictly to earned income (like salary or self-employment income) and is highly effective if you reside in a low-tax jurisdiction. However, if your foreign income consists primarily of passive streams (like dividends or capital gains), leveraging the Foreign Tax Credit (FTC) often yields the better financial outcome.
Which Income Types Can You Claim FTC On and Which Are Excluded?
Not every payment you make to a foreign government qualifies as a creditable tax. Rule 128 is explicit about this.
| Employment salary (foreign employer, foreign-source) | Yes | It must be offered to tax in India in the same year |
| Foreign dividends (ETFs, stocks) | Yes | Credit capped at the Indian dividend tax rate |
| Foreign capital gains | Yes | Short-term and long-term are treated separately |
| Foreign rental income | Yes | Net of standard deduction |
| Foreign interest income | Yes | |
| Foreign wealth tax/property tax | No | Only income taxes qualify |
| Late payment penalties/interest charged by the IRS | No | Not a tax — expressly excluded |
| Social security contributions (FICA, NI) | No | Not an income tax |
| Taxes are under active dispute in a foreign court | No | Cannot claim until the dispute is resolved |
| Taxes reimbursed by the employer | No | You did not bear the economic burden |
You can verify whether a DTAA exists for your country on the official Income Tax India portal: India's full list of active DTAAs.