Earning a salary in foreign currency comes with unique tax challenges. Learn with us the ways for how to save tax on salary paid in foreign currency in India.
We discuss Indian tax laws that offer various exemptions, deductions, and strategies to help you legally reduce your tax burden, from leveraging DTAA benefits to planning foreign remittances.
Taxation Rules for Salary Paid in Foreign Currency
In order to understand how salary paid in foreign currency is taxed in India, you need to understand a person’s residency status and the scope of income considered taxable under Indian tax laws.
Below is a detailed explanation of the key rules governing this area:
Tax Residency and Worldwide Income
Under the Income Tax Act, 1961, an individual can be classified as:
Indian residents are liable to pay income tax on their worldwide income regardless of where the salary is paid or the currency in which it is paid
Taxable Income Scope
If the work is performed in India, the salary (even if paid in foreign currency) is taxable in India. The location of payment or receipt does not impact taxability.
If the individual is a non-resident or RNOR, salary earned and received outside India is usually exempt.
For residents, foreign income earned outside India is taxable in India but may qualify for relief under Double Taxation Avoidance Agreements (DTAA).
Conversion to Indian Rupees
Salary paid in foreign currency must be converted to INR for tax calculation as per Rule 115 of the Income Tax Rules.
The exchange rate used is typically the telegraphic transfer buying rate of the State Bank of India on the last day of the month immediately preceding the month in which the income is due or received.
Tax Deducted at Source (TDS)
If your foreign employer does not deduct TDS from your salary, you are responsible for paying the applicable taxes directly to the Indian government.
How to Save Tax on Salary Paid in Foreign Currency In India: 10 Best Ways!
As a person receiving salary on foreign currency in India, you can save taxes in the following ways:
1.
Tax Residency Status Management:
As per the Income Tax Act rules, residency determines taxability. So, it’s important to understand and manage your tax residency status.
If possible, stay outside India for 182 days or more in a financial year to maintain non-resident status. For RNOR status, limit your physical presence in India over the preceding years.
2.
Utilise Double Taxation Avoidance Agreement (DTAA):
DTAA treaties between India and other countries help prevent double taxation.
By utilizing these agreements, you can claim relief from taxes paid in the foreign country on your salary, thereby reducing your overall tax liability in India.
Make sure you have proper documentation like a Tax Residency Certificate (TRC) and Filed Form 67.
3.
Adjust TDS Based on Foreign Tax Paid:
If taxes are withheld at a higher rate than necessary due to foreign earnings, ensure that you adjust the Tax Deducted at Source (TDS) accordingly when filing your return.
By doing this, you can make sure you aren’t paying too much in taxes and, if necessary, get a refund.
4.
Claim Foreign Tax Credit:
If you have paid taxes in the country where you earned your salary, you can claim a foreign tax credit under Sections 90 and 91 of the Income Tax Act.
This credit can be used to offset the taxes payable in India, thus minimizing double taxation.
File Form 67 before filing your income tax return and submit proof of foreign tax payments and income details.
5.
Explore Section 10 Exemptions:
Certain allowances and perquisites received while working abroad may be exempt under Section 10 of the Income Tax Act.
Some of these exemptions include:
- Housing Rent Allowance (HRA).
- Travel or special allowances for work-related expenses.
- Employer-provided perquisites like company accommodation, vehicles, or education benefits.
6.
Opt for Salary Structuring:
Structuring your salary components strategically—such as opting for allowances instead of a higher basic salary—can help maximize exemptions and deductions available under Indian tax laws.
Include allowances and reimbursements like meal coupons, conveyance, and medical expenses.
7.
Explore Foreign Assignment Allowances:
Cost of living, hardship, and foreign service allowances may be tax-exempt if structured correctly.
Income earned while working abroad and credited to a foreign account may also be exempt for non-residents or RNOR individuals.
8.
Invest in Tax-Free Instruments:
Consider investing in tax-free instruments such as certain bonds or fixed deposits that provide returns without attracting income tax, thereby preserving more of your earnings.
9.
Plan for Retirement Contributions:
Contribute to retirement funds like the National Pension System (NPS).
It allows you to claim additional deductions beyond the standard limits under Section 80C, helping to reduce taxable income.
10.
Invest in Tax-Saving Instruments:
Depending on the tax regime you choose, you can Invest in eligible tax-saving instruments such as Equity-Linked Savings Schemes (ELSS) or Public Provident Fund (PPF).
This allows you to claim deductions under Section 80C, reducing overall taxable income.
Frequently Asked Questions
- Is salary earned in foreign currency taxable in India?
Yes, the taxation of salary earned in foreign currency depends on your residency status under Indian tax laws. For Residents, global income, including salary earned abroad, is taxable in India. For Non-Residents (NR) and Residents but Not Ordinarily Residents (RNOR), only income earned or received in India is taxable.
- Are there any exemptions for allowances received as part of the salary?
Yes, certain allowances are exempt under Indian tax laws, such as House Rent Allowance (HRA), travel, relocation, and special foreign assignment allowances, and perquisites like company accommodation, vehicles, or education benefits, subject to limits.
