The digital age has opened doors to global earnings. Thus, understanding the tax implications of foreign income in India is now more important than ever.
We take you through the essentials of earning overseas income. From the tax implications of your foreign earnings to ways to save tax, explore with us all you need to know about being a part of a global economy.
Definition of Foreign Income for Tax Purposes
For tax purposes in India, foreign income is defined as any income earned outside the country in which a taxpayer resides. It includes:
- Salary earned for work done abroad
- Business or professional income from activities outside India
- Capital gains from the sale of foreign assets, such as property or investments
- Rental income from foreign properties
- Interest from foreign bank accounts
- Dividend income from foreign companies
Tax Implications of Foreign Income in India: An Essential Guide
The tax implications of foreign income in India depends on the taxpayer’s residential status as defined under Section 6 of the Income Tax Act, 1961.
The classifications includes:
Resident and Ordinarily Resident (ROR):
An individual classified as a resident in India for a particular financial year, is taxed on their global income.
This income includes domestic income and foreign income and is taxed according to applicable tax slabs in India.
They can claim relief for taxes paid in foreign countries under DTAAs that India has signed with various nations.
Resident but Not Ordinarily Resident (RNOR):
A RNOR is taxed only on income earned or received in India. However, any income derived from a business controlled or set up in India, is taxable in India.
Example: An RNOR earns INR 4 Lakh from a foreign gig, but does not transfer it to India. In this case, this income will not be taxable in India.
For the RNOR who operates a business in India that generates INR 3 Lakh in profits from services provided abroad but receives it in India, this amount will be taxable.
Non-Resident (NR):
Similar to RNORs, non-residents are taxed only on income that is earned or received in India. Foreign income is not taxable unless it is earned or received within India
Filing Foreign Income on ITR & Other Requirements
As a resident of India earning foreign income, it is essential to report this income when filing your Income Tax Return (ITR).
Foreign earnings include salaries, dividends, interest, and capital gains and must be reported by all categories of residents – RORs, RNORs and NRs depending on their implications.
Filing Foreign Income on ITR
Foreign income can be listed under the Schedule “FSI (Foreign Source Income)” of the following ITR forms:
- ITR-2: For individuals who earn income from salary, foreign income, capital gains, or other income but not business income.
- ITR-3: For individuals or HUFs (Hindu Undivided Families) who have income from business or profession.
- ITR-1 (Sahaj): Only for residents whose total income is up to INR 50 lakh (not applicable if you have foreign income or foreign assets)
Disclosure of Foreign Assets and Income
If you have foreign income or own foreign assets, you must disclose them in Schedule FA (Foreign Assets) of the ITR form. These assets include:
- Foreign bank accounts
- Immovable property (like real estate)
- Foreign stocks or mutual funds
- Any foreign financial interest, such as trusts or pension accounts
Penalties for Non-Compliance
If you fail to report foreign income or assets can lead to heavy penalties:
- A penalty of INR 10 lakhs for each year of non-disclosure may be imposed.
- Imprisonment ranging from six months to seven years for willful tax evasion or non-disclosure.
- Revoking the right to claim relief under Double Taxation Avoidance Agreements (DTAAs), increasing overall tax liability.
- The Budget 2024 proposed amendments on these penalties where the aggregate value does not exceed INR 20 lakhs, effective from October 1, 2024. However, this exemption does not apply to immovable properties.
Tax Benefits, Deductions and Exemptions Available for Foreign Income
There are different provisions in the Income Tax Act that can help save tax on foreign income in India. Some of these benefits, deductions and exemptions that can be utilized include:
Double Taxation Avoidance Agreement (DTAA)
India has DTAAs with various countries to prevent double taxation on foreign income.
Under the exemption method, income is taxed only in one country, and under the tax credit method, tax paid abroad is credited against Indian taxes, reducing overall liability.
Foreign Tax Credit (FTC)
You can claim a FTC for taxes paid on foreign income, reducing your Indian tax liability. This requires filing Form 67 with proof of taxes paid abroad.
Form 67 needs to be filed within the IT filing Due Date or else no claim is granted
Note that it is available only if there is a DTAA between India and the foreign country or if foreign income is taxed in both countries.
Exemptions under Section 10 of the Income Tax Act
Some foreign income is exempt under Section 10 of the Income Tax Act.
These include foreign allowances for Indian government employees working abroad and interest on NRE accounts for NRIs.
Standard Deductions and Rebates Applicable to Foreign Income
Foreign income can still benefit from general deductions like the INR 50,000 standard deduction on salary.
They can also claim deductions under Section 80D, 80E, 80G for health premiums, education loans, and donations (applicable on old tax regime).
Special Provisions for Non-Resident Indians (NRIs)
NRIs are exempt from Indian tax on NRE account interest.
They can also claim Section 80C deductions for specific Indian investments, such as insurance premiums and ELSS funds.
Exemptions on Retirement Benefits
If you receive pension or other retirement benefits from a foreign country, it may be exempt from taxation in India under certain DTAAs (varies between countries)
In some cases, retirement benefits are taxable only in the country where they are received, while in others, a tax credit or exemption may apply.
Avoidance of Double Tax on Foreign Dividends
Dividends earned from foreign companies may be taxed both in the foreign country and in India.
However, under DTAA provisions, individuals can claim tax credits for the foreign tax paid on dividends (subject to filing form 67), reducing their tax liability in India.
Best Practices to Optimize Taxation on Foreign Income
To optimize taxation on foreign income in India, you can adopt the following best practices that ensure compliance while minimizing tax liabilities:
- Keep detailed records of all foreign earnings, including salary slips, bank statements, and tax payment proofs.
- Use the appropriate ITR forms to report foreign income and assets, ensuring all details are accurate and complete.
- Use the Telegraphic Transfer Buying Rate (TTBR) on the last day of the month preceding the month in which the income is earned. Ensure accurate conversion to reflect true earnings in your ITR.
- Engage with tax professionals like PKC Management Consulting to develop a proactive tax strategy that considers future income scenarios and changes in tax laws.
- Tax laws can change frequently; staying informed helps you remain compliant and optimize your tax position.
Frequently Asked Questions
- Do I need to pay tax on foreign income in India?
Yes, if you are a resident Indian, all income earned worldwide, including foreign income, is taxable in India. You may claim a Foreign Tax Credit (FTC) to avoid double taxation if taxes have already been paid in the foreign country.
- How much foreign money is tax free in India?
There is no specific exemption for foreign income; however, certain types of income may be exempt under specific provisions. For example, interest earned on Non-Resident External (NRE) accounts is tax-free.
- What is the tax rate for foreigners in India?
Foreigners earning income in India are subject to tax based on the same slab rates applicable to residents. The applicable tax rate can vary depending on the nature of the income and whether there is a DTAA with their country of residence.
- Do I need to show foreign remittance in ITR?
Yes, if you are a resident Indian and receive foreign remittances that constitute taxable income, you must report them in your ITR. This includes salaries, interest, dividends, and any other earnings from abroad.
- How to claim relief for taxes paid on foreign income?
You can claim relief under Double Taxation Avoidance Agreements (DTAA) by filing Form 67 along with your ITR. This form allows you to declare the foreign income and estimate the taxation on it. Documentation such as tax payment certificates from the foreign jurisdiction will be required.
