Foreign source income refers to earnings whose source of income is situated a country outside India. It is taxable in case of residents and but taxable for of non- residents. If such income is taxable both in India and the foreign source country, we can claim credit of double tax paid. This is called Foreign Tax Credit. This article explains in detail, the meaning of residence rule and source rule, residential status, taxability of income for different residential status of the assessee, meaning and manner of computation of foreign tax credit.
Every country in the world imposes tax on income basis two rules
So, even if you are a tax resident of India and earn an income in the United Kingdom (UK), the UK will impose a tax on such income based on the source rule.
India follows residence rule, irrespective of where you earn your income, if you are a resident in India, whole of your global income is taxable.
There are also differences in the taxability of foreign sources of income basis the residential status of a person.
A residential status of an Individual in India is governed by Section 6 of Indian Income-tax Act, 1961.
As per it there are three types of residential status that an individual can have in India:
Taxability of an income depends on the type of residential status of an Individual.
For a thumb rule, you would be considered as ordinarily resident in India,
Basic Conditions: (Any one condition to be satisfied)
Additional Conditions: (Both the conditions to be satisfied)
If you satisfy any one of the basic conditions and both the additional conditions, you will be an ordinary tax resident of India (i.e., Your global income will be taxable in India)
There are certain other conditions also to be considered while determining residential status.
For Ordinary Residents in India: As mentioned above, global income will be taxable in India for such residents, so wherever you may earn income, that income will be taxable in India even if the country where such income is earned has already collected tax on it.
For Not Ordinary Residents/Non-Residents: Taxability of an income will arise in India only if an income is accrued or arise or received in India. So as a non-resident if you earn an income in any country other than India that income will not be taxed in India (subject to the condition that income should not be received in India).
With so much discussion you must be wondering whether you need to pay tax on foreign source income twice, i.e., in India and in foreign country. The answer is No, there are Agreements in place between countries over the world to avoid this situation where a taxpayer is required to pay tax on a single income in more than one country. They are known as Double Tax Avoidance Agreement (DTAA).
So, you can take advantage of DTAAs entered between India and different countries. You need to obtain a Tax Residency Certificate to claim the benefit of DTAA in a foreign country.
Further, to claim the foreign tax credit Form 67 needs to be filed along with the relevant documents.
Determining Residential Status