Taxation of Foreign Source Income

The global economy in the present day has made it possible for everyone to have an income from different sources around the world. However, such incomes are not always taxed in the residence country of a person. If you are an Indian resident with a foreign income source, you might be curious if India taxes it. According to the Indian taxation system, the answer is indeed yes. 

The global economy in the present day has made it possible for everyone to have an income from different sources around the world. However, such incomes are not always taxed in the residence country of a person. If you are an Indian resident with a foreign income source, you might be curious if India taxes it. According to the Indian taxation system, the answer is indeed yes. 

In this article, we will learn about the taxation process of foreign-sourced income under the Indian tax system.

Taxation of foreign source income for residents

If you are an Indian resident, your income from all sources, domestic and foreign, is taxable in India. However, if you have paid tax on any foreign income in the source country, you can claim credit in India for the same. 

India has entered into an arrangement with different countries called Double Taxation Avoidance Agreements (DTAA) that helps to avoid double taxation on the same income. This agreement authorises the taxpayer to claim relief from the tax paid on foreign income against the tax payable in India. 

The income from foreign sources gets taxed at the same rate applicable to earnings in India. If the taxpayer receives his foreign income in India, he/she must pay taxes in the same fiscal year. If the income is not received in India, it gets taxed in the financial year in which it is realised or accrued.

Taxation of foreign source income for non-residents

Only income earned or accrued in India is subject to taxation for non-residents. The Indian Government does not tax money earned outside of the nation. However, some income categories, such as interest, royalties, fees for technical services, and capital gains, are taxed in India. 

Section 195 of the Income Tax Act governs how non-residents are taxed on income from a foreign source. Income paid to non-residents must have tax withheld from it by the payer of income. The nature of income and the rules applicable under DTAA determine the tax rate that applies to non-residents. 

Residential status for taxation in India

The taxability of your income significantly depends on your residential status. As per the Income Tax Act 1961, there are three categories of residential status. They are discussed as follows.

Residents

A taxpayer will be considered a resident of India if he/she stays in India for 182 days or more in a year. Also, if the taxpayer remains in India for at least 60 days in a single fiscal year and at least 365 days in the four prior fiscal years, he/she would also be considered a citizen. 

Resident but Not Ordinarily Resident (RNOR)

You will be considered an RNOR of India if you can satisfy any one of the following two conditions:

• If you stay in India for at least 730 days in seven immediate preceding years.
• If you have been an Indian resident for at least nine out of the ten immediate previous years. 

Non-Resident Indian (NRI)

An individual is considered a non-resident if they do not satisfy any of the conditions stated above.

Is there TDS payable on foreign income?

In various circumstances, you receive your foreign income after deducting the TDS. The already-deducted TDS will lower your tax obligation, after which you can pay the remaining balance. In such cases, you can claim credit for TDS in tax liability by incorporating the DTAA policy.

Two credit methods under DTAA can be followed while claiming the credit. 

• First is the exemption method, where the income taxed in one country gets fully exempted in another country. 
• The other is the credit method, where taxation is applicable in both countries, but the taxpayer can claim relief in their resident country.

Step-by-step guide to include foreign income on tax returns

A taxpayer might have to pay taxes on the income from foreign assets or investments in India. Here is a step-by-step guide on incorporating foreign income on your tax returns.

Step 1: Convert your foreign earnings into Indian rupees. The rate of conversion will be based on the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India as on the final day of the month preceding the month of revenue earned. 

Step 2: After converting the money to Indian currency, you must put it under the appropriate income head on your tax return. 

Step 3: After putting it under the appropriate income head, your foreign income will get added to the income you earned in India. 

Add all your earnings from all sources to determine your gross taxable income. The net taxable income gets calculated by subtracting the permitted deductions and exemptions under various sections of the Income Tax Act. 

Step 4: Finally, use the income tax slabs to determine your tax liability on your taxable income and then pay the necessary taxes. The income tax slabs applicable to a taxpayer are given below.

Income tax slab under new regime for FY 2023-24

Income tax slab under the old regime for FY 2023-24