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Tax Implication of Foreign Income

Tax Implication of Foreign Income

Anyone can have different sources of income. With globalization and the opening up of economies, one can also have income from other countries. But, such incomes are not always taxed in the residence country. Now if you’re an Indian resident having a foreign income, you must be thinking about what would be the tax implication of foreign income arising to you. Well, then this article is all about it. Come on, let’s understand what will the tax implication of foreign income in India.

Tax Implication of foreign income for Residents

Indian follows a territorial tax system. All income arising to a resident Indian whether domestic or foreign is taxable in India. On any tax paid on a foreign income in a foreign country, you can claim a tax credit from the Indian Tax Department[1]. The tax credit can be claimed as per the Double Taxation Avoidance Agreements (DTAA). DTAA is an agreement between two countries. The purpose of DTAA is to avoid double taxation of the same income. This agreement also authorizes the taxpayer to claim tax relief from the tax paid in the foreign country. In India, an income is taxed in the year in which it is received and when it accrues.  

Tax Implication of foreign income for non-residents arising in India

The income of non-residents which arises or accrues in India is subject to taxation in India. The Indian government does not tax income earned outside India other than some such as interest, capital gains, royalties, fees for technical services, etc. Section 195 governs the tax implication of foreign income earned by a non-resident in India. A tax must be deducted at source while making payments to a non-resident by the payer. The tax rate applicable to non-residents depends upon the nature of income and rules under DTAA.

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No tax return is required to be filed by a non-resident in India even if, the non-resident earns dividends and interest in India. The payment will be made to the non-resident simply by deducting TDS.

Residential Status of an Individual and its Tax Implication in India

Tax liability of an income depends significantly upon the residential status of a person. The Income Tax Act of 1961 prescribes three categories of residential status which are discussed as follows:

  1. Residents

For the purpose of tax in India, a person is considered a resident of India if he/she stays in India for at least 182 days in a year or if the taxpayer stays in India for at least 60 days in the previous financial year and at least 365 days in four years preceding the previous financial year or if he/she is a citizen of India who leaves India in any previous year as a member of the crew or for employment purposes.

2. Residents but Not-Ordinarily Residents (RNOR)

A person will be considered an RNOR if he satisfies the following two conditions:

  1. If he/she stays in India for at least one year out of the ten years preceding the previous financial year; or
  2. If he/she stays in India for 729 days or less out of the seven years preceding the previous financial year.

3. Non-Resident Indian (NRI)

A person is an NRI if he/she does not satisfy any of the conditions stated above.

Tax Deducted at Source (TDS) on Foreign Income

If you have foreign income, then you must have observed that your income is paid after deducting TDS. TDS lowers your tax obligation. You can claim credit for TDS if the DTAA policy allows it. Generally, a DTAA provides one of the two tax credit methods mentioned below:

  1. Exemption Method
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Under this method, the income is taxed in one country and the other country fully exempts it.

2. Tax Credit Method

In this, the taxes are paid in both countries but the taxpayer is allowed to claim relief from the resident country.

Guide to including foreign income in tax returns

We have seen the tax implication of foreign income. Now let’s see how to incorporate foreign income in your tax returns.

  1. The First Step is to convert your foreign earnings into INR. The rate of conversion depends upon the Telegraphic Transfer Buying Rate (TTBR) of the State Bank of India (SBI) on the final day of the month preceding the month in which the income is earned.
  2. After converting foreign earnings into INR, you will have to put it under the appropriate head of income in your tax return.
  3. Under the head of income, the foreign income is added to the Indian income. The total earning from all sources is determined which is the gross taxable income. The net taxable income is calculated by subtracting the permitted deductions and exemptions under various sections of the Income Tax Act from the gross taxable income.
  4. Lastly, the applicable income tax slab is applied to determine the tax liability on taxable income and then pay the necessary taxes. The new income tax slab introduced by the Finance Act 2023 is as follows:
IncomeApplicable Rates
< INR 300,000/-NIL
> INR 300,000/- but < INR 600,000/-5%
> INR 600,000/- but < INR 900,000/-10%
>INR 900,000/- but < INR 12,00,000/-15%
> INR 12,00,000/- but < INR 15,00,000/-20%
> INR 15,00,000/-30%
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In conclusion, the tax implication of foreign income for a resident is such that the income gets taxed in India under the applicable tax slab. Apart from this, India has entered into a DTAA policy with several nations to prevent the double taxation of foreign income. This helps in accurately determining income and taking advantage of it in filing tax returns. This will also help you in reaching your financial goal and will help save your taxes. These provisions and policies have been introduced to bring clarity and certainty to tax laws and to reduce complications for non-residents.

Read our Article: Tax Implications of Foreign Portfolio Investors

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