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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.
Table of Contents
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.
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.
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.
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:
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:
3. Non-Resident Indian (NRI)
A person is an NRI if he/she does not satisfy any of the conditions stated above.
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:
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.
We have seen the tax implication of foreign income. Now let’s see how to incorporate foreign income in your tax returns.
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
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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