Taxation of Foreign Source Income

Foreign Source Income refers to income that is earned from sources outside India. This can include income from employment, business, or investments located in a foreign country. Foreign Source Income (FSI) refers to income earned from sources outside of a taxpayer’s home country. This can include wages, interest, dividends, royalties, and business profits. Understanding how FSI is taxed is crucial for individuals and businesses operating internationally.

 

Process for filing taxes on Foreign Source Income?

To file taxes on foreign source income –

1. Determine residential status.
2. Calculate total foreign income.
3. Check eligibility for DTAA benefits.
4. Disclose foreign income and assets in the ITR.
5. File Form 67 for claiming tax credit.
6. Pay any additional taxes due and submit the ITR before the due date.

 

Tax Treatment on Foreign Source Income in India?

Tax liability on foreign source income depends on the residential status of the taxpayer in India:

Resident and Ordinarily Resident (ROR) – 

• Taxed on their global income, including income earned outside India.
• This global income is combined with their Indian income and taxed according to the applicable income tax slabs in India.
• Relief may be available for foreign taxes paid under Double Taxation Avoidance Agreements (DTAA).

Resident but Not Ordinarily Resident (RNOR)- 

• RNORs’ income from foreign sources is generally not taxable in India if it’s not received within the country.
• Taxed on income earned in India and income from a business controlled or profession set up in India.

Non-Resident (NR): Only taxed on income earned in India.

Note: For all these categories, it’s important to consider Double Taxation Avoidance Agreements (DTAA) that India has signed with many countries. These agreements help avoid paying tax on the same income twice.

How is Residential Status determined?

Residential status is determined based on the number of days an individual stays in India during a financial year and the preceding years. The criteria are as follows:

• Resident and Ordinarily Resident (ROR):
  • An individual qualifies as an ROR if they meet either of the following conditions:
    • Stayed in India for 182 days or more during the previous year.
    • Stayed in India for at least 60 days in the preceding year and a total of 365 days or more during the four years immediately preceding the relevant financial year.
  • RORs are subject to tax on their global income.
• Resident but Not Ordinarily Resident (RNOR):
  • An individual falls into the RNOR category if they haven’t been an Indian resident for 9 out of the 10 preceding years or haven’t stayed in India for more than 729 days during the 7 preceding years.
  • RNORs are taxed only on their Indian income and foreign income received in India.
• Non-Resident (NR):
  • If an individual doesn’t meet the conditions for ROR or RNOR, they are considered an NR.
  • NRs are taxed only on their Indian income

 

Methods to Avoid Double Taxation?

India has Double Taxation Avoidance Agreements (DTAAs) with various countries to prevent taxpayers from being taxed twice on the same income. The methods include:

• Exemption Method: Income is taxed in only one country.
• Tax Credit Method: Tax paid in the foreign country is credited against the tax payable in India.

 

How to report Foreign Source Income in India?

Foreign source income should be reported in the Indian tax return under the relevant heads of income. Details about foreign assets, bank accounts, and financial interests must also be disclosed in the Schedule FA of the Income Tax Return (ITR) forms.

Reporting foreign source income in India involves several steps and compliance with the Indian Income Tax Act, 1961. Here is a detailed guide on how an Indian resident should report foreign source income:

1. Identify the Type of Foreign Income

Foreign income can include:

• Salary from employment abroad
• Business or professional income earned outside India
• Income from house property situated outside India
• Capital gains from assets located outside India
• Interest, dividends, and other investment income from foreign sources

2. Determine the Residential Status

The taxability of foreign income depends on the residential status of the individual. As an Indian resident (resident and ordinarily resident, ROR):

• Global income is taxable in India.
• Foreign income must be reported and taxed in India.

3. Double Taxation Avoidance Agreement (DTAA)

Check if India has a DTAA with the country from which the foreign income is earned. DTAA can provide relief from double taxation either through an exemption method or a tax credit method.

4. Convert Foreign Income to INR

Convert the foreign income into Indian Rupees (INR) using the prevailing exchange rate on the specified date. Typically, the State Bank of India’s telegraphic transfer buying rate (TTBR) on the last day of the month preceding the month in which the income is due is used.

5. Report Foreign Income in the Income Tax Return (ITR)

• Form ITR-2 or ITR-3: Most commonly used for reporting foreign income by individuals.
• Schedule FSI (Foreign Source Income): Fill in the details of foreign income in this schedule.
• Schedule TR (Tax Relief): If you have paid tax on the foreign income in the source country, claim relief under DTAA in this schedule.

6. Declare Foreign Assets and Liabilities

• Schedule FA (Foreign Assets): Provide details of foreign assets and income from any source outside India. This includes details of foreign bank accounts, financial interests in any entity, immovable property, trusts, etc.

7. Tax Payment and Filing

• Pay any additional tax liability that arises from including foreign income.
• File the income tax return by the due date, which is usually 31st July for individuals.

8. Documentation and Proofs

• Keep all documentation related to foreign income, such as payslips, bank statements, Form 16 from the foreign employer, tax payment proofs, and DTAA-related documents.
• Maintain these records for at least 6 years, as required by Indian tax laws.

Example Steps in Filing ITR-

1. Login to the Income Tax e-Filing Portal:
   • Visit the e-filing portal
   • Login using your credentials (PAN, password, and captcha).
2. Select the Appropriate ITR Form:
   • Choose ITR-2 or ITR-3 based on your income sources.
3. Fill in the Personal and Income Details:
   • Complete the sections for personal information and income details.
4. Fill in Schedule FSI:
   • Provide the details of each foreign income source, including the nature of income, country, gross income, taxes paid abroad, and the DTAA relief, if applicable.
5. Fill in Schedule FA:
   • Declare all foreign assets and accounts accurately.
6. Fill in Schedule TR:
   • Enter the details for claiming relief under DTAA if you have paid foreign taxes.
7. Verify and Submit the Return:
   • Verify the information entered, calculate the tax, pay any outstanding dues, and submit the return.
   • E-verify the return using Aadhaar OTP, EVC, or by sending the signed ITR-V to the Centralized Processing Centre (CPC).

Final Tips

• Ensure all foreign income is accurately reported to avoid penalties.
• Utilize the services of a chartered accountant if you have complex foreign income or significant foreign assets.
• Regularly check for any updates in tax laws or DTAA provisions that might affect the reporting of foreign income.