Income Tax liability on Foreign Income

Tax on Foreign Income

Calculating Income Tax for Foreign Nationals in India

  • Income tax for foreign nationals in India is determined based on their level of residency.
  • Foreign nationals who are employed in India are liable to income tax.
  • Only foreign nationals who qualify as non-residents are not liable to income tax.

In India, an individual’s income is taxed at graduated rates, depending on his/her residential status in India, as determined by the Income Tax Act, 1961 and income level. Non-employment income is taxed at a variable rate according to income type. 

Any individual who is not a citizen of India is considered a foreign national.

However, whether a foreign national is liable to pay Indian income tax is dependent on the individual’s physical presence in India during a financial year which runs from April 1 to March 31, regardless of their citizenship or the purpose of the stay. 

Residential status and tax liability under Income Tax Act, 1961

Residential status

Section 6 of the Income Tax Act, 1961 defines the principles governing an individual’s residential status in India.

1. Resident

An individual is said to be “resident” in India if they qualify either of the following conditions.
    • They are present in India in the relevant fiscal/tax year for a period of 182 days or more; or
    • They are present in India for a period of 60 days or more during the relevant fiscal year and a total of 365 days or more during the four fiscal years immediately preceding the relevant fiscal year.

2. Resident and ordinarily resident (ROR)

If an individual qualifies the following two conditions, they will be deemed as ordinarily resident.
  1. The individual has been “resident” in India in at least two out of the 10 fiscal years immediately preceding the relevant fiscal year; and
  2. The individual’s stay in India during the seven preceding fiscal years immediately preceding the relevant fiscal year is 729 days or more.

3. Resident but not ordinarily resident (RNOR)

If the individual qualifies as a resident only based on the deemed residency clause or based on the reduced stay of 120 days or more, and does not satisfy any other basic condition, they will be qualified as an RNOR.

4. Non-resident (NR)

If none of the conditions specified for residency are met, then the individual will qualify as a non-resident.

New criteria for NRI status/Deemed Residence

Till end of FY 2019-20, NRIs (covers Indian citizens and Persons of Indian Origin) included those individuals who visited India for less than 182 days in a financial year. Finance Act 2020 reduced this period to 120 days for all NRIs.

Further, amended section 6 provides that the reduced period of 120 days shall apply, only in cases where the total Indian income (i.e., income accruing in India) of such visiting individuals during the financial year is more than Rs 15 lakh. Accordingly, visiting NRIs whose total income (which is defined as taxable income) in India is up to Rs 15 lakh during the financial year will continue to remain NRIs if the stay does not exceed 181 days, as was the case earlier.

The deemed residents will be classified as RNOR with the effect from financial 2020-21. This amendment was brought in force to tax the incomes of the Indian citizen who are not liable to tax in any country.

Special relief due to COVID lock-down

For FY 2019-20 if an individual has come to India on a visit before 22nd March, 2020 and

  • Has been unable to leave because of lockdown on or before 31st March, 2020, period of stay from 22nd to 31st March shall not be considered.
  • Has been quarantined due to Covid19 on or after 1st March, 2020 and departed on evacuation flight on or before 31st March, 2020, or unable to leave India his period of stay from the beginning of quarantine to 31st march shall not be considered.
  • Has been departed on a evacuation flight on or before 31st March, 2020, period of stay from 22nd March 2020 to date of departure shall not be considered

Tax on foreign income of resident Indians

If you have a foreign asset or an international investment which yields you income, such an income would be subject to tax in India at your income tax slab rates. Here is a detailed process on how to include your foreign income in your tax returns and pay tax on it –
  1. The first step would be to convert your global income into Indian currency, to do so you would have to use State Bank of India’s Telegraphic Transfer Buying Rate (TTBR) applicable on the last day of the month immediately preceding the month in which you earn the income. For example, if you earn the income in September 2019, use the TTBR of August 2019 for converting the income into Indian Rupees.
  2. After the income is converted, list it under the relevant head of income. So, if you have earned an income from property held in a foreign country, list the income under the head ‘Income from house property’. If, on the other hand, the income is a payment for your services rendered abroad, include it under ‘Income from salary’. Choose the relevant head of income based on the nature of income that you earn and list the foreign income under that head.
  3. Once added, the foreign income would become a part of your income earned in India. You would then have to add up all the incomes from all the heads of income and arrive at the gross taxable income.
  4. You can then deduct the allowed deductions and exemptions under different sections of the Income Tax Act to arrive at the net taxable income. Calculate your tax liability on the net taxable income using the income tax slabs and pay the tax which is due.

In case an individual becomes taxable in India, he/she needs to ensure the following to avoid/minimize double taxation:

  • Determine residential status accurately.
  • Evaluate appropriate taxability in India.
  • Claim exemption as per the tax treaty, if the prescribed conditions are met.
  • In case the income is taxable in the other country as well, claim appropriate tax credit.

Income Earned Abroad are Taxable or not

An NRI’s income taxes in India will depend upon his residential status for the year.

If your status is ‘resident,’ your global income is taxable in India. If your status is ‘NRI,’ your income which is earned or accrued in India is taxable in India.

  • Salary received in India or salary for service provided in India, income from a house property situated in India, capital gains on transfer of asset situated in India, income from fixed deposits or interest on savings bank account are all examples of income earned or accrued in India. These incomes are taxable for an NRI.
  • Income which is earned outside India is not taxable in India.
  • Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.

TDS on foreign income

It might so happen that you receive your foreign income after deducting TDS from it. If it happens, you can take credit for such TDS in your tax liability. You can reduce your tax liability by the TDS already deducted and then pay the remaining amount. To claim credit, however, you should use the rules of Double Tax Avoidance Agreement (DTAA). Different countries have different rates of DTAA with India. You would have to consider the DTAA of the country from which you have earned the income. DTAA would help you avoid paying double tax on an income in the country where the income originated and in India where you are required to pay a tax on such income.

To avail the benefit under DTAA, you would have to avail a Tax Residency Certificate (TRC). This certificate helps in the identification of your residential status for taxation purposes so that the right DTAA rule could be applied.

You can claim a credit under DTAA under two methods. One is the exemption method and the other is the tax credit method. Under the exemption method, if the income is taxed in one country, it is exempted from tax in the other country. On the other hand, under the tax credit method, income is taxed in both countries but the tax payer can claim tax relief in the country of residence.

Disclosing all your income in your income tax return is very important whether you earn the income in India or abroad. So, know the rules of taxing your foreign income in India so that you can file your taxes correctly.

For more info visit TAXAJ
Posted by Ramesh Kumar Gupta

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