The expansion of global career opportunities, international investments, and cross-border transactions has made understanding the taxability of foreign income a critical area for individuals and entities in India. The framework governing this taxation is rooted in the Income Tax Act, 1961, and is fundamentally defined by the residential status of the taxpayer.

The Foundation: Residential Status and Global Income

In Indian tax law, the taxability of worldwide income hinges on the concept of Residential Status, which is determined for each financial year. An individual’s residential status falls into three primary categories:

1. Resident and Ordinarily Resident (ROR): An individual who qualifies as an ROR is liable to pay tax in India on their global income. This means all income earned, accrued, received, or deemed to have accrued or been received, both within and outside India, is included in their total taxable income in India. This is the broadest tax liability.
   
2. Resident but Not Ordinarily Resident (RNOR): This status provides a limited period of relief, usually for returning non-residents. For an RNOR, only the following incomes are taxable in India:
   • Income received or deemed to be received in India.
   • Income accrued or arisen in India.
   • Income accrued or arisen outside India from a business controlled in or a profession set up in India.
   • Crucially, any other income (such as salary from an overseas job, foreign interest, or rent from property outside India) that accrues and is received entirely outside India is not taxable for an RNOR.
     
3. Non-Resident (NR): A Non-Resident is only taxable in India on income that is sourced or received in India. Income earned and received outside India is completely exempt from tax in India.

The determination of ROR, RNOR, or NR status is based on the number of days of physical stay in India during the financial year and in preceding years, with specific rules applicable to Indian citizens and persons of Indian origin.

Taxing Specific Streams of Foreign Income

The tax treatment of foreign income for a Resident and Ordinarily Resident (ROR) generally follows the rules applicable to domestic income, but with certain practical considerations:

• Foreign Salary Income: This is fully taxable in India. The salary is typically converted into Indian Rupees (INR) using the Reserve Bank of India’s (RBI) prescribed exchange rate or the telegraphic transfer buying rate on the date of credit.
  
• Rental Income from Foreign Property: The net rental income, after deductions permitted by Indian law (such as standard deduction and interest on a housing loan), is taxable.
  
• Interest, Dividends, and Royalties from Foreign Sources: These are generally fully taxable at the applicable slab rates of the individual.
  
• Capital Gains on Sale of Foreign Assets (Shares, Property, etc.): Capital gains are taxed as per the Indian capital gains regime, classified as short-term or long-term based on the holding period prescribed in the Indian Income Tax Act. The foreign currency sale price and cost of acquisition are converted into INR.

Preventing Double Taxation: DTAA and FTC

The most significant complexity arises when the same income is taxed in the source country (where it is earned) and in India (based on the taxpayer’s ROR status). To mitigate this unfair burden, India provides Double Taxation Relief through two primary mechanisms:

1. Double Taxation Avoidance Agreements (DTAAs) – Under Section 90/90A

India has comprehensive DTAAs with numerous countries. These bilateral treaties specify how different streams of income (e.g., salary, interest, capital gains) are to be taxed, often granting priority to the source country or setting reduced tax rates.

• The relief under a DTAA is allowed to a taxpayer based on the agreement’s terms, ensuring the more beneficial provision (either the DTAA or the Indian Income Tax Act) is applied.
• To claim relief, the taxpayer must be a tax resident of one or both countries and must furnish a Tax Residency Certificate (TRC) from the foreign tax authority.

2. Unilateral Relief – Under Section 91

For income earned from a country with which India does not have a DTAA, the Indian government provides Unilateral Relief under Section 91. This ensures that a credit is still available for foreign taxes paid.

Foreign Tax Credit (FTC)

In practice, double taxation is often avoided through the Foreign Tax Credit (FTC) mechanism, where the taxpayer is allowed a credit for the tax paid abroad against the tax payable in India on the same income.

• The credit allowed is typically the lower of the tax paid in the foreign country or the tax payable in India on that specific foreign income.
• To claim this credit, a taxpayer must file Form 67 electronically before or along with the Income Tax Return (ITR), providing proof of foreign tax payment or deduction, such as a statement from the foreign tax authority.
• The FTC can be adjusted against the Indian tax, surcharge, and cess liability, but not against any interest, fees, or penalties.

Compliance and Reporting Obligations

Taxation of foreign income extends beyond simply paying the tax; it involves strict disclosure requirements that necessitate careful attention to compliance.

• Income Tax Return (ITR) Filing: Residents with foreign income are generally required to file ITR Form 2 or ITR Form 3. The foreign income details are reported in Schedule FSI (Foreign Source Income).
• Reporting of Foreign Assets (Schedule FA): All ROR individuals are mandatorily required to disclose details of any foreign assets held during the financial year in Schedule FA (Foreign Assets) of their ITR. This includes foreign bank accounts, financial interests in any entity outside India, immovable property, capital assets, and any other income derived from foreign sources. Non-disclosure or inaccurate reporting can attract severe penalties.

The Role of FEMA

While the Income Tax Act governs the tax on income, the Foreign Exchange Management Act, 1999 (FEMA) governs the holding of foreign currency and foreign assets. Generally, under the Liberalised Remittance Scheme (LRS), resident individuals are permitted to remit a specified amount per financial year for permissible capital and current account transactions. The holding of foreign assets and the remittance of funds must comply with both FEMA and RBI regulations.

Conclusion

Navigating the tax treatment of foreign income requires a deep understanding of India’s source-based and residence-based taxation rules. The residential status is the cornerstone, dictating the scope of tax liability. For ROR taxpayers, careful planning is essential to correctly calculate the tax liability, claim the Foreign Tax Credit via Form 67, and ensure meticulous disclosure of both income in Schedule FSI and assets in Schedule FA. Adherence to these legal provisions not only ensures compliance but also optimises the taxpayer’s financial position by legitimately avoiding the burden of paying tax on the same income in two jurisdictions. Consulting with a qualified tax advisor is often an invaluable step for those managing global finances.

Simplify Global Payments and Tax Compliance with BRISKPE

If you earn from international clients or investments, managing inflows efficiently is just as important as staying tax compliant. BRISKPE lets Indian freelancers, exporters, and consultants receive international payments directly to their Indian bank accounts with up to 80% lower fees than traditional platforms like PayPal or wire transfers.

• Instant KYC and easy setup
• Faster settlement and better exchange rates
• Full RBI and FEMA compliance

Start receiving global payments the smarter way.