Foreign Income Taxation and Return Filing

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How to claim Tax Credit on Foreign Income of a Resident Indian?

Foreign Income Tax Filing - An Overview

When filing the income tax return, your residential status is an important consideration in calculating your tax liability, especially if you have earned some income abroad during the financial year. Your residential status is determined by adding up the number of days that you were physically present in India during the last financial year. 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.

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Have Foreign Income and Filing Taxes in India?

Overview on Foreign Income of Resident Indians

You would be a resident Indian if you have fulfilled the below-mentioned conditions:

  • - You have stayed in India for 182 days or more in one financial year
  • - You have stayed in India for 60 days in the last financial year and 365 days or more in the last four financial years preceding the last financial year

If you are a resident, it would have to be determined whether you are a resident ordinarily resident (ROR) or a resident not ordinarily resident (RNOR). You would be a resident ordinarily resident (ROR) if you fulfil the following two additional conditions:

  • - You have been a resident of India in a minimum of 2 out of the last 10 financial years
  • - You have stayed in India for at least a total of 730 days in the last 7 financial years

If both the conditions are fulfilled, you would be a resident ordinarily resident (ROR). However, if any of the above-mentioned conditions are not fulfilled, you would be called a resident not ordinarily resident (RNOR). Moreover, if you do not fulfil any of the conditions listed above, you would be considered a non-resident Indian (NRI).

Now that you know how your residential status is determined, it is time to find out about the taxability of your income.

In case of resident not ordinarily resident (RNOR) and non-resident Indians, income tax in India would be applicable only on the income that they earn in India.The income which will be taxed as below:

  • - Income received or accrued in India
  • - Income deemed to be received or accrued in India.

However, if you are a resident and resident ordinarily resident (ROR), you would have to pay income tax on the income that you earn in India as well as income that you earn internationally. The resident person has to report if there is any property or assets in the name of the assessee or he/ she is a beneficial owner of the property or asset in the return of income.

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 –

  • - 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.
  • - 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.
  • - 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.
  • - 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.

TDS on Foreign Income of Resident Indians

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.

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