Taxation of Foreign Source of Income in India for NRIs

A foreign source of income is earnings derived from an activity or source located outside India. In India, an individual's tax obligations depend on their residential status and source of income.

Generally, Indian residents pay tax on their global income, while NRIs pay tax on income received in India. According to section 5 of the Income Tax Act, 1961, an Indian resident is liable to pay tax on their global income, whether it is earned from local or foreign sources.

Want to know more about how foreign sources of income are taxed in India? Read the blog and get all the information.

What is Foreign Source Income?

As mentioned above, a foreign source of income can be defined as the income that is earned outside your resident country. It includes dividends, royalties, interest, and fees for technical services from outside sources.

To consider your income earned outside India, you should conduct the following activities overseas. Further, you may also provide your services from within the country. However, they should be used by an individual working outside India.

Apart from this, even if the income is earned overseas, it is advisable not to receive it directly in your Indian bank account. The first receipt of it should be received outside India. This helps you remit the income to India later.

So, this was all about foreign source income. Moving ahead, let's know how India taxes this income.

How India Taxes Foreign Source Income?

Across the globe, all countries impose the income tax based on two rules: the residency rule and the source rule. The same taxation rule is also followed by India.

• Source Rule: According to the source rule, income is liable to be taxed in the country where it is earned. Here, the source of income is considered, i.e., whether it is earned from the resources or the person of that country. For instance, you are an Indian resident working in the US. In this scenario, you need to pay tax in the US.
• Residence Rule: According to this rule, a taxpayer is liable to pay tax on their earned income in their residency country, no matter whether the income is earned inside or outside India. In simple words, a resident is liable to pay tax on his/her global income in India. For instance, continuing the above example, being an Indian resident, the income you earn while working in the US is also taxable in India.

Considering this, in India, the residential status of an individual is divided into three groups, i.e., non-resident (NR), Resident, and ordinary resident (ROR) and Resident but not ordinary resident (RNOR). Further, according to the residential status, the person pays tax in India.

Confused, let's understand this better in the next section.

Tax Treatment of Foreign Income Based on Residential Status

Here is how India imposed tax on foreign income based on the residential status of the taxpayer:

• ROR (Resident and Ordinarily Resident)
  • As a ROR, you are liable to pay tax on your global income. It also includes the income you earned overseas.
  • The income you earned abroad is combined with your Indian income. Additionally, they taxed together as per the applicable Indian income tax slabs.
  • However, through Double Taxation Avoidance Agreements (DTAA), you can claim a tax credit on your already paid tax income.
• RNOR (Resident but Not Ordinarily Resident)
  • The Indian taxation rules for RNOR are slightly difficult. It depends on the number of years in the past ten years they stayed in India.
  • Generally, they are not liable to pay tax on their foreign source of income if it is not received in India.
  • However, RNORs are liable to pay tax on the income they earn from an Indian professional or business.
• NR (Non-Resident)
  • As an NRI, you are generally liable to pay tax on the income that accrues or is earned in India.
  • However, there are some exceptions to this. Specific income categories like royalties, interest, fees for technical services, and capital gains are taxed in India.

This was all about how foreign source income is taxed in India. Moving further, let's know how DTAA helps in avoiding paying tax on the same income twice.

Double Taxation Avoidance Agreement (DTAA)

To solve the issue of double taxation, wherein income is taxation in both the residence and source countries, the Double Taxation Avoidance Agreement (DTAA) comes as a relief. India has signed this agreement with several foreign countries. It helps the taxpayers in claiming tax relief from the already paid tax on foreign income against the tax payable in India.

Considering this, using the DTAA, taxpayers can claim a foreign tax credit on the income that is liable to be taxed in both India and a foreign country. Under sections 90 and 91 of the Income Tax Act, you can claim this tax credit benefit. Through these sections, taxpayers get relief from paying taxes on the same income twice in two different countries.

Further, to avail the DTAA benefits, you need to consider the following things:

• Form 67: To claim the foreign tax credit, you need to fill out Form 67 of the Income Tax Act under section 139(1) when filing your ITR. This tax credit is for taxpayers who earn income outside India and are liable to pay taxes in both countries.
• Schedule FA of the Income Tax Act: Under the Schedule Foreign Assets (FA), in the ITR, mention the details of all your foreign assets. It includes employee stock options (ESOPs), mutual funds, and shares of foreign companies.

This is how DTAA helps taxpayers in India avoid paying taxes on the same income twice. However, to claim the tax benefits, it is vital to mention all your foreign assets in Schedule FA. Additionally, report your foreign source of income in Schedule FSI (foreign source of income) when filing your ITR form. Only then will you be able to claim the tax benefit.

Now, moving ahead, let's know how to claim the foreign tax credit in India.

How to Claim Foreign Tax Credit (FTC) in India?

Here are the steps that you need to follow to claim a foreign tax credit in India:

• Step 1: Gather the documents that prove you have foreign income. It includes invoices and salary slips with bank credits. Apart from this, you also need to provide other papers, such as:
  • Foreign Tax return (if applicable)
  • Statement or certificate of overseas paid tax
  • Foreign employer statements or TDS certificates
• Step 2: Log in to the e-filing Income Tax Portal using your PAN-linked login credentials. Go to: e-File → Income Tax Forms → File Income Tax Forms → Choose Form 67. Additionally, select 2026-27 as the Assessment Year.
• Step 3: Fill out Form 67 and mention the following information:
  • Provide your PAN card number along with your full name and residential address
  • Information on your earned income from each country
  • Paid taxes in that overseas country
  • Additionally, mention the income type, including business and salary or capital gains, along with other types.
  • Using the RBI TT buying rate, convert foreign currency to INR as per the last day of the month when you receive income.
• Step 4: Under the DTAA, to claim the foreign tax credit, you need to attach the following documents:
  • Payment proof
  • Tax residency certificate (TRC)
  • Foreign tax certificates
• Step 5: To submit your Form 67, you need to use either Net banking, Aadhaar OTP, or a Digital Signature Certificate. Once you fill out this form, proceed to file your ITR.

This is how you can claim a foreign tax credit in India. Moving further, let's know the common mistakes that NRIs often make while filing taxes in India.

Common Mistakes NRIs Should Avoid When Filing Taxes in India

Here are some of the common mistakes that NRIs should avoid when filing taxes in India:

• Mentioning the wrong residential status. This results in paying tax on your global income. Additionally, your tax return can also be flagged for evasion or a mismatch.
• Filing out the wrong ITR form. You should choose the ITR form as per your residential status and income type.
• Before claiming the foreign tax credit (FTC), do not file out Form 67. It results in being unable to claim the DTAA benefits and paying tax twice on the same income.
• Not providing proof of paid foreign taxes, as self-declaration is not enough.
• Mismatch information between the ITR filing and Form 67. It is one of the most common mistakes that NRIs often face. So, before filing your ITR, cross-check all the information and amounts.

These are some of the common mistakes that NRIs often make when filing their ITR.

Final Thoughts

Lastly, this was all about the taxation of foreign sources of income in India. Under the DTAA signed between India and other foreign countries, you can claim FTC and avoid paying twice the taxes on your foreign income. However, for this, you need to fulfill several requirements, such as filing out Form 67 and more.

Furthermore, if you need more information about foreign source income or need assistance in claiming the DTAA benefits, connect with Savetaxs. We have a team of professionals who will help you out in this and solve all your tax-related queries.