Taxation of Foreign Source Income

Individuals often earn income from various sources worldwide. However, not all countries tax foreign income earned by their residents. If you're an Indian resident with income sourced from abroad, you may wonder about India's taxation policies concerning such earnings. The Indian tax system does indeed impose taxes on foreign income. This article aims to explore all about taxation of foreign source income in India.

Qualifying for Foreign Tax Credit

The introduction of Rule 128 and Form 67 has streamlined the process of claiming foreign tax credits, easing the burden for taxpayers with foreign income. Rule 128, also known as the Foreign Tax Credit Rule, governs the eligibility criteria for claiming foreign tax credits in India. Here are the key rules regarding eligibility for claiming foreign tax credits on tax on foreign income of resident Indian:

  • Resident Assessee Requirement: Only resident taxpayers can claim credits for taxes paid in foreign countries or specified territories outside India.
  • Year of Taxation: The foreign tax credit can be claimed in the year when the foreign income is subjected to taxation in India, aligning with the principle of taxation in the resident country.
  • Proportionate Credit: The credit allowed is proportional to the income on which tax has been paid or levied, excluding amounts paid as interest, fees, or penalties.
  • DTAA Consideration: If a Double Tax Avoidance Agreement (DTAA) exists between the countries involved, only taxes covered under the agreement are eligible for the foreign tax credit.
  • Disputed Income: Any disputed income amount is not eligible for tax on foreign income India credit unless resolved within six months, with no outstanding liabilities and no prior deduction claimed.
  • Separate Calculation: The credit for foreign tax is calculated separately for each source of income from each country, considering the lower tax payable in the resident country.
  • Minimum Alternate Tax (MAT): A tax on foreign income India credit is available for income tax paid on foreign income under Section 115JB (minimum alternate tax).
  • Currency Conversion: The amount of foreign tax credit is determined by converting the foreign tax payment currency at the Telegraphic Transfer Buying Rate on the last day of the preceding month.

TDS Application to Foreign Income

In certain scenarios, your foreign income may be subject to Tax Deducted at Source before it reaches you. The TDS amount deducted upfront can reduce your overall tax liability, and you may need to settle any remaining balance accordingly. In such instances, you have the option to claim credit for the TDS against your tax liability, typically through the provisions outlined in the Double Taxation Avoidance Agreement (DTAA).

Under DTAA, there are two primary methods for claiming this credit. The first method is the exemption method, where income taxed in one country is fully exempted from taxation in the other country. The second method is the credit method, which allows for taxation in both countries but provides relief to the taxpayer in their resident country.

Incorporating Foreign Income into Your Tax Returns

Taxpayers may find themselves liable to pay taxes on income derived from foreign assets or investments in India. Here's a systematic approach to including foreign income in your tax returns:

  • Use the State Bank of India's Telegraphic Transfer Buying Rate (TTBR) as of the last day of the previous month to convert your international profits into Indian rupees.
  • After conversion, place the amount in your tax return under the relevant income head.
  • Once your income has been classified, add it to any income you have earned in India.
  • Add up all of your earnings to determine your gross taxable income. To determine your net taxable income, subtract the allowed deductions and exemptions under the applicable sections of the Income Tax Act.
  • To ascertain your tax liability on the foreign income taxable and pay the necessary taxes, use the income tax slabs. The following lists the applicable income tax slabs for individuals.

Adjusting foreign income into your tax returns mandates careful consideration of currency conversion rates and accurate categorization to ensure compliance with tax regulations.

Comparison of Income Tax Slabs for FY 2023-24

For the financial year 2023-24, there are two sets of income tax slabs applicable in India: the new regime and the old regime. Below is a comparison of the income tax slabs for both regimes, including answers to the common doubt regarding how much foreign income is tax free in India:

New Regime:

  • Income up to Rs. 3,00,000: No tax
  • Income from Rs. 3,00,001 to Rs. 6,00,000: Taxed at 5%
  • Income from Rs. 6,00,001 to Rs. 9,00,000: Taxed at 10%
  • Income from Rs. 9,00,001 to Rs. 12,00,000: Taxed at 15%
  • Income from Rs. 12,00,001 to Rs. 15,00,000: Taxed at 20%
  • Income above Rs. 15,00,000: Taxed at 30%

Old Regime:

  • Income up to Rs. 2,50,000: No tax
  • Income from Rs. 2,50,001 to Rs. 5,00,000: Taxed at 5%
  • Income from Rs. 5,00,001 to Rs. 10,00,000: Taxed at 20%
  • Income above Rs. 10,00,000: Taxed at 30%

The Bottom Line

The taxation of foreign-sourced income within India's tax framework requires an understanding of various rules and procedures. The introduction of Rule 128 and Form 67 has simplified the process of claiming foreign tax credits, benefiting taxpayers with foreign income. Incorporating foreign income into tax returns involves careful consideration of currency conversion rates and accurate categorization. Understanding these aspects empowers individuals to manage their tax liabilities and fulfill their financial responsibilities effectively.

 

Frequently Asked Questions Expand All

Rule 128, also known as the Foreign Tax Credit Rule, governs the eligibility criteria for claiming foreign tax credits in India. It outlines the rules and procedures for residents to claim credits for taxes paid in foreign countries or specified territories outside India.


Only resident taxpayers are eligible to claim credits for taxes paid in foreign countries or specified territories outside India. Non-residents cannot avail themselves of this benefit.


The credit allowed is proportional to the income on which tax has been paid or levied in the foreign country. It excludes amounts paid as interest, fees, or penalties. The credit is determined separately for each source of income from each country.

 

Under DTAA, taxes covered by the agreement are eligible for the foreign tax credit. It provides relief to taxpayers by avoiding double taxation on the same income in both countries.

 

 

Yes, you can. To include foreign income in your tax returns, convert it into Indian rupees using the State Bank of India's Telegraphic Transfer Buying Rate (TTBR). Then, classify the amount under the relevant income head and calculate your tax liability accordingly.