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Tax Implications of Foreign Income

calculating tax on foreign income

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Learn how to report and pay taxes on income earned from foreign sources, including foreign tax credits and Double Taxation Avoidance Agreements (DTAA).

When you earn income from foreign sources and reside in India, it’s essential to understand how to report and pay taxes on that income. The Indian government has measures like the Double Taxation Avoidance Agreement (DTAA) to help individuals avoid being taxed twice on the same income. Here’s a simple guide on how to manage foreign income, report it, and utilize benefits under the DTAA:

Reporting Foreign Income

1. Income Declaration

All foreign income must be declared in your Income Tax Return (ITR). This includes salary, business income, interest, dividends, capital gains, or any other form of income earned abroad.

2. Residential Status

Your tax liability in India depends on your residential status. If you are a resident in India, your global income is taxable. If you are a non-resident (NRI) or resident but not ordinarily resident (RNOR), only income earned in India or received in India is taxable.

Paying Taxes on Foreign Income

1. Calculate Tax Liability

Determine the total foreign income and compute the tax based on Indian tax rates applicable to your income slab.

2. Foreign Tax Credits

If you have paid taxes in the country where the income was earned, you can claim a credit for these taxes to avoid double taxation. This credit can be claimed - you have to file Form 67 with the Indian Income Tax Department.

Double Taxation Avoidance Agreement (DTAA)

DTAA is a tax treaty signed between two countries -- between India and another country to avoid double taxation of the same income. The primary benefits of DTAA include:

1. Tax Relief Methods

Exemption Method

Income is taxed in only one country, and the other country exempts it.

Tax Credit Method

Both countries tax the income, but the resident country allows a credit for the tax paid in the source country.

2. Lower Withholding Tax Rates

Under DTAA, the withholding tax rates on royalties, dividends, interest, and fees for technical services may be lower than the usual rates.

Claiming DTAA Benefits

1. Form 67

To claim credit for foreign taxes, you must file Form 67 before filing your ITR. This form should include details of foreign income and the taxes paid in the foreign country.

2. Documents Required

  • Tax Residency Certificate (TRC): Obtain a TRC from the tax authority of the foreign country to prove your tax residency status there.
  • Proof of Foreign Taxes Paid: This could be in the form of tax receipts, returns filed, or any other documentary evidence of tax payment.

3. Filing ITR

After filing Form 67, report the foreign income and tax credits in your ITR. Ensure accurate and complete disclosure to avoid any issues with the tax authorities.

By understanding and utilizing the provisions of the DTAA, you can effectively manage your tax liabilities on foreign income and avoid the burden of double taxation