How much Foreign Income is Tax-free in India? 

When it comes to foreign income, Indian residents may be unsure about the tax implications of earnings sourced from abroad. Understanding India’s taxation policies is essential, especially considering the distinct provisions under the New and Old Regimes. Under the New Regime, income up to Rs. 3,00,000 is tax-free, while under the Old Regime, the threshold is Rs. 2,50,000. This article will explore the taxation on foreign sources of income in India for both residents and non-residents.

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Foreign Source of Income - An Overview

Foreign source income includes earnings such as dividends, interest, royalties, and fees for technical services derived from sources outside India. For income to qualify as foreign-sourced, the beneficiary must conduct the related activities abroad or provide services within India for a recipient conducting activities outside the country. Additionally, the income must be initially received outside India, and only then can it be remitted to India. If the income is directly received in India, it becomes taxable in the country. The taxability of such income also depends significantly on the residential status of the individual, making it essential to assess this factor for accurate tax compliance.

Taxation on Foreign Sources of Income

India’s tax laws categorise foreign-sourced income based on the individual’s residential status, ensuring clarity in tax obligations for residents and non-residents.

Taxation on Foreign Sources of Income for Residents

Residents, classified as either Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR), are taxed on foreign income at the same rates as domestic income.

Foreign Income for ROR and RNOR:

• RORs: Taxed on global income, including all foreign earnings.
• RNORs: Taxed only on income received or accrued in India or from a business controlled or profession set up in India.

Income Timing and Taxation:

• Income received in India must be taxed in the fiscal year of receipt.
• For income not received in India, taxation occurs in the year it is realised or accrued.

Taxation on Foreign Sources of Income for Non-Residents

Non-residents are taxed under a distinct framework targeting specific income types.

• Specified Income Categories: Income such as interest, royalties, fees for technical services, and capital gains is taxable in India under Section 195 of the Income Tax Act.
• Withholding Tax Mechanism: Income paid to non-residents is subject to withholding tax, deducted by the payer at the source, ensuring compliance and efficient tax collection.

Also read: Income Tax on Foreign Income

Comparison between New Tax Regime and Old Tax Regime

For the financial year 2023-24, India taxpayers can choose between two income tax regimes: the new tax regime and the old tax regime. Each regime has distinct tax slabs and rates, catering to varying financial preferences and saving strategies. Below is a detailed comparison of the two regimes.

New Tax Regime

The new tax regime offers simplified tax slabs with reduced rates but limited exemptions and deductions:

Old Tax Regime

The old tax regime includes higher tax rates but allows for various exemptions and deductions, such as Section 80C investments and HRA benefits:

Learn more: New Tax Regime vs Old Tax Regime

Double Taxation Avoidance Agreements (DTAA)

The Double Taxation Avoidance Agreement (DTAA) is a treaty between two countries designed to prevent individuals and entities from being taxed twice on the same income. While it doesn't exempt NRIs from all taxes, it provides relief by reducing tax liability in one or both countries, making international income taxation more equitable. DTAA covers various income types, including employment income, business profits, dividends, interest, royalties, and capital gains. These agreements outline which country has the primary right to tax specific income, often allowing the country of residency to impose taxes at a reduced rate. DTAA also helps minimise tax evasion and fosters international investment

Conclusion

In conclusion, understanding how foreign income is taxed in India is essential for residents and non-residents. Depending on their status (ROR or RNOR), residents are taxed on their global income, with rules on when it is received or accrued. Non-residents are taxed on specific income types like interest and royalties, with taxes withheld at the source. The new and old tax regimes offer different benefits, allowing taxpayers to choose the best option. Additionally, the Double Taxation Avoidance Agreement (DTAA) helps reduce tax burdens for NRIs by preventing double taxation, making foreign income taxation more manageable.

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FAQs

What is foreign-source income in India?

Foreign-source income includes earnings such as dividends, interest, royalties, and fees for technical services derived from sources outside India, and it must be initially received outside India before being remitted to India.

Are NRIs required to pay taxes on foreign income in India?

Depending on their residential status and income types, NRIs may be taxed in India on specific income, such as interest, royalties, and capital gains.

How does my residential status affect the taxation of foreign income? 

If you're a Resident and Ordinarily Resident (ROR), you will be taxed on your global income, including foreign earnings. Only income received in India or accrued in India is taxed if you are a Resident but Not an Ordinarily Resident (RNOR).

How is foreign income taxed for non-residents? 

Non-residents are taxed on income such as interest, royalties, and capital gains in India. The payer is required to deduct tax at source under Section 195 of the Income Tax Act.

What are the key differences between the new and old tax regimes for foreign income? 

The new tax regime offers lower tax rates but no exemptions or deductions, while the old regime has higher tax rates but allows for deductions like Section 80C investments and HRA.

What income is exempt from tax under the New Regime? 

Under the New Regime, income up to Rs. 3,00,000 is tax-free, with progressively higher tax rates for income beyond this limit.

What is the Double Taxation Avoidance Agreement (DTAA)? 

The DTAA is a treaty between two countries designed to prevent double taxation on the same income. It allows relief by reducing tax liability in one or both countries, making international income taxation more equitable.

How does the DTAA impact tax on foreign income? 

DTAA allows the country of residence to impose taxes at a reduced rate on specific income types, preventing individuals from being taxed twice on the same income, thus reducing tax liabilities.

DINESH P Expert

Updated on: January 9th, 2025