Tax Implication: Tax on Foreign Income of Resident Indian

Working in a foreign country is a dream for many aspirants around the world. Many students wish to secure their dream job by shifting to a foreign country and working there. However, it is advisable for the person shifting to abroad for work to deeply understand their tax obligation. It is the responsibility of the person who is posted abroad to take this responsibility and try to fulfill this obligation with innocence. Indian citizens who are currently posted abroad are advised to understand the tax implications as it is one of the crucial aspects of ensuring financial stability and they should also keep in mind all the requisite legal compliance regarding it. In this article, we will explore the key tax implications that individuals need to be aware of when they are foreign income of resident indian. 

Knowing your Residential Status to check whether you are NRI or Not?

The first thing that helps the government to determine the tax liability of an individual in India is their residential status. There are three categories of individuals as per the Income Tax Act, 1961:

• Resident: An individual is considered a resident, if they lived in India for at least 182 days in a financial year or if they are living in India for a total of 60 days during the financial year and they have been in India for a total of 365 days or more in four preceding financial years.
• Non-resident: An individual falls into the category of a non-resident if they do not meet the criteria for residency as a Resident.
• Resident but Not Ordinarily Resident (RNOR): An individual who has been an NRI for the previous nine out of ten financial years or in the case has lived in India for less than 730 days during the previous seven financial years, falls under the category of an RNOR.

The residential status is important in determining the individual’s tax liability in India. In India, Residents are liable to pay tax on the income earned by them. On the other hand, NRIs and RNORs are liable to pay tax only on the income earned in India.

Also, an Individual may be deemed to be an NRI if he is physically absent from India for more than 365 days over four consecutive years. Therefore, the duration of the period you have lived in India will be taken into cognizance in determining your status as an NRI.

Also Read our Article on: Concept of Residential Status under Income Tax, 1961

Tax Implication: Foreign Assets and Bank Accounts and Relief from Double Taxation

Individuals who are posted abroad may have a foreign bank account, investment options, and other assets. Hence, an individual needs to disclose all the assets to the concerned Indian authorities. Foreign Exchange Management Act (FEMA) and Income Tax Act, 1961 make it mandatory for Indian residents to report their foreign assets and liabilities while filing the Income Tax Return (ITR) and the Foreign Bank and Financial Accounts (FBAR) statement.

To avoid the double taxation on the same income in both the host and parent countries, many countries have entered into DTAAs. DTAAs are the agreements that provide guidelines for establishing the taxation rights for each country and they offer relief through mechanisms like tax credits or exemptions. Individuals posted abroad are advised to understand the specific provisions of the relevant DTAA entered between India and the host country to reduce their taxable liability.

Tax implications for Persons Living outside India

In case you are an Indian citizen who is working abroad, then your overall tax implications will depend on your residence status. 

When you are posted abroad, there may be two scenarios that may come into the picture, we’ll look at them one at a time:

• Scenario 1: Tax liabilities if you are employed abroad but are not an NRI

You can be made liable to pay taxes in both India and the foreign country in case if you are working abroad and you fail to obtain an NRI Status.

To understand this let us use Arvind as an example, who works in Bangalore for an IT company. His employer sends him on-site for five months in the USA. 

Arvind does not fall under the category of NRI because he has to spend only about 155 days outside India. Arvind received his regular pay while working abroad in addition to an expense reimbursement from a bank in the USA.

Arvind is under obligation to pay income tax in India because he does not fall under the category of NRI. Arvind is also under obligation to pay taxes in India upon his income, whether it was earned in India or abroad. His employer will also deduct TDS from the payments received by him.

As per Section 10(14) of the Income Tax Act, 1961 the foreign allowance will not be taxed if that money was used to pay for the employee’s work-related costs. As per his yearly income and the applicable tax bracket, Arvind is under obligation to file his usual tax return and pay tax.

Individuals are liable to pay the taxes abroad however; it is dependent on the nation in which the individual is currently residing. In this case, Arvind is currently residing in the USA, where it is legal for someone to be considered a resident if they have been there for more than 31 days in a year. Arvind is under obligation to pay income tax on his income in the USA as per US Taxation.

Thankfully, Arvind is obliged to pay income tax on his parent’s income because the USA and India both have entered into the Double Tax Avoidance Agreement.

• Scenario 2: Taxation Implications if you are a NRI

If you fall under the category of Non-Resident Indian, then you are only required to pay income tax on income that is received within the boundaries in India. All the foreign income that you have earned while you reside abroad is taxed by the appropriate nation as per their taxation regulations.

For Example, Arvind would be a non-resident Indian if he managed to spend more than 182 days in the United States within a given financial year. Arvind is under obligation to pay income tax in India as per the applicable tax rate because Arvind is receiving his regular income in India in his account along with a TDS Deduction. 

Arvind is liable to pay income tax on his worldwide income or foreign income under US law. However, he is eligible to subtract the amount of tax paid from his overall tax obligation in the USA because of the reason that he has already paid the tax in India, and then he is liable to pay the balance of the tax due.

Possible Solution regarding Tax Implications: Tax on Foreign Income of Resident Indian

If your employer is providing you the opportunity in the form of the choice of receiving your complete payment or salary in a foreign nation or receiving your payment split between two countries, you should choose the former.

If you do that, the matter of taxability in two countries gets resolved. And also by doing so, all the necessary paperwork in association with claiming tax credits for the taxes payable in India can be avoided. Furthermore, international treaties on taxes can be crucial, foreign income of resident indian, so before you make a decision, you should speak with professionals who have the requisite knowledge.

Way Forward

Individuals get numerous opportunities when they are posted abroad, but it is also the responsibility of the individual to go through or understand the tax implications that are present in the host country as well as in India. Individuals must have awareness of the residential status, and also to understand the taxation of different types of income, and be well-versed with the provisions of DTAAs. 

The individual is advised to take professional advice and also to comply with tax laws both in India and the host country as this will ensure a hassle-free and legally compliant international work experience. You can seek assistance from our Experts at Legal Window in case you are an individual and considering tax on money received from abroad to India.