Depending on the circumstances, some tax on money received from abroad to India may be withheld. This also includes earnings outside of India. If you are a resident Indian and earn money from anywhere else in the world, you will be subject to foreign income tax of India under Indian income tax legislation. To determine whether you are eligible for a foreign tax credit, you must add your foreign earnings to your overall taxable income and divide the total by the amount you receive as overseas payment. After that, it will be necessary to multiply your foreign-sourced income by the total amount of taxes you owe in India to determine your tax credit. This is the easiest formula to calculate and apply tax refund if you are eligible.
Foreign tax credits are only available to taxpayers who have valid and legitimate previous foreign tax debts that have been paid. Because you cannot claim credit for taxes that you did not owe or that you might have avoided. You must take advantage of all available tax cuts and deductions in order to save yourself from paying too much income tax. It is also not permissible to include any excess tax amounts, such as refunds, in the tax calculation. In addition, if you have paid the taxes of another party, you are not eligible to claim a foreign tax credit. To be eligible for a foreign tax credit, you must have paid the tax that you owed in the foreign country in question. Furthermore, you must have paid all of your international taxes on time and completely. This may be difficult for Indian citizens who have lived in other countries for a lengthy time period, such as non-resident Indians.
In this post, we will take a deep look into how to claim tax credit to a foreign income received by an Indian resident, and how should this foreign income be reported on a tax return.
Did you know?
If you are a resident Indian and you earn any income within the territory of India, Then you must include everything into your total income when you file your income tax for a particular financial year. It is taxable and failing to include will result in paying hefty penalty.
Can a Resident Indian Claim Foreign Income Tax Credit on Foreign Wages?
Resident Indians who want to claim foreign income tax credit must follow the standards given below to be considered for tax credit and its related benefits.
- According to the regulations, you should have spent more than 182 days in India in a financial year.
- You must have spent 60 days in India during the previous financial year and 365 days or more in each of the four last financial years.
- The residency status is required to determine whether you are an Indian resident or an individual who is not typically an Indian resident (RNOR).
If you fulfil the two additional criteria listed below, you will be considered an Indian resident.
- According to the Indian income tax rules, you should have spent at least two of the preceding ten financial years in India.
- You must have spent at least 730 days in India during each of the last seven financial years.
- As long as you fulfil all these necessary criteria, you will be classified as an "ordinary" resident.
- According to the law, those who do not satisfy the criteria outlined above will be classified as non-resident Indians (NRI) rather than citizens of India.
Now that you've learned how your residency status is determined, it's time to find out whether or not your foreign income is subject to taxes. Kindly remember that only income received in India is liable to Indian income tax for regular residents of India and non-residents of the country who generate income inside the Indian territory.
Also Read: GST Input Tax Credit on Supply of Goods or Services
Types of Income Taxed Under the Indian Income Tax Law
The following types of income earned in India is subject to taxation in accordance with the Indian income tax Law.
- Income generated or received in India is taxable and income received/generated by the resident of India outside the Indian territory is considered foreign income.
- For those who are residents of India, income tax is due on both domestic and overseas income.
- If a resident of India is planning to file an income tax return of their income, then they must report any assets held by them or that they are a beneficial owner of in the application form.
Taxation of Resident Indians’ Abroad Income
Suppose you earn income from a foreign asset or an overseas investment. In that case, you will be taxed in India at the rates applicable to your tax bracket, unless you qualify for a tax exemption under Indian income tax law.
The steps for reporting earned income and paying taxes on your overseas earnings are outlined below.
- You must convert your overseas revenue into Indian currency.
- Amounts of money obtained in one currency and converted into another currency (Indian ₹) should be classified clearly in the appropriate category. If you got money from a foreign property, then you must disclose it on your tax return under Income earned from House Property.
- If you earn money outside of India, then it will be automatically deducted from your taxable income in India.
- The amount of taxable income then calculated by deducting the number of eligible tax deductions and exemptions from the amount of taxable income you earned in a particular financial year. These rules are clearly specified in various parts of the Internal Revenue Code. Estimate your taxable net income and your payable tax obligation based on the appropriate tax slab you fit into and find out with your final tax payment.
Also Read: Taxation Policy and Rules for Non-resident Indians (NRIs)
Benefits of Double Taxation Avoidance Agreement For Indian Residents and NRIs
- If you are an Indian citizen or a non-residential Indian and you earn income in India as well as from a foreign country, your income is taxable in both India and the country in which you earned your income for that financial year. To avoid this scenario and reduce the bourdon of taxpayers, India has entered a double taxation avoidance agreement (DTAA) with certain countries. If you earn income both in India and from a foreign source, then you need to know about DTAA and the benefits of filing your tax return under the DTAA provisions.
- The DTAA rates for every nation with India varies considerably and hence, it is important to learn about the DTAA rate for the country in which you earn income. This will help you to calculate the tax rates much faster and avail its benefits.
- The Double Taxes Avoidance Agreement (DTAA) will assist you in avoiding double taxation on income in the country where the money earned and in India, where you must pay tax on your foreign income.
- To take advantage of DTAA benefits, you'll need a Tax Residency Certificate (TRC). This certificate certifies your tax residency, enabling the applicable DTAA exemption method to be implemented in your circumstance.
- Under the DTAA, you may claim tax credit in two ways. They are tax credit and tax exemption. Adopting the exemption technique makes it easy to avoid paying taxes in both countries at the same time.
- Unlike the tax exemption plan, which taxes income in both countries, the tax credit strategy allows the person to claim a tax reduction in the nation where they reside.
- If you are a non-residential Indian, then you must include all of your NRI income tax returns, whether earned in India or overseas. To ensure that your tax returns are correct, you must be familiar with the methods of taxing followed in India to tax your income earned outside and within India.
Conclusion
We hope that the details of this article would have given you a clear roadmap of how does an Indian resident can claim tax credit for the foreign income earned and steps that they need to follow in order to do it the right way. When you know these steps, you can avail the associated benefits without having to pay unwanted taxes.
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