What is International Taxation?
International taxation refers to the body of tax laws and regulations that govern cross-border transactions and the taxation of income earned by residents and businesses across different jurisdictions. In India, international taxation is governed primarily by the Income Tax Act, 1961, along with Double Taxation Avoidance Agreements (DTAAs) that India has signed with various countries.
Key Aspects of International Taxation
- • Determination of tax residency status
- • Taxation of income earned outside India
- • Relief from double taxation through DTAA
- • Transfer pricing for related party transactions
- • Foreign Tax Credit mechanisms
- • Reporting requirements for foreign assets
Residential Status Determination
Your tax liability in India depends entirely on your residential status. The Income Tax Act categorizes taxpayers into three categories:
Resident, Resident but Not Ordinarily Resident (RNOR), and Non-Resident
| Residential Status | Basic Conditions | Tax Liability |
|---|---|---|
| Resident | In India for 182+ days in FY; OR 60+ days + 365 days in preceding 4 years | Taxed on global income |
| RNOR | Non-resident in 9 of 10 preceding FYs; OR in India ≤729 days in preceding 7 FYs | Foreign income not taxed unless business controlled from India |
| Non-Resident | Does not satisfy any basic condition | Taxed only on India-sourced income |
Important: For Indian citizens leaving for employment abroad or crew of Indian ships, the 60-day condition is replaced by 182 days.
Taxation of Foreign Income
The tax treatment of foreign income varies based on your residential status:
Types of Foreign Income and Their Taxation
Salary Income Earned Abroad
- • Residents: Taxable in India (subject to DTAA relief)
- • Non-Residents: Not taxable in India
- • Deputation cases may require special consideration
Dividend from Foreign Companies
- • Taxable as "Income from Other Sources"
- • Subject to DTAA rates if TRC obtained
- • Foreign Tax Credit available
Capital Gains on Foreign Assets
- • Sale of foreign shares/securities taxable in India for residents
- • Long-term gains: 20% with indexation (if applicable)
- • Short-term gains taxed at slab rates
Rental Income from Foreign Property
- • Taxable under "Income from House Property"
- • Standard deduction of 30% available
- • Municipal taxes paid abroad deductible
Double Taxation Avoidance Agreements (DTAA)
India has signed DTAAs with over 85 countries to prevent the same income from being taxed in both jurisdictions. These agreements allocate taxing rights between countries.
Methods of Relief Under DTAA
Exemption Method
Income taxed in one country is exempt in the other. Common for government service pensions and certain passive income.
Tax Credit Method
Income is taxed in both countries, but credit is given for taxes paid in the source country. Most commonly used method.
Popular DTAA Provisions
| Country | Dividend Tax Rate | Interest Tax Rate | Royalty Tax Rate |
|---|---|---|---|
| USA | 15% / 25% | 10% / 15% | 10% / 15% |
| UK | 10% / 15% | 10% / 15% | 10% / 15% |
| Singapore | 10% / 15% | 10% / 15% | 10% / 15% |
| UAE | 5% / 10% | 5% / 12.5% | 10% |
Foreign Tax Credits (FTC)
Section 90 and 91 of the Income Tax Act provide relief for taxes paid in foreign jurisdictions. Taxpayers can claim credit for:
- • Tax deducted at source in the foreign country
- • Tax paid on self-assessment in the foreign country
- • Tax payable under DTAA provisions
FTC Calculation Formula
Foreign Tax Credit = Lower of:
- 1. Tax paid in foreign country
- 2. (Indian tax liability × Foreign income) ÷ Total income
Documents Required for FTC Claim
- • Tax Residency Certificate (TRC) from foreign tax authority
- • Proof of tax paid abroad (tax challans, withholding certificates)
- • Form 67 (for claiming FTC under DTAA)
- • Copy of tax return filed in foreign country
Compliance Requirements
Taxpayers with foreign income must comply with several reporting and disclosure requirements:
Form 67 - Claiming Foreign Tax Credit
Mandatory for claiming FTC under DTAA. Must be filed before ITR filing or by ITR due date.
Schedule FA - Foreign Assets
Mandatory disclosure of foreign bank accounts, financial interests, immovable property, etc.
Form 3CEB - Transfer Pricing
Required for international transactions with related parties exceeding ₹1 crore.
Reporting Foreign Assets (Schedule FA)
Residents (including RNOR) must report foreign assets and income in Schedule FA of the ITR. This includes:
Foreign bank accounts (checking, savings, deposits)
Financial interests in foreign entities
Immovable property outside India
Accounts with foreign signatory authority
Trusts created outside India (beneficial owner/trustee/beneficiary)
Any other foreign income/capital assets
Foreign retirement accounts (401k, IRA, etc.)
Directorships in foreign companies
Penalties for Non-Compliance
| Violation | Penalty |
|---|---|
| Non-disclosure of foreign assets (Schedule FA) | ₹10 lakhs per undisclosed asset |
| Non-filing of return with foreign income | ₹5,000 - ₹10,000 under Section 234F |
| Concealment of foreign income (Black Money Act) | 3× tax + 200% penalty |
| Non-compliance with transfer pricing | 2% of transaction value |
| Failure to furnish Form 67 | Denial of FTC claim |
Frequently Asked Questions
Q: Do I need to pay tax in India on my foreign salary?
If you are a Resident in India, your global income including foreign salary is taxable in India. However, you can claim Foreign Tax Credit for taxes paid abroad. Non-residents are not taxed on foreign salary.
Q: What is the Black Money Act and when does it apply?
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 applies to undisclosed foreign income and assets. It imposes a flat 30% tax plus 90% penalty (total 120%) on undisclosed foreign assets.
Q: How do I obtain a Tax Residency Certificate (TRC)?
A TRC is issued by the tax authority of the country where you claim to be a resident. For India, you can obtain TRC by filing Form 10FB (for individuals) or Form 10FC (for companies) with the Indian tax authorities.
Q: Are NRE account balances taxable in India?
Interest earned on NRE accounts is exempt from tax in India for Non-Resident Indians (NRIs). However, once you become a Resident, the interest becomes taxable. The account should be converted to a Resident account.
Q: What happens if I don't report my foreign bank account?
Non-reporting of foreign bank accounts in Schedule FA can attract a penalty of ₹10 lakhs per undisclosed account under Section 43 of the Black Money Act. It's considered a serious violation.
Q: Can I claim FTC for taxes paid in the USA?
Yes, India has a DTAA with the USA. You can claim Foreign Tax Credit for taxes paid in the USA by filing Form 67 and providing proof of tax payment (Form 1040, W-2, etc.).