Foreign Income Return

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Foreign Income Return

A. FOREIGN INCOME RETURN:

The term foreign income return refers to the reporting and taxation of income earned outside India by residents. Here’s a detailed explanation:

Meaning and Scope:

Foreign income return involves the declaration of any income earned outside India by individuals or entities who are residents of India for tax purposes. This includes various types of income such as:

  • Salaries: Income earned from employment in a foreign country.
  • Business Income: Profits from business operations conducted outside India.
  • Investment Income: Interest, dividends, and capital gains from foreign investments.
  • Property Income: Rental income from properties located abroad.
  • Other Income: Any other income such as royalties, technical fees, etc., earned from foreign sources.

B. Key Points to Consider:

  1. Resident Status:
  • The obligation to report foreign income depends on the individual’s residential status. Residents are taxed on their global income, meaning they must declare and pay tax on income earned both in India and abroad.
  • Non-residents and Resident but Not Ordinarily Residents (RNOR) are generally taxed only on income that is received or accrued in India.
  1. Double Taxation Relief:
  • To avoid double taxation (paying tax both in India and the foreign country), India has entered into Double Taxation Avoidance Agreements (DTAA) with several countries. These agreements provide methods for tax relief such as:
  • Exemption Method: Income taxed in the foreign country is exempt from tax in India.
  • Credit Method: Taxes paid in the foreign country are allowed as a credit against Indian tax liability on the same income.
  1. Foreign Asset Disclosure:
  • Residents must also disclose details of foreign assets and income in the Income Tax Return (ITR) form. This includes information about bank accounts, financial interests, and immovable property held abroad.
  1. Compliance and Penalties:
  • Non-disclosure or incorrect disclosure of foreign income and assets can lead to severe penalties, including fines and prosecution under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
  1. Forms and Filing:
  • The declaration of foreign income and assets is typically done in specific sections of the ITR forms, such as ITR-2, ITR-3, etc., depending on the type of taxpayer and the nature of income.

Importance:

  • Transparency: Reporting foreign income ensures transparency and compliance with tax laws.
  • Tax Revenue: It contributes to the country’s tax revenue by bringing global income into the tax net.
  • Legal Requirement: Proper reporting is a legal obligation, and non-compliance can have serious legal and financial repercussions.

Example:

An Indian resident working for a multinational company might earn a salary partly in India and partly in a foreign country. This individual must declare both parts of the salary in their Indian income tax return. If tax has already been paid on the foreign salary in the foreign country, they can claim relief under DTAA to avoid double taxation.

In summary, a foreign income return in India refers to the requirement for residents to declare and pay taxes on income earned from foreign sources, ensuring compliance with global income taxation rules.

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C. REQUIREMENT AND STEPS FOR FILING FOREIGN INCOME TAX RETURN:

Filing a foreign income tax return in India involves several requirements to ensure compliance with Indian tax laws. Here are the key requirements and steps involved in reporting foreign income for residents of India:

  1. Determine Residential Status
  • Resident and Ordinarily Resident (ROR): Taxed on global income, including income earned outside India.
  • Non-Resident (NR) and Resident but Not Ordinarily Resident (RNOR): Taxed only on income received or accrued in India.
  1. Identify Foreign Income Sources

Residents must report all types of foreign income, including but not limited to:

  • Salaries: Income from employment abroad.
  • Business Income: Profits from foreign business operations.
  • Investment Income: Interest, dividends, and capital gains from foreign investments.
  • Property Income: Rental income from properties located abroad.
  • Other Income: Royalties, technical fees, and other miscellaneous income from foreign sources.
  1. Use the Appropriate ITR Form

Choose the correct ITR form based on the type of income and taxpayer:

  • ITR-2: For individuals and HUFs with income from salary, pension, capital gains, house property, and foreign income/assets.
  • ITR-3: For individuals and HUFs with income from business or profession, along with foreign income.
  • ITR-5: For firms, LLPs, AOPs, BOIs, etc., reporting foreign income.
  • ITR-6: For companies, except those claiming exemption under section 11, reporting foreign income.
  1. Fill Relevant Schedules in the ITR Form

Complete the following schedules in the ITR form to report foreign income and assets:

  • Schedule FA (Foreign Assets): Report details of foreign assets, including bank accounts, financial interests, immovable property, trusts, and other foreign assets.
  • Schedule FSI (Foreign Source Income): Provide details of foreign income, such as the country of origin, tax identification number, income type, and amount.
  • Schedule TR (Tax Relief): Claim relief under the Double Taxation Avoidance Agreement (DTAA) by providing details of foreign taxes paid or deducted and the relief claimed.
  1. Maintain Documentation

Keep thorough records and documentation to support the foreign income reported, including:

  • Foreign Tax Returns: Copies of foreign tax returns filed.
  • Tax Payment Receipts: Proof of taxes paid abroad.
  • Income Statements: Salary slips, bank statements, investment statements, property rental agreements, etc.
  • DTAA Certificates: Certificates of foreign tax deduction and other relevant documents.
  1. Claiming Double Taxation Relief

To avoid double taxation on the same income, utilize the provisions under the DTAA between India and the foreign country. This may involve:

  • Exemption Method: Exempting income taxed abroad from Indian tax.
  • Credit Method: Claiming credit for taxes paid abroad against the Indian tax liability on the same income.
  1. File and Verify the Return
  • File Online: Submit the ITR form electronically through the Income Tax Department’s e-filing portal (https://www.incometax.gov.in/iec/foportal).
  • Verification: Verify the return electronically using Aadhaar OTP, net banking, etc., or by sending a signed physical copy of the ITR-V acknowledgment to the Centralized Processing Center (CPC) in Bangalore.
  1. Compliance and Penalties
  • Ensure timely and accurate reporting of foreign income and assets to avoid penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
  • Non-disclosure or incorrect disclosure can result in severe penalties, including fines and prosecution.

By following these requirements and steps, residents of India can properly file their foreign income tax returns, ensuring compliance with Indian tax regulations and avoiding potential legal and financial repercussions.

D. RESIDENTIAL STATUS

Residential status in India refers to the classification of an individual or entity for tax purposes, based on their duration of stay and connection to India during a financial year (April 1 to March 31). This status determines the extent of income subject to Indian taxation. Residential status is categorized primarily into:

  1. Resident and Ordinarily Resident (ROR)
  2. Resident but Not Ordinarily Resident (RNOR)
  3. Non-Resident (NR)
HOW RESIDENTIAL STATUS IS CALCULATED

Determining an individual’s residential status in India is crucial for understanding their tax liability, as it affects whether they are taxed on their global income or only on income earned within India. The criteria for calculating residential status are defined under the Income Tax Act, 1961. Here’s how residential status is determined:

E. Categories of Residential Status

  1. Resident and Ordinarily Resident (ROR)
  2. Resident but Not Ordinarily Resident (RNOR)
  3. Non-Resident (NR)

F. Criteria for Determining Residential Status

Step 1: Determine if the Individual is a Resident

An individual is considered a resident in India for a financial year if they meet either of the following conditions:

  1. Stay in India: The individual is in India for 182 days or more during the financial year.
  2. Stay Over Four Years: The individual is in India for at least 60 days during the financial year and has been in India for at least 365 days in the four years preceding the financial year.

Exception: For Indian citizens or persons of Indian origin (PIO) who visit India or leave India for employment, the second condition (60 days and 365 days rule) is extended to 182 days.

Step 2: Determine if the Resident is Ordinarily Resident or Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine whether they are an ordinarily resident (ROR) or not ordinarily resident (RNOR). An individual is considered an ROR if they satisfy both of the following conditions:

  1. Resident in Previous Years: The individual has been a resident of India in at least 2 out of 10 preceding financial years.
  2. Stay in Previous Years: The individual has stayed in India for 730 days or more during the 7 preceding financial years.

If either of these conditions is not satisfied, the individual is classified as an RNOR.

Non-Resident (NR)

If an individual does not meet the criteria for being a resident (neither condition under Step 1), they are classified as a non-resident for that financial year.

Examples

  1. Example 1: Resident and Ordinarily Resident (ROR)
  • Mr. A has been in India for 200 days during the financial year.
  • He has also been a resident of India for 4 out of the last 10 years and has stayed in India for 800 days in the last 7 years.
  • Mr. A is a Resident and Ordinarily Resident (ROR).
  1. Example 2: Resident but Not Ordinarily Resident (RNOR)
  • Ms. B stayed in India for 190 days during the financial year.
  • She has been a resident in India for only 1 out of the last 10 years and stayed for 500 days in the last 7 years.
  • Ms. B is a Resident but Not Ordinarily Resident (RNOR).
  1. Example 3: Non-Resident (NR)
  • Mr. C stayed in India for 50 days during the financial year.
  • Despite his previous stays in India, he does not meet the criteria of 182 days or the 60 days plus 365 days over the last four years.
  • Mr. C is a Non-Resident (NR).

Special Cases

  1. Indian Citizens Leaving for Employment:
  • Indian citizens leaving India for employment abroad or as crew members of an Indian ship are considered residents only if they stay in India for 182 days or more during the financial year.
  1. Indian Citizens or PIO Visiting India:
  • For Indian citizens or persons of Indian origin visiting India, the 60 days criterion is extended to 182 days if their total income (excluding foreign income) does not exceed ₹15 lakh. If it exceeds ₹15 lakh, the 60 days rule applies.

 

Conclusion

Understanding the residential status is essential as it determines the scope of taxable income for an individual. Residents (ROR) are taxed on their global income, while NR and RNOR are taxed only on income received, accrued, or deemed to be received in India. This classification ensures that the tax liabilities align with the individual’s actual presence and connection with India

G. MEANING AND IMPORTANCE OF DOUBLE TAXATION RELIEF

Meaning of Double Taxation Relief:

Double Taxation Relief refers to the mechanisms put in place to mitigate the issue of double taxation, where the same income is taxed in two different countries. This typically occurs when an individual or entity earns income in a foreign country and is subject to tax both in the country where the income is earned and in their country of residence.

Importance of Double Taxation Relief:
  1. Avoidance of Double Taxation: Ensures that taxpayers are not unfairly taxed twice on the same income.
  2. Promotes International Trade and Investment: Encourages cross-border economic activities by reducing the tax burden on international income.
  3. Compliance with International Tax Laws: Aligns with global tax principles and standards to prevent tax evasion and avoidance.
Mechanisms for Double Taxation Relief:

There are two primary methods for providing relief from double taxation:

  1. Double Taxation Avoidance Agreement (DTAA):
  • Bilateral Agreements: These are treaties between two countries to specify the taxing rights of each country on various types of income. They outline how income earned from cross-border activities is to be taxed, providing relief from double taxation.
  • Provisions in DTAA: These may include which country has the primary right to tax certain types of income, how to allocate taxing rights, and methods for providing tax credits or exemptions.
  1. Unilateral Relief:
  • Domestic Law Provisions: Some countries, including India, provide unilateral relief for double taxation in the absence of a DTAA. This allows residents of the country to claim relief for taxes paid in another country.
Methods of Relief under DTAA
  1. Exemption Method:
  • The income that has been taxed in the foreign country is exempted from taxation in the resident country. The exemption can be full or partial.
  1. Credit Method:
  • The tax paid in the foreign country is allowed as a credit against the tax liability in the resident country. This credit is typically limited to the amount of tax payable on the same income in the resident country.
  • Example: If you pay tax on income in both the foreign country and India, the tax paid abroad can be deducted from the Indian tax liability on that income.
Examples of Double Taxation Relief
  1. DTAA between India and the USA:
  • If an Indian resident earns income in the USA, the DTAA between India and the USA helps to determine which country has the right to tax that income and how the relief is provided.
  • For example, if an Indian resident earns salary income in the USA, the USA may tax the salary at the source, and India will provide relief by allowing a tax credit for the tax paid in the USA against the Indian tax liability on the same income.
  1. Unilateral Relief in India:
  • If there is no DTAA between India and the country where the income is earned, India’s domestic tax law provides unilateral relief.
  • Example: An Indian resident earning interest income in a country without a DTAA with India can claim relief under Section 91 of the Income Tax Act, 1961, by getting a credit for the tax paid in the foreign country.
Practical Steps to Claim Double Taxation Relief in India
  1. Determine Eligibility:
  • Check if there is a DTAA between India and the foreign country.
  • If not, determine if unilateral relief applies.
  1. Collect Documentation:
  • Obtain proof of income earned abroad and tax paid (e.g., foreign tax return, tax payment receipts, certificates).
  • Gather any DTAA documentation or relevant certificates from foreign tax authorities.
  1. Fill Relevant ITR Schedules:
  • Use Schedule FSI (Foreign Source Income) to report foreign income.
  • Use Schedule TR (Tax Relief) to claim relief for taxes paid abroad.
  1. File the Return:
  • File the appropriate Income Tax Return (ITR) form (e.g., ITR-2, ITR-3) through the Income Tax Department’s e-filing portal.
  1. Keep Records:
  • Maintain thorough records of foreign income, tax paid abroad, and the relief claimed for future reference and verification by tax authorities.

Conclusion

Double Taxation Relief is essential for ensuring that taxpayers do not face the burden of being taxed twice on the same income. Through mechanisms such as DTAAs and unilateral relief provisions, countries provide a fair and equitable tax environment for individuals and businesses engaged in cross-border activities.

 

H. Who Can Claim Double Taxation Relief in India and Under Which Section

Eligible Claimants:
  1. Individuals:
  • Indian residents earning income from foreign sources.
  1. Companies:
  • Indian companies with business operations, investments, or any income-generating activities abroad.
  1. Other Entities:
  • Trusts, partnerships, and other entities that are residents of India and have foreign income.

I. Sections of the Income Tax Act, 1961:

  1. Section 90: Relief Under Double Taxation Avoidance Agreements (DTAA)
  • Applies to taxpayers who are residents of countries with which India has a DTAA.
  • Taxpayers can claim relief based on the provisions of the relevant DTAA, which may involve the exemption method or the credit method.
  • The DTAA outlines which income can be taxed by each country and how relief from double taxation is provided.
  1. Section 90A: Relief for Specified Associations
  • Similar to Section 90 but applies to agreements between specified associations in India and foreign associations.
  • Used in scenarios where there are agreements between Indian entities and non-sovereign foreign entities, such as foreign associations or institutions.
  1. Section 91: Unilateral Relief
  • Applies when no DTAA exists between India and the foreign country where the income is earned.
  • Provides a credit for the foreign tax paid against the Indian tax liability on the same income.
  • Relief is available if the income is doubly taxed, i.e., taxed both in the foreign country and in India.

J. Conditions and Procedures for Claiming Relief:

  1. Eligibility Criteria:
  • The taxpayer must be a resident of India during the financial year for which the relief is claimed.
  • The foreign income must have been subjected to tax both in the foreign country and in India.
  1. Required Documentation:
  • Proof of foreign income and the tax paid, such as foreign tax returns, payment receipts, and tax certificates.
  • Documents showing eligibility under DTAA, if applicable.
  • Foreign Tax Credit (FTC) certificate or similar documentation if claiming under Section 91.
  1. Filing Requirements:
  • Use the appropriate Income Tax Return (ITR) form based on the type of taxpayer and the nature of the income.
  • Complete the relevant schedules in the ITR:
  • Schedule FSI (Foreign Source Income): Report details of foreign income.
  • Schedule TR (Tax Relief): Provide details of foreign taxes paid and relief claimed.
  • File the ITR electronically through the Income Tax Department’s e-filing portal (https://www.incometax.gov.in/iec/foportal).
  1. Verification:
  • Verify the return using electronic verification methods such as Aadhaar OTP, net banking, or by sending a signed physical copy of the ITR-V acknowledgment to the Centralized Processing Center (CPC) in Bangalore.
Examples:
  1. Example under Section 90 (DTAA):
  • Mr. A, an Indian resident, earns interest income from a bank in the USA. The interest is taxed in the USA at 10% as per the DTAA between India and the USA. In India, the same income is subject to tax at 30%. Mr. A can claim a credit for the 10% tax paid in the USA against his Indian tax liability.
  1. Example under Section 91 (Unilateral Relief):
  • Ms. B, an Indian resident, earns salary income in a country with no DTAA with India. She pays tax on this salary in that country. In India, the same income is also taxable. Ms. B can claim a credit for the tax paid abroad under Section 91, reducing her Indian tax liability by the amount of foreign tax paid.

K. Services Related to Foreign Income Returns and Related Tax Services

1. Foreign Income Tax Filing
  • Preparation and Filing: Assistance in preparing and filing income tax returns for individuals and entities with foreign income.
  • Double Taxation Relief: Guidance on claiming relief under Double Taxation Avoidance Agreements (DTAAs).
  • Tax Residency Status: Determination of tax residency status under Indian tax laws and applicable DTAAs.
2. Global Income Reporting
  • Comprehensive Reporting: Ensuring global income, including salaries, business income, capital gains, dividends, interest, and rental income from foreign sources, is accurately reported in Indian tax returns.
  • Documentation: Assistance in gathering and organizing necessary documentation for foreign income.
3. Foreign Tax Credit (FTC)
  • FTC Calculation: Calculation of foreign tax credit to avoid double taxation.
  • FTC Documentation: Assistance with required documentation for claiming foreign tax credits.
4. Foreign Asset and Account Reporting
  • Form FA Schedule: Assistance in disclosing foreign assets and accounts in the income tax return (Schedule FA).
  • Compliance with Black Money Act: Ensuring compliance with the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.
5. Income from Foreign Investments
  • Dividend and Interest Income: Reporting and tax planning for dividends, interest, and other income from foreign investments.
  • Capital Gains from Foreign Assets: Calculation and reporting of capital gains from the sale of foreign assets, including securities and real estate.
6. Expatriate Taxation Services
  • Tax Planning for Expats: Tax planning and compliance services for expatriates working in India or Indian citizens working abroad.
  • Salary Structuring: Assistance in structuring salary packages to optimize tax benefits under Indian and foreign tax laws.
7. Non-Resident Indian (NRI) Taxation
  • NRI Tax Return Filing: Preparation and filing of tax returns for NRIs, including income earned in India and abroad.
  • Repatriation Services: Advisory services related to repatriation of income and assets from India to the resident country.
8. Transfer Pricing Services
  • Transfer Pricing Documentation: Preparation of transfer pricing documentation for transactions between related parties across borders.
  • Transfer Pricing Compliance: Ensuring compliance with Indian transfer pricing regulations.
9. International Tax Advisory
  • Cross-Border Tax Planning: Advisory services on cross-border tax planning to minimize tax liabilities.
  • DTAAs Advisory: Guidance on the application and benefits of DTAAs between India and other countries.
10. Representation Services
  • Tax Authorities Representation: Representing clients before Indian tax authorities in case of queries, assessments, and disputes related to foreign income.
  • Litigation Support: Support in litigation related to foreign income tax issues.
11. Compliance with FATCA and CRS
  • FATCA Compliance: Assistance in compliance with the Foreign Account Tax Compliance Act (FATCA) regulations.
  • CRS Compliance: Ensuring compliance with the Common Reporting Standard (CRS) requirements for reporting foreign accounts and assets.
12. Tax Equalization Services
  • Tax Equalization: Advisory on tax equalization policies for employers sending employees on international assignments.
  • Tax Reimbursement Plans: Designing tax reimbursement plans for employees working abroad.
13. Estate and Gift Tax Planning
  • International Estate Planning: Advisory services on estate planning involving foreign assets.
  • Gift Tax Compliance: Assistance in complying with gift tax regulations for cross-border gifts.
14. Foreign Business and Investment Advisory
  • Setting Up Foreign Entities: Advisory on setting up businesses or investing in foreign countries.
  • Regulatory Compliance: Ensuring compliance with both Indian and foreign regulations for businesses and investments.
15. Currency Conversion and Tax Implications
  • Currency Exchange Impact: Analysis of tax implications due to currency conversion.
  • Foreign Exchange Management: Advisory on compliance with the Foreign Exchange Management Act (FEMA) for foreign income and assets.
16. Other related services.
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