Income tax liability on foreign income | Income from abroad
Foreign Income: Tax liability of income is one of the major concerns in our country, be it direct tax or indirect it’s confusing. An icing on the top of the cake is foreign income or income from Abroad. There is always a question, whether this foreign income taxable, if yes then how? Let us understand in details.
Tax ability mainly depends upon the Residential Status of a person in our Country. Say for example-
In case of resident, they will be liable for tax in India on their global income. Global income can be defined as Income earned in India as well as income earned in abroad.
Non-Resident and Ordinary Non- Resident (NR & NOR):
In case of NR and NOR, their tax liability is restricted to the income they earn in India. They are not required to pay tax in India on their foreign income.
But in case of double taxation of income, when the same income that is income earned once, but it is getting taxed twice both in India and abroad. In such cases a person can resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country in order to get relief or eliminate the possibility of double taxation.
For example, Babatax has already paid tax on the income earned in abroad, and then they’re transferring that money back to India. In this case Babatax need not have to pay tax again.
How much money can be sent to India in a year from Abroad?
In general, no limit is set to receive money from foreign countries. But there might be a limit in transferring money to abroad. This depends upon the policies set by the government with different countries.
If tax is applicable on the receiver, on money received from abroad to India?
No tax is to be paid by the receiver, if the sender is a close relative of the receiver. As per rules of RBI, the remittance money received from persons abroad, from close relatives, is treated as a tax-free gift.
Close relatives can be defined as;
- Spouse of the individual
- Brother or sister of the individual
- Brother or sister of the spouse of the individual
- Brotheror sister of either of the parents of the individual
- Any lineal ascendant or descendant of the individual
- Any lineal ascendant or descendant of the spouse of the individual
However, if one is receiving money from abroad and the sender is not related to you, then any amount over Rs. 50,000 will be liable to tax as it will be considered as taxable income. Income Tax has to be paid on the excess amount.
For example: If a friend from the USA has sent BabaTax US$ 10,000 as a gift (around Rs. 7,50,000 at today’s US Dollar rate in India). They would have to add the excess Rs. 7,00,000 to their income and pay tax on it.
But generally, an Individual can remit a maximum of $250,000 abroad every year. However, any amount sent abroad to buy foreign tour packages, and every other foreign remittance made above Rs7 lakh, will attract a tax-collected-at source (TCS) unless tax is already deducted at source (TDS) on that amount. This provision to collect tax on remittances was introduced in the Finance Act of 2020 subject to riders and notified on 27 March to take effect from 1 October, 2021.
While the tax on foreign tour packages will be 5% for any amount, for other foreign remittances the tax will kick in only for the amount spent above Rs 7 lakh. For education-related foreign remittances funded by loans, though, the tax will be just 0.5% for the amount above Rs7 lakh, considering many Indian students take loans to pursue education abroad.
Many financial institutions have communicated the applicability of tax-collected-at source on remittances from October to customers.
The Union finance ministry has been extending the scope of both tax-deducted at source and tax-collected at source, and encouraging electronic payments in order to have a better idea of transactions in the Indian economy and to be able to match the spending pattern of assesses with their reported taxable income.
For any questions, you may reach us at Discussion Forum
The author of the above article is Sneha Bhalotia.
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