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Across the globe, many individuals benefit from the principles of liberalism, allowing them to generate income from diverse sources worldwide. However, this global income-generating scenario prompts questions about how taxation is applied in different nations. In India, an individual's tax obligations hinge on their residential status and the origin of their income. Generally, resident Indians are subject to taxation on their global income, while non-residents face taxation solely on their Indian income. Exceptions and specific provisions apply to various types of income, including interest, royalties, and capital gains. Additionally, India has established double taxation avoidance agreements (DTAA) with numerous countries to prevent the same income from being taxed in both the source and residence countries. Through these agreements, resident Indians can seek credit for the tax paid on foreign income, offsetting it against their tax liability in India.
The initial phase in grasping the tax ramifications of overseas earnings involves comprehending one's residential status. In India, individuals are categorized into three groups depending on residency: Resident and typically resident (ROR), Resident but not typically resident (RNOR), and Non-resident (NR). Precise classification holds significance as it delineates the scope of one's tax obligations.
The tax on foreign income in India varies based on residential status:
ROR (Resident and Ordinarily Resident):
RNOR (Resident but Not Ordinarily Resident):
NR (Non-Resident):
Note: For all these categories, it's important to consider Double Taxation Avoidance Agreements (DTAA) that India has signed with many countries. These agreements help avoid paying tax on the same income twice.
Foreign Income Taxation for Residents:
Residents, whether ROR or RNOR, face taxation on foreign income at rates applicable to domestic earnings. Taxes must be paid on time to avoid trouble; if foreign income is received in India, it must be settled in the same fiscal year. For income not received in India, taxation occurs in the financial year when it is realized or accrued.
Distinguishing the Tax Treatment for ROR and RNOR:
While RORs are taxed on their global income, including earnings from foreign sources, RNORs face taxation solely on income received or accrued in India or from a business controlled or a profession set up in India. This nuanced differentiation aligns the tax liability with the individual's degree of connection to the Indian economy.
Specified Income Categories for Non-Residents:
Non-residents encounter a distinct tax framework. Specific income categories, such as interest, royalties, fees for technical services, and capital gains, are subject to taxation in India. Section 195 of the Income Tax Act governs how non-residents are taxed on income from a foreign source.
Withholding Tax for Non-Residents:
Income paid to non-residents is subject to withholding tax by the payer. This mechanism ensures that the Indian government can collect taxes on certain types of income earned by non-residents within its jurisdiction.
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In response to the dilemma of double taxation, wherein income faces taxation in both the source and residence countries, India has engaged in numerous Double Taxation Avoidance Agreements (DTAA). These agreements are significant in relieving taxpayers by allowing them to claim relief from the tax paid on foreign income against the tax payable in India.
Income from capital gains and losses incurred on publicly traded securities is typically categorized as foreign income when the securities are traded on an international stock exchange.
The sale of foreign stocks, resulting in long-term capital gains, is subject to a 20% tax rate, along with additional charges such as a surcharge, health and education cess, and the inclusion of an indexation benefit on the cost.
Residents are required to declare all income derived from various sources and countries in their income tax return, with the corresponding obligation to pay taxes on the disclosed income within India. (Non-resident Indians, on the other hand, are only liable to pay taxes on income accumulated or accrued within India).
Whether foreign income is taxable in India depends on your residency status:
