Money-Wise: Worried about taxes on your overseas income? Here's how you can save them

In today's time, it is very common to earn income from overseas. However, such income bring with them the complexity of tax calculation on the earned amount.

Let's first understand when is an income considered to have been earned from a foreign source. An overseas income means an income earned by an individual like interest, royalties, fees, or dividends from sources which are outside the country.

How is income tax calculated on overseas income in India?

The income is considered to have been earned from overseas when the activity of the ultimate beneficiary is happening outside the country even though the individual is providing services while being in India.

Also Read: Money-Wise: Planning to save taxes on interests earned? Here's how you can in India

Generally, two rules are followed by the countries to calculate tax on income earned from overseas.

First, is the source rule, as per which the government taxes the income in the country it is earned, regardless of who is earning the income. Second is the residence rule, which says that all the income earned by residents is taxed by their country, no matter where they are earning it.

The taxability over an income is dependent on what type of residential status an individual has in India.

Simplifying the complication involved in this calculation of tax, Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited said to WION, "As per the Income Tax Act, an individual is either a Resident, Non-resident, or Resident but Not Ordinarily Resident (RNOR status) and this essentially determines the scope of one’s global income tax liabilities."

Watch: Indian Cabinet Approves PAN 2.0

So, the global income of ordinary residents in India is entirely taxable even if they pay tax on the income in the country where they are earning it.

In the case of the Not Ordinary Residents/Non-Residents, the income becomes taxable only if it is accrued or received in India.

How can you save tax on overseas income?

Our expert, Siddharth Maurya, Founder & Managing Director of Vibhavangal Anukulakara Private Limited, shares thumb rules on managing tax on overseas income.

• For residents living in India, global income is regarded as taxable in India, however, there are certain exceptions specified such as Double Taxation Avoidance Agreements (DTAAs) with various countries.
• Determination of Residential status is done on the basis of the number of days an individual stays in the territory of India during the course of the financial year and there are tax obligations associated with certain thresholds.
• Any income earned from foreign sources has to be declared and includes salary, capital gains after selling an asset, dividends after investing in shares and rental income.
• However, such a strategic tax plan can also include taking advantage of the available provisions for non-residents in a DTT, which can alleviate double taxation and lower total taxes.
• A taxpayer can claim offset due to foreign taxes, and certain exemption thresholds, consolidate sources of revenue and endorse tax efficiency.
• International tax specialist has to be consulted and strong records have to be kept to deal with this complex web of taxes and comply with the country as well as the foreign tax laws.