Taxation of Foreign Source Income in India: A Complete Guide

With more professionals working remotely for global companies, understanding how salary from a foreign employer is taxed in India is crucial. The taxation of such income depends on your residential status, how the salary is received, and whether any Double Taxation Avoidance Agreement (DTAA) applies.

This article breaks down income tax implications, tax-saving strategies, and compliance tips, along with special considerations for freelancers and independent contractors earning from foreign clients.

How is Salary from a Foreign Company Taxed in India?

The taxability of foreign salary is primarily determined by your residential status under Section 6 of the Income Tax Act, 1961.

Key Tax Implications of Foreign Salary

Salary vs. Contractual/Freelance Income – Know the Difference

Before deciding on tax treatment, determine whether your earnings are from a salary or a contractual arrangement.

• If you are a salaried employee: The foreign employer deducts tax at source as per the laws of that country. However, you must still declare and pay tax in India if you are an ROR.
• If you are a contractor or freelancer: Your income may be categorized as professional or business income under the Income Tax Act, with different tax rules and benefits.

If unsure, it is best to hire a tax professional to ensure compliance. As the financial year-end approaches, correct classification will impact your tax return (ITR) filing.

Double Taxation and DTAA Relief (Section 90 & 91)

If tax is deducted in the foreign country, you may face double taxation. India has DTAA (Double Taxation Avoidance Agreements) with several countries, which allow relief through:

• Exemption Method: The income is taxed only in one country.
• Tax Credit Method: Taxes paid abroad are deducted from your Indian tax liability.

To claim DTAA benefits:

• File Form 67 before the due date.
• Maintain proof of foreign tax payments (salary slips, tax certificates).
• Disclose foreign income in Schedule FSI of your ITR.

Tax Treatment of Contractual/Freelance Income from Foreign Clients

If you are freelancing or working on a contract basis, your income is classified as professional income under Section 44ADA.

How to Receive Foreign Payments Efficiently?

Platforms like Skydo simplify the process of receiving international payments:

• Sign up on Skydo – They provide a virtual US account to receive payments.
• Raise an invoice and send it to your foreign client.
• Client deposits funds in your US account.
• You initiate a transaction, and Skydo converts the amount to INR and credits it to your Indian bank account.

Why Use Skydo for Freelance Income?

• FIRA Certificate: You need a Foreign Inward Remittance Advice (FIRA) certificate to prove that your earnings are export income.
• GST Compliance: Register under GST and file returns with 0% tax, as exports are zero-rated.

Tax Benefits for Freelancers (Section 44ADA)

• Claim 50% as expenses without proof – If your annual turnover is below ₹50 lakh, you only pay tax on 50% of your income under Section 44ADA.
• Additional Deductions: After computing taxable income, you can claim standard deductions, NPS, and 80C investments under the old tax regime.

For example:

• If you earn ₹10 lakh per year, only ₹5 lakh is taxable after applying Section 44ADA.
• Further deductions can reduce taxable income, minimizing tax liability.

How to Plan Your Taxes on Foreign Salary?

Choose the Right Bank Account for Salary Credit

• If you are an NR or RNOR, receiving salary in a foreign bank account may help avoid taxation in India.
• Salaries credited to Indian accounts are taxable in India, even if you are an NR.

Maximize Deductions and Exemptions

• Use Section 16 (Standard Deduction) if salaried.
• Claim HRA, LTA, and NPS deductions.
• If receiving freelance income, use Section 44ADA to claim 50% as expenses.

File Form 67 for Foreign Tax Credits

If you have paid taxes abroad, claim tax relief under DTAA by filing Form 67 before the ITR due date.

Dos and Don’ts for Managing Taxes on Foreign Salary

What You Should Do

• Determine your residential status each financial year.
• Check DTAA agreements to avoid double taxation.
• File Form 67 before the due date to claim foreign tax credits.
• Use platforms like Skydo to efficiently receive freelance payments.
• Maintain tax records, invoices, and remittance details for compliance.

What You Shouldn’t Do

• Do not assume foreign salary is automatically exempt—it depends on residency.
• Do not credit salary to an Indian bank account if you are an NR, unless required.
• Do not ignore GST compliance—register and file returns even if at 0% tax.
• Do not forget to declare foreign income in ITR, even if DTAA relief applies.
• Do not wait until the last minute to file Form 67 and ITR.

Final Thoughts: How to Stay Tax Compliant and Save on Taxes

Understanding taxation on foreign salary can be complex, but careful planning and the right tax-saving strategies can help minimize tax liability. Whether you are a salaried employee or a freelancer, taking proactive steps—such as claiming DTAA benefits, optimizing deductions, and using platforms like Skydo—can ensure compliance while maximizing savings.

If you need expert guidance on tax-saving strategies for foreign income, book a consultation today to optimize your tax filings.