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ITR Filing: Tax On Foreign Income Research Team | Posted On Thursday, July 05,2018, 04:41 PM

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ITR Filing: Tax On Foreign Income




The IT Sector in India is booming. The IT Sector is worth more than $156 Billion. Many young people work in the IT Sector and it’s quite common for them to be deputed to an offshore client.

These young people get deputed to projects in the US, UK, France, Italy, Japan, Germany, South Africa and many other countries. Now to the big question? How can these people file income tax returns in India?

Madukar, a software engineer, was very happy with his first job. His joy increased when he was deputed to a project in Poland for 2 years. Madukar was living his dream until he was rudely brought back to Earth. One day when Madukar opened his mailbox, he got a rude shock.

The Income Tax Department had issued a show-cause notice and wanted to know why Madukar had not filed his IT returns? Want to know more on Tax Planning? We at will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.


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How An Indian Techie Deputed Offshore Files Tax?


Your tax liability is calculated based on the total income and what goes into this total income, is greatly influenced by your residential status in India.

Your residential status as a taxpayer can be very different from citizenship. Your total income as a taxpayer cannot be determined unless your residential status is fixed.


1. You have to determine your residential status


You (individual) are treated as a resident of India in a particular Financial Year if your stay within India during that year is 182 years or more. This is condition 1.

Then we have condition 2. If you stay in India for 60 days or more in that particular financial year, and 365 days or more in the last 4 years, you are treated as a Resident of India. If any of these conditions are satisfied, you are deemed a citizen of India for the previous year.

But there’s an exception to this rule. The second condition of 60 days or more is not applicable to an Indian citizen who leaves India for employment purposes. This person is deemed a citizen of India only if his stay in India for the previous year is 182 days or more.


2. How is income taxed in India?


If a person is a resident Indian, then his Global income is taxed in India. It doesn’t matter which country the resident Indian earns the income. If a person is an NRI, then only income earned or received in India is taxed.

The income you earn from FDs, Salary from your Company (Indian), Salary from a foreign Company, all of this is taxed in India. If a person is an NRI, then he has to pay tax on any interest income he earns from banks in India, or a salary received from an Indian Company for services which have been rendered in India.

If an NRI renders services to a foreign client, then the salary which has been paid by an Indian Company for this period, (the time period during which services are rendered to a foreign client), is not taxed in India. Any salary the NRI gets when he works for Indian clients is taxed in India.


3. How is foreign allowance taxed?


When an Indian Company (say an IT Company), posts its employees abroad on deputation, (deputed to a foreign country), these employees are given a foreign allowance to meet food, travelling, communication, living costs and so on.

Companies give these employees pre-loaded travel cards or actual expenses incurred are reimbursed. The actual expenses incurred by an employee when he stays in the foreign country, are exempt from tax. If this employee saves some money out of this (very common when IT employees go abroad), then this amount is taxed in India, if he is a resident of India.

If an NRI gets a living allowance for services rendered outside India, these amounts are not taxed in India.

You (employee) must retain proof of expenses incurred on living expenses (per-diem allowances) abroad. The tax officer may want proof of the actual expenses incurred, out of the money your Company has given you as a living expense.


4. You have to convert foreign earnings into Indian Rupees


Any foreign earnings in Dollars, Euros, Yen, Sterling Pounds must be converted into Indian Rupees. Only then income tax can be calculated. The foreign currency must first be converted into Indian Rupees. This is done according to TT buying rate of these currencies (Euro, Dollar and so on), on the last day of the month, which immediately precedes the month in which the salary is paid or whichever comes earlier.

Let’s understand this with a simple example. You get a salary of $ 7,000 for the month of May 2018. This amount must be converted into Indian Rupees and for this conversion, TT buying rate of April 30th 2018, would be used.


5. How to file income tax in India?


It is compulsory to file ITR if your total income, this is before claiming Chapter V1A deductions, (This is Section 80C to Section 80U) or an exemption under Section 10(38) exceeds the limit of Rs 2.5 Lakhs a year. This is the maximum exemption limit for a citizen who is 60 years or below.

If a citizen is between 60-80 years, the maximum exemption limit is Rs 3 Lakhs a year and the maximum exemption limit is Rs 5 Lakhs for citizens above 80 years.

The IT Department has 4 ITR Forms. The applicability of these ITR Forms depends on the nature of income earned and the taxpayer status. A resident Indian must file ITR-1 if he has income from salary, income from one house property, other income (This is interest income and dividend income), and the aggregate of all such income, must not exceed Rs 50 Lakhs. If it does, then you must file ITR 2. An employee who is an NRI with no business income must file taxes using ITR-2.


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6. E-file tax returns in India


It’s compulsory to file ITR in the electronic format for most taxpayers. To file ITR, visit the website Before filing ITR, make sure you have a PAN Card and an account on the e-filing website.

Be sure to file ITR in time. Even a single delay of a day can cost you Rs 5,000. You will have to pay a penalty of Rs 5,000, if you file ITR between August 1st 2018 and December 31st 2018. If you file ITR after January 1st 2019 and March 31st 2019, you will have to pay Rs 10,000 as a penalty.

Make sure you file ITR before July 31st 2018 and avoid paying the penalty.


7. Use tax deductions and save tax


The Government gives you tax exemptions and tax deductions to save tax. The most popular is the Section 80C where you get tax deductions up to Rs 1.5 Lakhs a year if you invest in certain financial instruments like PPF, NSC, ELSS, SCSS and so on.

You also get this deduction on premiums paid for life insurance, Principal and Interest (EMI) on home loans and Tuition fees paid for children’s education. This is a collective deduction up to Rs 1.5 Lakhs a year.

You can also avail Chapter V1A deductions (Section 80C to Section 80U), Section 24 and so on, to save tax.


8. Aadhaar compulsory while filing taxes


If you are a resident taxpayer, you have to link PAN with Aadhaar. It’s compulsory to mention Aadhaar Number while filing ITR. Your details in the Aadhaar database must match with the Income Tax Department records. If there is a mismatch or if you don’t have Aadhaar, the E-Filing website will not allow you to file ITR.

If you are an NRI, it’s not compulsory to link Aadhaar with PAN. No error would be shown if the Aadhaar number field is left blank.


9. Foreign tax credit


India has a Double Tax Avoidance Agreement with over 90 countries. Let’s say your income is taxable in India, but you have already paid taxes on this income in a foreign country. You can claim a credit on these taxes, up to a certain amount.


10. Claim TDS Refunds


Let’s say you have opened an FD at your bank. You earn interest on this FD. The bank will not deduct TDS if interest income from all FDs, is less than Rs 10,000 a year. Otherwise, the bank deducts TDS of 10% from interest income. If your income is below the minimum exemption limit, you can file ITR and claim a refund on taxes (TDS) paid.  


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