In today’s globalized world, many individuals are employed by foreign companies while living and working in India. If you are receiving salary payments from a foreign employer, it’s important to understand how these earnings are taxed under Indian tax laws. The Income Tax Act, 1961 provides clear guidelines on how salary paid by foreign companies is taxed for Indian residents.

This blog will walk you through the tax implications, exemptions, and compliance requirements when receiving salary from a foreign company.

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Understanding Taxation of Salary Paid by Foreign Companies

Under Indian tax law, the taxability of salary income depends on the residential status of the individual. Resident individuals are subject to tax on their global income, which includes salary earned from foreign companies. However, there are exemptions and conditions that can affect the taxation of this income.

Section 5: Scope of Total Income

As per Section 5 of the Income Tax Act, 1961, a resident individual is liable to pay tax on:

• Global income, i.e., income earned both in India and abroad.
• If an individual is a non-resident, only the income earned or accrued in India is subject to tax.

Therefore, salary earned from a foreign employer is considered global income and is subject to Indian tax if the individual is a resident.

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Taxability of Salary Paid by Foreign Companies for Resident Indians

1. Global Income:
   For residents, all income, including salary paid by a foreign company, is taxable in India. The salary is added to the total income and taxed according to the applicable tax slab rates.
2. Tax Deducted at Source (TDS):
   • If the foreign employer has no permanent establishment (PE) in India, it is not required to deduct TDS at source.
   • In such cases, the individual receiving salary must report this income and pay taxes in India through self-assessment.
   • If the foreign employer has a PE in India, it may be required to deduct TDS before paying the salary.

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Exemption on Salary Paid by Foreign Employers

While salary from a foreign company is generally taxable, there are certain exemptions available under Indian tax laws:

1. Salary for Services Rendered Outside India

Under Section 10(4)(ii), salary earned by a resident for services rendered outside India is exempt from tax in India.

• Example:
  If you are working in a foreign country for a foreign employer, the salary you receive for services rendered outside India is not taxable in India.
  • However, it’s important to note that you must not have a permanent establishment or fixed place of business in the foreign country.

2. Income Exemption Under Double Taxation Avoidance Agreements (DTAA)

India has Double Taxation Avoidance Agreements (DTAAs) with several countries, which prevent individuals from being taxed on the same income in both countries.

• If an Indian resident receives salary from a foreign company and the foreign country also taxes the salary, the taxpayer can claim tax credit or exemption on the foreign taxes paid under the applicable DTAA.
• The relief will be in the form of:
  • A tax credit: Set off the foreign tax paid against Indian tax liability.
  • Exemption: Exempt income as per the DTAA provisions.

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Tax Filing Requirements for Salary Paid by Foreign Companies

1. Reporting Foreign Salary in ITR:
   • Even if the foreign employer does not deduct TDS, the employee must report the salary as Income from Salaries in the Income Tax Return (ITR).
   • The salary must be converted into Indian Rupees (INR) using the Reserve Bank of India (RBI) exchange rate applicable on the date of receipt.
2. Form 26AS:
   • If TDS has been deducted by the foreign company, ensure that the Form 26AS reflects the foreign tax credit or TDS details.
3. Claiming Exemptions:
   • Salary earned outside India for services rendered abroad can be claimed under Section 10(4)(ii).
   • Ensure proper documentation, such as the employment contract and proof of employment in the foreign country, for claiming exemptions.
4. Filing Self-Assessment Tax:
   • If no TDS has been deducted and the salary is taxable in India, you may need to pay self-assessment tax to settle your tax liability before filing the return.

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Example of Taxation of Salary Paid by Foreign Companies

Scenario 1: Resident Indian Earning Salary from a Foreign Employer

• Salary: ₹12,00,000 per year
• Worked in India for 6 months and in the UK for 6 months.
• Salary paid by a UK-based company.

Taxation:

• The salary is fully taxable in India as global income.
• Salary earned in the UK for work done outside India is exempt under Section 10(4)(ii).
• The salary earned in India (₹6,00,000) is taxable, while the remaining amount (₹6,00,000) for services rendered outside India is exempt.

Scenario 2: Non-Resident Indian Earning Salary from a Foreign Employer

• Salary: ₹15,00,000
• Worked entirely outside India.

Taxation:

• As a non-resident, only the salary earned in India is taxable.
• The salary earned outside India (₹15,00,000) is exempt from Indian tax under Section 10(4)(ii).

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Frequently Asked Questions (FAQs)

1. Is salary paid by foreign companies taxable in India?

Yes, salary paid by foreign companies is taxable in India if the recipient is a resident. Non-residents are only taxed on income earned in India.

2. Can I claim exemption on salary earned abroad?

Yes, salary for services rendered outside India is exempt from tax under Section 10(4)(ii), subject to certain conditions.

3. What is the Double Taxation Avoidance Agreement (DTAA)?

DTAA is an agreement between India and other countries to avoid taxing the same income in both countries. If you pay taxes in a foreign country, you may claim tax credit or exemption in India under the relevant DTAA.

4. Do I need to report my foreign salary in my Indian tax return?

Yes, you must report foreign salary as income in your ITR, even if it is exempt or TDS is not deducted.

5. How do I convert my foreign salary to INR for tax purposes?

Use the exchange rate set by the Reserve Bank of India (RBI) on the date the salary is received or credited.

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Conclusion

Understanding the tax implications of salary paid by foreign companies is crucial for individuals working abroad or receiving foreign income. By knowing the exemptions under Section 10(4)(ii) and the provisions of the Double Taxation Avoidance Agreement (DTAA), taxpayers can minimize their tax liability. Ensure accurate reporting and compliance with Indian tax laws to avoid penalties.

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