Tax-Free Limit on Foreign Income in India

Introduction

When it comes to income earned from abroad, many Indian residents are often uncertain about the applicable tax rules. A clear understanding of India’s tax laws is crucial—particularly with the differences between the Old and New Tax Regimes. Under the New Regime, income up to ₹3,00,000 is exempt from tax, while the Old Regime offers a lower exemption limit of ₹2,50,000. This article examines how foreign income is taxed in India, covering key considerations for both residents and non-residents

Overview of Foreign Source Income

Foreign source income refers to earnings generated from activities or services linked to locations outside India. This includes income such as dividends, interest, royalties, and fees for technical services. To qualify as foreign-sourced, the related activities must be conducted abroad, or the services must be rendered in India to an overseas client. Importantly, the income must first be received outside India—only then can it be lawfully remitted to India. If the income is received directly in India, it is considered taxable in India from the outset. The taxability of such income depends primarily on the individual’s residential status, making this an essential factor for determining tax obligations.

Taxation of Foreign Income in India

India’s tax system classifies the taxation of foreign income based on the residential status of the taxpayer. The treatment differs for residents and non-residents to ensure clarity and fairness in compliance.

For Residents

Indian residents are further divided into:

Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)

Taxation Rules:

ROR: Liable to pay tax on their global income, including all foreign earnings.
RNOR: Taxed only on income that is received or accrued in India or arises from a business or profession controlled or set up in India.

Timing of Taxation:

If income is received in India, it is taxed in the financial year of receipt.
If the income is not received in India, it is taxed in the year it accrues or is realized.

For Non-Residents

Non-residents are subject to a specific tax framework targeting certain types of income sourced from India.

Key Provisions:

Taxable Income Types: Includes interest, royalties, fees for technical services, and capital gains, as outlined under Section 195 of the Income Tax Act.
Withholding Tax: Income paid to non-residents is subject to tax deduction at source (TDS) by the payer. This ensures proper tax collection and compliance without burdening the non-resident with direct tax filing in many cases

Comparison: New Tax Regime vs Old Tax Regime (FY 2023–24)

For the financial year 2023–24, Indian taxpayers have the option to choose between two income tax regimes—the New Tax Regime and the Old Tax Regime. Each regime comes with its own structure of tax slabs, rates, and benefits, catering to different financial goals and planning strategies.

New Tax Regime

The New Tax Regime features reduced tax rates across more income slabs but limits most exemptions and deductions, including popular ones like Section 80C, 80D, and HRA.

Income Range (₹)	Tax Rate
Up to ₹3,00,000	Nil
₹3,00,001 – ₹6,00,000	5%
₹6,00,001 – ₹9,00,000	10%
₹9,00,001 – ₹12,00,000	15%
₹12,00,001 – ₹15,00,000	20%
Above ₹15,00,000	30%

Note: A standard deduction of ₹50,000 is now allowed under the New Regime (as per Budget 2023).

Old Tax Regime

The Old Tax Regime follows traditional tax slabs with higher rates but offers numerous deductions and exemptions. Taxpayers who invest in eligible schemes (e.g., under Section 80C) or receive benefits like HRA may find this regime more advantageous.

Income Range (₹)	Tax Rate
Up to ₹2,50,000	Nil
₹2,50,001 – ₹5,00,000	5%
₹5,00,001 – ₹10,00,000	20%
Above ₹10,00,000	30%

Understanding Double Taxation Avoidance Agreements (DTAA)

A Double Taxation Avoidance Agreement (DTAA) is a bilateral treaty between two countries aimed at preventing the same income from being taxed twice. It is particularly beneficial for Non-Resident Indians (NRIs) and international businesses with cross-border income.

While DTAA doesn’t offer complete tax exemption, it provides relief by lowering the tax burden in one or both countries. This ensures a fairer taxation system for individuals and companies earning income internationally.

🔹 Key Features of DTAA:

Scope: Applies to various types of income such as:
- Salaries and wages
- Business profits
- Dividends
- Interest
- Royalties
- Capital gains
Taxation Rights: Specifies which country has the primary right to tax certain income sources. Often, the country of residence is allowed to tax at a reduced rate or offer a credit for taxes paid abroad.
Methods of Relief:
- Exemption Method: Income is taxed in only one of the two countries.
- Tax Credit Method: The resident country allows a tax credit for the tax paid in the source country.

Benefits of DTAA:

Prevents double taxation on cross-border income
Reduces overall tax liability
Encourages international trade and investment
Helps reduce tax evasion

About the Author

Rohan

Dinesh Pandiyan is a skilled content writer specializing in business registration, tax laws, trademark regulations, and company compliance. His expert articles provide clear, practical guidance, enabling businesses to confidently navigate and resolve complex legal and regulatory issues

May 31, 2025