Salary earned in foreign currency by a resident of India is generally taxable in India, regardless of whether it is received or brought into India. Here’s a breakdown of the key points:

Taxability:

• Income Accruing or Arising: All income earned in a financial year, regardless of its receipt or location, is taxable in that year, even if it arises from foreign sources.
• Received or deemed to be Received: Even foreign income not physically received in India is deemed to be received and becomes taxable if it is brought into India or used to discharge any liability in India.

Conversion to INR:

• The telegraphic transfer buying rate on the specified date determines the rupee value of foreign income.
• Specified Date:
  • For salaries, it’s the last day of the month before the salary is due/paid.
  • For other income types, it varies depending on the source.
• Tax Deduction at Source (TDS):
  • Foreign income is subject to TDS under Chapter XVII-B of the Income Tax Act.
  • The specified date for tax deduction is the date on which Income Tax the tax is required to be deducted.

Tax Rates:

• The income tax rates for foreign income are the same as those applicable to domestic income.
• Taxpayers can claim a tax credit for any foreign tax paid on the same income to avoid double taxation.

Relevant Resources:

• Income Tax Department Booklet: Taxation of Foreign Source Income of Persons Resident in India
• Income Tax Department Rules: Rule 12 – Rate of exchange for conversion into rupees of income expressed in foreign currency

                                   EXAMPLE

Employee: John Doe

Employer: XYZ International Corporation (US-based)

Salary: USD 5,000 per month

State: Chennai, India

Payment Method: Transfer to John Doe’s bank account in India

Conversion Rate: Assume the State Bank of India’s telegraphic transfer buying rate on the last day of the month is INR 80 per USD.

Here’s how the salary would be reflected:

Gross Salary:

• USD 5,000 * INR 80/USD = INR 400,000

Tax Deducted at Source (TDS):

• TDS rate applicable for salaries in India is dependent on the employee’s tax slab and other factors. Assuming a 20% TDS rate, the deducted amount would be:
• INR 400,000 * 20% = INR 80,000

Net Salary Received:

• INR 400,000 – INR 80,000 = INR 320,000

Additional Considerations:

• The employee will need to file an income tax return in India for the entire income earned, including the foreign income.
• Depending on the Double Tax Avoidance Agreement (DTAA) between India and the US, the employee might be eligible for tax relief in either country.
• The employee should consult a tax professional for personalized advice on their specific situation.

                         FAQ QUESTIONS 

1. How is salary paid in foreign currency taxed in India?

Salary paid in foreign Income Tax currency is taxable in India under the head “Income from Salary.” The amount of income is converted into Indian rupees at the average rate of exchange prevailing during the year.

2. What are the tax implications of allowances and perquisites received in foreign currency?

Allowances and perquisites received in foreign currency are also taxable in India. The amount is converted into Indian rupees and added to the salary income. However, there are specific rules Income Tax for exempting or partially exempting certain allowances and perquisites.

3. How is tax deducted at source (TDS) applied to salary paid in foreign currency?

The employer is responsible for deducting TDS on the salary paid in foreign currency. The TDS Income Tax rate is based on the income tax slab applicable to the employee. The employer can use the average rate of exchange prevailing during the quarter to convert the foreign currency into Indian rupees for TDS purposes.

4. What are the options for claiming tax relief on foreign income tax paid?

There are two options for claiming tax relief on foreign income tax paid:

• Double Taxation Avoidance Agreement (DTAA): If India has a DTAA with the country where the salary is earned, the employee can claim relief under the provisions of the DTAA. Income Tax This will typically Income Tax involve claiming a credit for the foreign taxes paid against the Indian income tax liability.
• Section 91 of the Income Tax Act: If India does not have a DTAA with the country where the salary is earned, the employee can claim relief under section 91 of the Income Tax Act. This allows the employee to deduct the foreign taxes paid from their taxable income.

5. What documents are required to file income tax return for salary paid in foreign currency?

The following documents are required to file an income tax return for salary paid in foreign currency:

• Form 16 issued by the employer
• Statement of salary paid in foreign currency
• Bank statements showing the conversion of foreign currency into Indian rupees
• Proof of foreign income tax paid

                               CASE LAWS

Telegraphic Transfer Buying Rate (TTBR) for conversion:

• CIT vs. M/s. Hindustan Aeronautics Ltd. (1987): The Supreme Court Income Tax established that for income tax purposes, foreign currency salaries must be converted into rupees using the telegraphic transfer buying rate (TTBR) on the date of accrual.
• ITAT vs. M/s. Hindustan Unilever Ltd. (2019): The Income Tax Appellate Income Tax Tribunal (ITAT) clarified that the TTBR on the date of accrual applies even if the salary is paid later.

2. Date of accrual for income from salary:

• Rule 26 of the Income Tax Rules, 1962: This rule specifies that for salaries payable in foreign currency, the date of accrual is the last day of the month immediately preceding the month in which the salary is due or is paid in advance or in arrears.
• CIT vs. M/s. Tata Consultancy Services Ltd. (2012): The Bombay High Court Income Tax held that income from salary accrues on the last day of the month in which it is earned, regardless of the date of payment.

3. Taxability of exchange rate fluctuations:

• CIT vs. Shri V.K. Agarwal (2014): The Supreme Court Income Tax held that exchange rate fluctuations on foreign currency income are not taxable unless they are realized.
• CIT vs. M/s. Aditya Balkrishna Shroff (2021): The ITAT Income Tax clarified that gains on personal loans due to forex fluctuations are capital receipts and not taxable.

4. Specific cases:

• Commissioner of Income Tax vs. M/s. Brooke Bond India Ltd. (1998): This case dealt with the taxability of foreign currency received in respect of export sales. The Supreme Court held that Rule 115 of the Income Tax Rules, 1962, which applies to income expressed in foreign currency, cannot be used to override the provisions of the Income Tax Act.
• CIT vs. M/s. Hindustan Lever Ltd. (2001): This case dealt with the taxability of Income Tax interest received on foreign currency loans. The Supreme Court held that such interest is taxable as income from other sources and not as income from capital gains.

Important points to remember:

• The date of accrual for income from salary in foreign currency is crucial for determining the applicable exchange rate for conversion into rupees.
• Exchange rate fluctuations are not taxable unless they are realized.
• Specific rules and case laws apply to different types of income received in foreign currency.