If you are working from home for a foreign company and not sure if you require to pay income tax, then here’s what you should do. First, check your Indian residency status, tax deducted at source (TDS), if any, and Double Taxation Avoidance Agreement (DTAA) to determine your tax liability. Then, if all conditions are satisfied, submit Form 67 (foreign tax details) if applicable and pay either advance tax or self-assessment tax (before ITR).
The issue was recently highlighted by a social media user who works from home for a European company. He said the company pays him his salary via direct bank transfer but does not deduct TDS. The user wishes to comply with tax laws and sought guidance.
Read here to check if you need to pay tax on your foreign salary.
Factors That Determine Income Tax Liability
Since the person works for a foreign firm from home and uses Indian resources (power, internet, telephone, etc.) and receives a salary, he would require to file income tax returns.
Sameer Jain, the managing partner of PSL Advocates & Solicitors, a New Delhi-based law firm, said that if a person who lives in India and conducts a service using assets and resources available within the Indian geographical boundary, whether these resources are physical or virtual in nature, then the income generated using them will be taxable regardless of the said person’s citizenship status.
There are two factors which determine a person's income tax liability.
● Income Source: The person should check the geographical territory, and the location of the assets or facilities within which the job has been carried out.
● Residential Status: The person must check the residency status to determine whether he will pay income tax. Since the person’s residency status could change, his tax liability may vary depending on his physical existence in the country.
Jain has advised people to check their residency status and based on that, they will pay income tax irrespective of whether they earned income from an Indian or foreign employer.
Now comes the part where Income Tax has to be paid, although his tax liability amount may differ.
How To Check Income Tax Liability
Check For Double Taxation Avoidance Agreement (DTAA): Go to the Income Tax Department’s website and check if your employer’s country has a DTAA agreement with India. Don’t worry If it has not signed a DTAA because Indian tax laws have relief for you.
Anushkaa Arora, principal and founder, ABA Law Office, a New Delhi-based law firm, said that DTAA allows an Indian resident to avoid double taxation. Still, if there is no DTAA agreement, “then the deduction can be claimed from the Indian income-tax at the tax rate
of India or the other country, whichever is lower, or at the Indian tax rate if both are equal.”
Check For TDS Deduction: "If a country has not signed a DTAA with India, it is still possible to deduct TDS (by the foreign firm) as per the Indian tax regime," said Jain.
In addition, if a country has signed a DTAA with India, they don't need to deduct TDS. It is because the company must be registered in India to deduct TDS.
So, ask the foreign company's HR and legal department whether they are registered in India and if yes, ask them about the TDS deduction. In the case of the social media user, no TDS was deducted.
How To Pay Income Tax?
Step 1 involves checking the factors for income tax payment; step 2 involves knowing the compliances before paying tax; and step 3 is paying tax after considering all the aspects.
●The tax rate and slabs would be the same as the income earned in India.
●If any taxes have been deducted in the foreign country, the taxpayer can take credit for such tax, subject to the rules. “If no taxes are deducted abroad, then he has to pay the full tax in India before filing his tax return,” said Ankit Jain, partner at Ved Jain & Associates, a New Delhi-based CA firm.
●One should follow the advance tax payment schedule and pay off the tax due for the year. “However, if such advance tax has not been paid, one can still make the payment in the form of self-assessment tax before filing his return,” Jain added.
●Jain has advised people to give details of foreign taxes in “Form 67” and submit it before filing returns. One may get full or partial credit for foreign taxes.
Jain added that if there's no additional tax payable in India due to foreign taxes, one should still declare the income in their tax return and not consider it exempt.
Sameer Jain said India eliminated double taxation in most DTAA treaties by following the credit method. It allows a credit of tax paid in the source country by the Indian resident while taxing that income in India.
Edited by: Sanjeeb Baruah