Tax authorities have clarified that Indian residents earning consulting or freelance income from foreign clients must pay tax in India, even if the money is never brought into the country. The guidance, covered by Mint Money, clarifies that income earned while working from India is taxable regardless of where the payment is received.
According to the Income-tax Act, 1961, if a person does consulting work while residing in India, the income is noted as sourced in India. Hence, it will undergo tax policies in India, irrespective of the client's location. The tax liability remains the same regardless of the receipt’s method.
This stipulation concerns individuals classified as ROR and RNOR, but only if the services are provided from India. Tax experts warned the misconception of income being taxable only when remitted to India is not true.
Wherever the consulting fees might stay, in a foreign bank account or a native source, the income has to be taxed in India. The location of the service delivery is what's important, not the money transfer itself.
Income from international consulting services should be properly stated as it is taxed in the taxpayer’s home country. Taxpayers must declare their earnings and details on Schedule FSI (foreign-sourced income).
If the taxpayer fails to do so, he or she can seek relief under the relevant DTAA (Double Taxation Avoidance Agreement) by providing the data in Schedule TR. Residents may additionally be required to register foreign assets identified as reporting in Schedule FA.
The foreign exchange laws, together with the income tax regulations, control whether overseas earnings must be returned to India or maintained abroad. FEMA compliance is based on both the individual's tax residency and the exchange control requirements, which differ from tax residency.
If a person provides consultancy services to foreigners while in India and chooses to keep the money outside the country, they cannot avoid paying Indian taxes. Complete reporting and compliance with both income tax and FEMA laws are now required.