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Step-by-Step Process for International Taxation

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Financial Analyst

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Step 1: Determine Your Residential Status

Your taxability depends primarily on your residential status for the financial year.
In India, residency is classified as:

  • Resident & Ordinary Resident (ROR) – Global income is taxable in India
  • Resident but Not Ordinary Resident (RNOR) – Only India-source income + income from certain foreign businesses controlled from India
  • Non-Resident (NRI) – Only income earned or received in India is taxable

Why this matters:
The first step helps decide which portions of income from domestic and foreign sources will be taxed.

Step 2: Identify and Classify Foreign Income

Next, classify the type of foreign income you receive. Common categories include:

  • Salary earned abroad
  • Foreign business or profession income
  • Investment income (interest, dividends, capital gains)
  • Income from property held abroad
  • Remittances received in India
  • Income from foreign subsidiaries or branches

Proper classification enables correct tax treatment and reporting.

Step 3: Determine Source of Income and Applicable Country Tax Laws

Every country has its own tax laws based on:

  • Source-based taxation – tax based on location where income arises
  • Residence-based taxation – tax based on the taxpayer’s residency

For individuals or companies operating globally, it is essential to check:

  • If the foreign country taxes that income
  • Applicable withholding taxes
  • Local tax rates
  • Compliance requirements (VAT, GST, payroll taxes, etc.)

Step 4: Check Applicability of DTAA (Double Taxation Avoidance Agreement)

DTAA is a treaty between India and many countries to ensure you do not pay tax twice on the same income.

Through DTAA, taxpayers get:

  • Tax credit method – Pay tax in one country and claim credit in another
  • Exemption method – Income taxed in one country is exempt in the other
  • Reduced TDS rates – Lower withholding tax on dividends, interest, royalties, etc.

Before calculating tax, check if India has a DTAA with the country of income origin.

Step 5: Convert Foreign Income into Indian Currency

For tax filing in India, all foreign income must be converted into INR using:

  • SBI TT (Telegraphic Transfer) buying rate on the date of earning the income
  • Foreign exchange conversion rules specified under Income Tax Act Rule 115

This ensures accuracy in tax calculations.

Step 6: Calculate Taxable Income in India

Based on:

  • Residential status
  • Classification of income
  • DTAA relief

you can determine how much foreign income is taxable in India.
Add this to your total income for the financial year.

Step 7: Claim Foreign Tax Credit (FTC)

If you have already paid tax in the foreign country, India allows Foreign Tax Credit (FTC) to avoid double taxation.

To claim FTC, you must:

  1. File Form 67 online before filing the Income Tax Return
  2. Provide proof of foreign tax paid (tax receipts, Form W-2, foreign assessment order, etc.)
  3. Ensure income matches the returns filed abroad

Step 8: File Income Tax Return in India

Choose the right ITR form:

  • ITR-2 or ITR-3 for individuals
  • ITR-6 for companies

Ensure you report:

  • Foreign income
  • Foreign assets
  • Foreign bank accounts
  • Direct or indirect interests in overseas companies

Schedule FA (Foreign Assets) must be completed accurately to avoid penalties under the Black Money Act.

Step 9: Maintain Documentation for International Transactions

Keep proper records, including:

  • Foreign bank statements
  • Salary slips, invoices, contracts
  • Proof of taxes paid abroad
  • DTAA benefit documents
  • Transfer pricing documentation (for businesses)

This step is essential for compliance and smooth audits.

Step 10: Comply with Transfer Pricing Regulations (For Businesses)

For multinational companies:

  • Maintain Arm’s Length Pricing
  • Prepare mandatory Transfer Pricing documentation
  • File Form 3CEB certified by a CA

This ensures that cross-border transactions between associated enterprises are compliant with Indian regulations.

Conclusion

International Taxation may seem complex, but following a clear step-by-step process makes compliance easier and ensures you optimize your tax liability across countries. Whether you are an NRI, global investor, freelancer, or business owner, understanding DTAA benefits, foreign income reporting, and FTC rules can significantly reduce tax burden and help avoid penalties.

The information provided in this blog is for general informational and educational purposes only and should not be construed as legal, tax, or professional advice. While every effort has been made to ensure accuracy and compliance with the applicable provisions of the Companies Act, 2013 and related rules, laws and regulations may change over time and interpretations may vary based on specific facts and circumstances.

All services are subject to applicable laws, rules, and government approvals prevailing at the time of execution.

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