Tax on Foreign Income for Indian Residents: Salary, Investments & DTAA Benefits for AY 2026-27

If you are an Indian resident working for a foreign company, earning dividends from US stocks, receiving rent from a property abroad, or holding mutual funds in another country, all of that income is taxable in India. India follows a global income taxation model for its residents — meaning your worldwide income, regardless of where it is earned or received, must be reported in your Indian ITR.

This creates a real problem: the same income often gets taxed in both the source country and in India. Fortunately, the Double Taxation Avoidance Agreements (DTAAs) and domestic relief provisions exist to prevent you from paying tax twice. This guide explains exactly how foreign income is taxed, how to claim relief, and what you must report for AY 2026-27.

Who Needs to Report Foreign Income?

Your obligation to report foreign income depends entirely on your residential status under the Income Tax Act:

If you lived in India for 182 days or more during FY 2025-26, or for 60 days or more in FY 2025-26 AND 365 days or more in the preceding 4 years, you are likely a Resident. The 60-day threshold is extended to 182 days for Indian citizens who left India for employment abroad, and to 120 days if your total Indian income exceeds ₹15 lakh.

Most salaried individuals working in India — even those with foreign clients, overseas investments, or rental properties abroad — are ROR and must declare their entire worldwide income.

Types of Foreign Income and How They Are Taxed

Foreign Salary

If you work remotely for a foreign company while sitting in India, your salary is taxable in India at your applicable slab rate. This is true regardless of whether the salary is received in a foreign bank account or an Indian one.

Example: Priya works remotely from Bangalore for a US-based startup and earns $80,000 per year (approximately ₹67 lakh at ₹84/USD). She is an Indian resident. Her entire salary is taxable in India under "Income from Salary." If her US employer withholds US federal taxes, she can claim DTAA relief to avoid being taxed on the same income in both countries.

If you are on a deputation or secondment where both countries claim taxing rights, the DTAA between India and that country determines which country gets primary taxing rights and how relief is provided.

Foreign Dividends

Dividends from foreign stocks — including US stocks purchased through platforms like Vested, INDmoney, or interactive brokers — are taxable in India as Income from Other Sources at your slab rate.

The US withholds 25% tax on dividends paid to Indian residents (reduced to 15% if you have filed a W-8BEN form claiming treaty benefits under the India-US DTAA). You can claim credit for this US tax against your Indian tax liability.

Example: Rahul holds Apple and Microsoft shares and received $2,000 in dividends during FY 2025-26. The US withheld $300 (15% after W-8BEN). In India, these dividends (approximately ₹1.68 lakh) are added to his total income and taxed at his slab rate. He claims ₹25,200 (₹300 equivalent) as foreign tax credit.

Foreign Capital Gains

When you sell foreign stocks, mutual funds, ETFs, or property located outside India, the capital gains are taxable in India. The classification depends on the asset type and holding period:

• Listed foreign equity (stocks, ETFs): Held over 12 months = LTCG at 12.5% above ₹1.25 lakh; held 12 months or less = STCG at 20%
• Foreign mutual funds (non-equity oriented): Taxed at slab rate regardless of holding period (treated as debt funds)
• Foreign property: Held over 24 months = LTCG at 12.5%; held 24 months or less = STCG at slab rate

Example: Sneha purchased US-listed ETFs worth $10,000 in January 2024 and sold them in August 2025 for $14,000. Her long-term capital gain of $4,000 (approximately ₹3.36 lakh) is taxable in India. After the ₹1.25 lakh exemption, she pays 12.5% on ₹2.11 lakh = ₹26,375. If the US taxed this gain, she claims relief under the DTAA.

Foreign Rental Income

Rental income from property located outside India is taxable in India under Income from House Property. You can claim the standard 30% deduction and deduct municipal taxes (or their equivalent) paid in the foreign country, just as you would for Indian property.

Foreign Interest and Other Income

Interest from foreign bank accounts, fixed deposits, bonds, or savings accounts is taxable in India as Income from Other Sources. If the source country deducted withholding tax, you claim credit under the DTAA.

How DTAA Relief Works: Sections 90 and 91

The mechanism to avoid double taxation is straightforward:

Section 90 applies when India has a DTAA with the country where income was earned. India has DTAAs with over 90 countries including the US, UK, Canada, Australia, Germany, Singapore, UAE, and Japan.

Under a DTAA, relief works in two ways:

1. Exemption method: Income is taxed only in one country (rare in Indian DTAAs)
2. Credit method (most common): Income is taxed in both countries, but India gives you credit for the tax paid abroad

Section 91 provides unilateral relief when there is no DTAA with the source country. You still get credit for foreign taxes paid, calculated as the lower of:

• The Indian tax rate on the doubly-taxed income, or
• The tax actually paid in the foreign country

Practical Calculation of DTAA Relief

The foreign tax credit is calculated per country and per income type. Here is a simplified example:

You effectively pay the higher of the two countries' tax rates — not the sum of both. The DTAA ensures you are not penalized for earning income abroad.

How to Claim Foreign Tax Credit: Form 67

To claim the foreign tax credit, you must file Form 67 on the income tax e-filing portal before or along with your ITR. This is a critical compliance step that many taxpayers miss.

Form 67 requires:

• Country-wise details of foreign income
• Tax paid in the foreign country (in foreign currency and INR)
• Nature of income (salary, dividend, capital gains, etc.)
• Relevant DTAA article under which relief is claimed
• Supporting documents: tax payment proof, tax residency certificate (if available)

Important: If you forget to file Form 67, the Assessing Officer can still allow the credit at their discretion — but it is far safer to file it on time. As per a 2022 CBDT circular, Form 67 can now be filed up to the end of the relevant assessment year (March 31, 2027 for AY 2026-27) or along with a belated/revised return.

Reporting Foreign Income in Your ITR

Foreign income reporting happens in multiple schedules within ITR-2 or ITR-3 (you cannot use ITR-1 if you have foreign income or assets):

Schedule FSI (Foreign Source Income)

This schedule captures:

• Country code of the income source
• Taxpayer identification number in that country (if any)
• Type of income (salary, house property, capital gains, other sources)
• Income earned (before and after DTAA relief)
• Tax paid outside India
• Tax relief claimed under Section 90/91

Schedule TR (Tax Relief)

This is where you claim the actual foreign tax credit. It pulls from your Form 67 filing and calculates the relief amount.

Schedule FA (Foreign Assets)

This is mandatory if you hold any foreign assets — even if they did not generate income during the year. You must report:

• Foreign bank accounts (even if the balance is zero)
• Foreign equity and debt holdings (stocks, ETFs, mutual funds, bonds)
• Foreign property (immovable assets)
• Foreign trusts or entities where you are a beneficiary or trustee
• Signing authority in foreign accounts
• Foreign cash value insurance or annuity contracts

Each asset must be reported with its peak balance or value during the financial year and the closing balance as of March 31.

Penalties for Non-Disclosure

The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 imposes severe penalties:

• ₹10 lakh penalty for failing to report foreign assets in Schedule FA
• Tax at 30% flat rate (plus surcharge and cess) on undisclosed foreign income, with no deductions or exemptions allowed
• Prosecution proceedings in cases of wilful evasion

The income tax department receives information about your foreign holdings through automatic exchange of information (AEOI) agreements and Common Reporting Standards (CRS). If you have a bank account or brokerage account abroad, India's tax authority likely already knows about it.

Common Scenarios and What to Do

Scenario 1: Remote Worker for Foreign Company

You work from India for a US/UK/Singapore company. Your salary is paid in foreign currency to a foreign or Indian bank account.

Action: Report entire salary under "Income from Salary" in ITR-2. File Form 67 if foreign taxes were withheld. Claim FTC under the India-US/UK/Singapore DTAA. Report the foreign bank account in Schedule FA.

Scenario 2: Indian Resident with US Stock Portfolio

You invest in US stocks via a platform and earn dividends and capital gains.

Action: Report dividends under "Income from Other Sources." Report capital gains under "Capital Gains." File Form 67 for any US taxes withheld on dividends. Report the brokerage account and all holdings in Schedule FA with peak and closing values.

Scenario 3: Property Owned Abroad

You own an apartment in Dubai that earns rental income.

Action: Report rental income under "Income from House Property" (claim 30% standard deduction). If UAE levied no tax (UAE has no income tax), there is no FTC to claim, and your Indian tax applies fully. Report the property in Schedule FA with its value. If you sell the property, report capital gains and claim relief under India-UAE DTAA if applicable.

Scenario 4: NRE/NRO Account Holder Who Became Resident

You returned to India and your NRE account was redesignated as a resident account, but you still have funds abroad.

Action: Interest from the erstwhile NRE account is now taxable (NRE interest is tax-free only for NRIs). Report all foreign accounts in Schedule FA. Declare the interest as "Income from Other Sources."

Key Deadlines and Filing Tips

• ITR filing deadline: July 31, 2026 for non-audit cases (AY 2026-27)
• Form 67: File before or along with ITR — can be filed up to the due date of belated return
• Advance tax: If your foreign income tax liability exceeds ₹10,000, pay advance tax in quarterly instalments
• Convert income to INR using the SBI TT buying rate on the date the income was earned or received (for salary, use the rate on the last day of the month)

Actionable Takeaway

If you are an Indian resident with any foreign income — even a few hundred dollars in US stock dividends — report it. The days of flying under the radar are over thanks to automatic information exchange between countries. The good news is that DTAAs ensure you do not pay double tax. File Form 67 diligently, fill Schedule FSI and FA accurately, and you will have nothing to worry about. 49Tax's AI can help you identify foreign income entries in your AIS and map them to the correct ITR schedules, making compliance straightforward even if this is your first time reporting foreign assets in your ITR.