Understanding Tax on Foreign Income for Freelancers

One of the biggest perks of freelancing is the opportunity to work with clients from different corners of the world. One day, you're working for an early-stage startup in the US. Next, a tech firm from Singapore.

Most of these payments land in your account through platforms like Xflow, PayPal, Wise, Payoneer, etc.

Come the season of taxes, and you could be left scratching your head. How do you report foreign income? Do you need a FIRC? And which ITR form should you file?

To avoid penalties and legal hassle, it's important to understand:

• How much foreign income is tax-free in India
• How to calculate tax on foreign income
• Which ITR forms should you fill out

When you work with clients abroad, the money you earn counts as foreign income. But from a taxation POV, it's not treated any differently. It is simply part of your total earnings as a freelancer. And so, it will be taxed like any other business income.

Foreign income in India generally includes:

• Payments from clients based in other countries
• Earnings from platforms like Upwork, Fiverr, etc.
• Working for international agencies that pay you from abroad

Now, since freelancing is treated as your business, this income usually falls under Income from Business or Profession. 

Plus, your tax on foreign income is always calculated in INR. This means any payment you receive in USD, EUR, or any other currency is first converted to Indian Rupees using the prescribed exchange-rate rules.

Foreign income becomes taxable in India depending on your residential status. If you qualify as a resident under Indian income tax rules, then the money you earn from clients abroad is taxable here.

You are treated as a resident if you:

• Stay in India for at least 182 days in a financial year, or
• Stay for 60 days in the year and 365 days or more in the previous four years

Residents further fall into two groups:

• Resident and Ordinarily Resident (ROR): You are taxed on your global income, including all freelance payments from abroad.
• Resident but Not Ordinarily Resident (RNOR): You are taxed only on income that is earned or received in India, and on income from businesses controlled from India.

Most freelancers living and working from India are considered ROR. So their foreign earnings are fully taxable under the Income Tax Act.

If you are a freelancer or consultant in India, the income you earn from overseas clients will be considered business or professional income. It is not considered a salary. The tax you pay depends on a few rules:

1. Income tax slabs

Your foreign earnings are added to your total annual income. You are then taxed based on the slab rates under the old or new tax regime you choose.

2. Currency conversion

If you receive money in USD, GBP, or any other foreign currency, it must be converted to INR for tax purposes. Banks often use the SBI TT buying rate on the day the payment reaches your account.

3. Double taxation relief

If your client's country has already deducted tax, you can get relief under the Double Taxation Avoidance Agreement (DTAA). India has such agreements with many countries. To use DTAA benefits, you need a Tax Residency Certificate and Form 10F.

4. TDS on foreign payments

In rare cases, foreign clients with a presence in India may deduct tax at source under Section 195. This depends on the nature of the service and whether a DTAA applies.

If you work remotely for a foreign company, your earnings are considered salary income. In India, salary is taxable if the work is performed within the country. It doesn't matter where the employer is based or which currency you are paid in. Even if your salary goes to a foreign bank account, it is still taxable under ITR-2.

Your tax liability depends on your residential status:

• Resident: Taxable on global income.
• RNOR: Taxable only on income earned in India or income linked to businesses controlled from India.
• NRI: Taxable only on income sourced in India.

Plus, before calculating and paying taxes, your foreign salary must be converted to INR. The SBI telegraphic transfer (TT) buying rate is used for this purpose.

You can also choose between the old and new tax regimes. The old regime allows several deductions, while the new one offers lower rates with limited deductions.

Reporting foreign income is not difficult. But you must choose the right ITR form and enter your details carefully.

1. Pick the correct ITR form

Many freelancers choose presumptive taxation under Section 44ADA because it reduces paperwork. Under this rule:

• 50% of your gross receipts is treated as profit.
• The limit is Rs. 50 lakhs, but it can go up to Rs. 75 lakh if cash receipts are within 5% of your total receipts.

If you don't opt for presumptive taxation or your income crosses the limit, you need to file ITR-3 or ITR-4. Here, you report your actual profit after deducting expenses.

2. Report your foreign income correctly

When filing your return:

• Declare your gross foreign income in INR.
• Treat platform fees as expenses.
• Fill out the correct schedules to disclose foreign income or assets. These are mandatory for transparency and can't be skipped.

When you earn from foreign clients, you need to maintain proper paperwork. This helps you report your income correctly and support your return if the tax department asks for proof.

Here's what you need:

• PAN and Aadhaar cards
• Bank statements, especially those showing inward remittances
• Invoices and contracts for all foreign projects
• Payment platform statements (Xflow, Wise, PayPal, etc.)
• Exchange rate proof
• Expense receipts linked to your freelance work
• Annual Information Statement (AIS)
• Form 26AS and any advance tax payment receipts
• GST registration certificate, if applicable
• FIRC/FIRA, when available, as proof of export of services
• Foreign tax deduction certificates, if tax was paid abroad

The GST rules for foreign payments are quite simple. You see, when you provide services to clients outside India, your work is treated as an export of services. Under GST, exports fall under GST zero-rated supply. This means GST doesn't apply to these invoices.

But GST rules still matter if your total income exceeds the registration limit of Rs. 20 lakh (or Rs. 10 lakh in specific states). Once you are registered, you must follow GST procedures even if your services are zero-rated.

To qualify as an export of service, you need to meet a few conditions:

• Your client must be located outside India.
• Your payments must arrive in convertible foreign currency or in INR if allowed by the RBI.

If you satisfy these conditions, you don't need to add GST to your foreign invoices. But you can still claim input tax credit (ITC) on GST you pay for business expenses. These include software, internet bills, office supplies, and other tools.

Many freelancers also submit a Letter of Undertaking (LUT). This allows them to enjoy zero-rated benefits without paying IGST upfront.

Freelancers earning from foreign clients often deal with challenges that don't show up in regular salaried jobs. For example, double taxation, compliance, and managing income from different sources.

1. Double taxation and FTC

Many freelancers worry about paying tax twice - once in the client's country and again in India. India's DTAA agreements help reduce this burden. If you have already paid tax abroad, you can claim a Foreign Tax Credit (FTC) to lower your Indian tax liability. But you can only avail of this benefit if you keep proper proof, like tax receipts and confirmation of the amount paid overseas.

2. FEMA compliance and disclosures

Freelancers must follow RBI rules for cross-border payments. Under FEMA, you need to:

• Report foreign income and assets in Schedule FA of your ITR.
• Keep clear payment terms in your contracts.
• Follow limits under the Liberalised Remittance Scheme for any outward transfers.

3. Income from multiple sources

As a freelancer, you often receive payments for different types of work:

• One-time projects
• Long-term retainers
• Consulting
• Digital products
• Affiliate payouts, etc.

While this can help grow your income, it also comes with different types of invoices, timelines, and paperwork. Managing all this data can complicate tax filing.

Staying compliant with foreign income isn't complicated. Just make sure to maintain detailed records, seek professional help, set some money aside, and use the right payment partner.

1. Keep detailed records: Save your invoices, receipts, contracts, and bank statements. These act as proof if any question comes up later.

2. Get professional help when needed: A tax consultant can guide you through the rules on foreign income and prevent costly mistakes.

3. Set aside money for taxes: Keep a small portion of every payment aside so you aren't stressed during the filing season.

4. Use the right payment partner: Platforms like Xflow give you full clarity on the FX rate at the time of withdrawal. This means you'll know the exact INR amount that will reach your bank. Plus, their rates are linked to inter-bank pricing. Xflow also provides a bank-issued FIRA from an RBI-authorised partner with every payout.

Working with clients overseas is exciting. But it also means you need to be clear on the tax on foreign income in India. By keeping organised records, using the correct ITR form, reporting your earnings properly, and following GST and FEMA rules, you can file your taxes accurately and avoid penalties.

Partnering with a reliable payment platform can further make compliance easier. Xflow offers competitive FX rates, RBI-authorised FIRA for every payout, and transparent invoicing tools, ensuring your international payments are safe and easy to manage.

Sign up today to learn more.