Income from foreign sources

Indian tax law does not tax every person on everything they earn. What gets taxed depends on where the income arose. It also depends on the taxpayer's residential status.

Income from foreign sources sits at the far end of that scale. It is income that arises outside India. It is also income that Indian law does not deem to arise in India.

One slice is carved out of it. Income from a business controlled in India is not foreign source income. Nor is income from a profession set up in India. Those two count as Indian income, even when the money is earned abroad.

The phrase matters for two separate tests. It decides who becomes a deemed resident under the Rs 15 lakh rule. It also decides what a resident but not ordinarily resident person actually pays tax on.

Where the definition comes from. The workbook defines the phrase inside section 6(1A), the deemed resident test introduced with effect from Financial Year 2020-21. An Indian citizen is deemed resident, whatever his stay in India, if his total income excluding income from foreign sources exceeds Rs 15 lakh in the previous year and he is not liable to tax in any other country by reason of domicile or residence. The residual figure is what the workbook calls Indian Income.

Where it bites hardest. Section 7.5 and Table 7.1 set out the scope of total income by residential status. Read the last row of that table: that is income from foreign sources.

So only a Resident and Ordinarily Resident pays Indian tax on income from foreign sources. An RNOR and a non-resident do not. And because a section 6(1A) deemed resident is always classified RNOR, the Rs 15 lakh test pulls a person into the Indian tax net without pulling his foreign income in with him.

Mr Venkatesh is an Indian citizen who spent the whole of FY 2024-25 in Dubai and paid no personal income tax there. His income for the year:

Step 1 — the Rs 15 lakh test. Indian income is 9,60,000 + 7,20,000 = Rs 16,80,000. That is above Rs 15 lakh. He is not liable to tax in the UAE by reason of residence. Both conditions of section 6(1A) are met, so he is a deemed resident and therefore RNOR.

Step 2 — what he actually pays tax on. As an RNOR he is taxed on the Rs 16,80,000 of Indian income. The Rs 51,40,000 of Dubai salary and deposit interest is income from foreign sources, and Table 7.1 leaves it out of the Indian tax net.

The trap the figures expose. Had the Chennai consultancy been a business genuinely controlled from Dubai rather than a profession set up in India, that Rs 7,20,000 would have been foreign source income. Indian income would then be Rs 9,60,000, below Rs 15 lakh, and section 6(1A) would not apply at all.

Chapter 7 (Concepts of Taxation), section 7.4.1, gives the definition as part of the section 6(1A) deemed resident test, and section 7.5 with Table 7.1 gives the scope of total income by residential status. Both are heavily examined because they can be set as a single arithmetic question.

Expect: what the Rs 15 lakh threshold is measured on (Indian income, excluding income from foreign sources), what residential status a section 6(1A) deemed resident gets (always RNOR), and a Table 7.1 row question asking whether a named foreign receipt is taxable for an ROR, an RNOR or a non-resident.

• The Rs 15 lakh threshold excludes income from foreign sources. It is a test on Indian income, not on worldwide income. Applying it to total global income is the commonest error on this section.
• A business controlled in India, or a profession set up in India, is not a foreign source even though the income arises abroad. That carve-out sits inside the definition itself.
• Only an ROR is taxed on income from foreign sources. An RNOR and a non-resident are not, per the last row of Table 7.1.
• Income deemed to accrue in India is never income from a foreign source, however far away the payer sits. The deeming provisions override geography.
• The definition is not the same as the residential-status day counts. The 182-day, 120-day and 60-day tests decide residence; this phrase decides what a resident of a given class is taxed on.
• Do not confuse it with the credit mechanism. A Double Taxation Avoidance Agreement relieves tax already paid abroad; this definition decides whether Indian tax arises at all.