Income earned from services performed in India is taxable
One clear rule to remember: if you perform services in India, the income you earn from those services is taxable in India — no matter where the money is paid or where it is received. The location of the performance of work, not the place of payment, is the key determinant for Indian tax liability.
Why the place of performance matters
India follows the source-based principle for certain categories of income. When services are physically or economically rendered in India, the income arising from that activity is treated as Indian-sourced income. This means even if a foreign client pays you directly into an overseas bank account, or a third party routes the payment outside India, the earnings linked to work done in India remain taxable here.
Residential status: how it changes obligations
Whether you are a resident, resident-but-not-ordinarily-resident, or non-resident under Indian tax law affects how your worldwide income and India-sourced income are taxed. Separately, your residential status under foreign exchange rules (FEMA) determines what you must report and how you can move money in and out of the country.
Tax residential status
- Residents: Generally taxed on their global income, including income earned for services performed in India and abroad.
- Non-residents: Taxed primarily on income that is earned in India or is received in India. Income from services performed in India is taxable even if payment is received overseas.
- Resident-but-not-ordinarily-resident (RNOR): Tax treatment is a hybrid — limited taxation of foreign income but full tax on income earned from India.
FEMA residential status
FEMA’s definition of residence determines your rights and duties for foreign exchange transactions. This affects:
- Reporting obligations: Whether you must report foreign receipts, foreign assets, or inbound receipts to Indian authorities.
- Repatriation rules: Whether funds held in India can be freely sent abroad, and under what limits or documentation requirements.
In practice, the two regimes interact: you might owe tax on income earned in India under income-tax law while also having to comply with FEMA rules when that money is moved across borders.
Common scenarios and implications
Freelancer or consultant working from India for a foreign client
If the work is performed in India, the income is taxable in India even if the client pays you in a foreign bank account. You will typically need to disclose this income when filing Indian tax returns. Depending on your residency status, additional worldwide income may also be taxable.
Employee of a foreign company stationed in India
Salaries for services rendered in India are taxable here, irrespective of whether salary payments are routed through a foreign payroll. Employers or payers may be required to withhold tax at source under Indian rules if the pay or services are connected to India.
Payment received in India but repatriated abroad
Repatriating earnings out of India can trigger FEMA reporting rules and documentation. Even after repatriation, the income’s Indian-source nature means tax obligations in India remain unless relieved by a tax treaty or foreign tax credit mechanisms.
Practical steps to stay compliant
- Determine your residential status under both tax law and FEMA to understand liability and reporting duties.
- Declare India-sourced income on your Indian tax return, regardless of where the payment was received.
- Check withholding requirements — clients or employers may need to deduct tax at source for payments related to services performed in India.
- Maintain documentation proving where and how services were provided, payment trails, and any foreign taxes paid.
- Consider double-taxation relief if you were taxed abroad on the same income; Indian rules often allow foreign tax credits or treaty relief.
- Follow FEMA formalities when repatriating funds: report as required and retain proof of compliance to avoid penalties.
Final points to remember
Income attribution hinges on where the services are performed. Residential status under income-tax rules decides the tax reach, while FEMA residency determines reporting and repatriation permissions. Both frameworks can apply simultaneously, so awareness and timely compliance are essential.
If your situation involves cross-border payments or complex residency questions, consider consulting a tax or legal professional to clarify obligations and avoid unintended penalties.