Foreign currency transactions for individuals and businesses in India involve specific tax implications under the Income Tax Act and the Foreign Exchange Management Act (FEMA). Taxation on foreign currency transactions varies based on the purpose of the transaction, such as foreign remittances, investment in foreign assets, income earned from foreign sources, and transactions on credit cards. Here’s a comprehensive overview of the types of foreign currency transactions and their taxation rules in India.

1. Taxability of Foreign Remittances (LRS)

Under the Liberalised Remittance Scheme (LRS), resident individuals are allowed to remit up to $250,000 annually for various purposes, such as travel, education, investments, and gifts. While the remittance itself is not directly taxable, certain foreign remittances are subject to Tax Collected at Source (TCS).

Tax Collected at Source (TCS) on Foreign Remittances

As of the Finance Act 2023, TCS applies to foreign remittances under LRS, depending on the type and amount of remittance:

• 5% TCS: Applicable on foreign education and medical remittances exceeding ₹7 lakh in a financial year.
• 20% TCS: Applicable on other foreign remittances, including travel, investments, and gifts (applicable from July 1, 2023).

Example: If an individual remits ₹10 lakh for travel purposes, TCS at 20% will apply on the full ₹10 lakh, resulting in a TCS of ₹2 lakh.

Claiming TCS as a Tax Credit

The TCS collected on foreign remittances can be claimed as a tax credit at the time of filing the income tax return. It is either refunded if tax payable is lower or adjusted against the tax liability.

2. Taxation of Income Earned in Foreign Currency

Income earned in foreign currency by Indian residents, whether from employment or business, is taxable in India as global income. The tax treatment varies based on the source of income and the residential status of the taxpayer.

2.1 Salary and Business Income

For residents, income earned abroad, including salary and business income, is taxable in India. The income should be converted into Indian Rupees (INR) using the exchange rate on the date of receipt, as per the Income Tax Act. This is known as global income taxability.

• Foreign Tax Credit (FTC): If tax has already been paid on foreign income in the source country, residents can claim a tax credit to avoid double taxation by filing Form 67 under the Double Taxation Avoidance Agreement (DTAA) with that country.

2.2 Interest, Dividends, and Capital Gains

Income from foreign investments, such as interest, dividends, and capital gains, is also taxable in India. The income is converted to INR using the exchange rate on the date of receipt.

• Interest and Dividend: Taxed as “Income from Other Sources” and included in total income, subject to slab rates.
• Capital Gains: Taxable as per the holding period and the asset type:
  • Short-Term Capital Gains (STCG): Gains from assets held for less than 36 months, taxed at slab rates.
  • Long-Term Capital Gains (LTCG): Gains from assets held for more than 36 months, taxed at 20% with indexation benefits.

Example: If an individual earns $10,000 as interest from foreign bonds, this amount is converted to INR at the exchange rate on the date of receipt and added to total income under “Income from Other Sources.”

3. Taxation on Foreign Credit Card Transactions

Foreign currency transactions on Indian credit cards, such as for travel or shopping, attract TCS under LRS if they exceed ₹7 lakh in a financial year. The TCS rates are:

• 5% TCS: On foreign education and medical expenses exceeding ₹7 lakh.
• 20% TCS: On other foreign currency expenses, including travel, shopping, and investments, above ₹7 lakh.

Example: If you spend ₹8 lakh on an international vacation using a credit card, 20% TCS applies to the entire ₹8 lakh, resulting in a TCS of ₹1.6 lakh.

4. Capital Gains Tax on Foreign Assets

Capital gains from the sale of foreign assets, such as foreign property or stocks, are subject to tax in India if the individual is a resident. Here’s how these are taxed:

4.1 Foreign Real Estate

• Long-Term Capital Gains (LTCG): Foreign property held for more than 24 months qualifies as LTCG and is taxed at 20% with indexation.
• Short-Term Capital Gains (STCG): Foreign property held for less than 24 months is subject to STCG and taxed as per the applicable slab rate.

4.2 Foreign Securities

• Listed Foreign Shares and ETFs:
  • LTCG: For assets held for more than 24 months, taxed at 20% with indexation.
  • STCG: For assets held for less than 24 months, taxed as per the income tax slab rate.
• Unlisted Foreign Shares: LTCG for unlisted shares is applicable if held for over 24 months and is taxed at 20% with indexation.

5. Reporting Foreign Assets and Income in Income Tax Return

Indian residents are required to disclose all foreign assets, income, and foreign financial interests when filing their income tax return under Schedule FA (Foreign Assets). Non-disclosure of foreign assets may result in penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

5.1 Foreign Assets to Report in Schedule FA:

• Foreign bank accounts (both savings and current).
• Foreign financial interests in equity or debt.
• Foreign real estate property.
• Foreign cash or cash equivalents exceeding specified limits.

5.2 Form 67 for Foreign Tax Credit (FTC)

To claim credit for taxes paid in a foreign country, individuals must submit Form 67 along with the income tax return. This form allows taxpayers to claim credit under DTAA, reducing double taxation.

6. Income Tax on Foreign Gifts and Inheritances

Foreign Gifts

Foreign gifts received in cash or as property are subject to tax in India if their value exceeds ₹50,000, except for gifts received from specified relatives.

• Taxable under “Income from Other Sources”: If the aggregate value of foreign gifts from non-relatives exceeds ₹50,000, the entire amount is taxable.

Foreign Inheritance

Inheritance received from foreign relatives is generally exempt from income tax in India, but income generated from inherited assets (e.g., rental income, dividends) is taxable.

7. Tax on Foreign Currency Conversion

While there is no direct tax on currency conversion, the Goods and Services Tax (GST) applies to foreign currency conversion by banks or authorized forex dealers:

• Up to ₹1 Lakh: 1% of the gross amount, with a minimum of ₹250.
• Between ₹1 Lakh and ₹10 Lakh: 1,000 + 0.5% of the amount exceeding ₹1 Lakh.
• Above ₹10 Lakh: ₹5,500 + 0.1% of the amount exceeding ₹10 Lakh, capped at ₹60,000.

8. Exchange Rate and Tax Calculations

Income earned in foreign currency must be converted to Indian Rupees for tax purposes. The conversion is done using the RBI reference rate or SBI’s telegraphic transfer buying rate on the date of transaction or income receipt.

• Capital Gains: For capital gains, the conversion rate at the time of purchase and the sale date determines the gain/loss amount.
• Interest or Dividends: The rate on the date of receipt is used to calculate taxable income.

9. Tax Planning Tips for Foreign Currency Transactions

To optimize tax liabilities associated with foreign currency transactions, consider the following strategies:

9.1 Monitor LRS Spending for TCS Thresholds

Keep track of annual foreign remittances and credit card expenses under the LRS threshold to avoid higher TCS rates, or plan to claim TCS credits in the tax return.

9.2 Utilize Double Tax Avoidance Agreement (DTAA)

Claim foreign tax credits under DTAA to reduce double taxation on foreign income, especially if working abroad or investing in foreign assets.

9.3 Report Foreign Assets Accurately

Ensure accurate reporting of all foreign assets, income, and investments in Schedule FA to avoid penalties and compliance issues under the Black Money Act.

9.4 Plan for LTCG Benefits on Foreign Assets

Hold foreign assets like real estate or securities long enough to qualify for long-term capital gains benefits, which attract lower tax rates and allow for indexation.

9.5 Invest in Tax-Efficient Foreign Investments

Consider tax-efficient foreign investments, like certain ETFs or mutual funds, to benefit from favorable DTAA rates and minimize tax liability.

Conclusion

Foreign currency transactions, while increasingly common, have unique tax implications based on the transaction type and income source. Understanding TCS requirements, capital gains rules for foreign assets, income tax on foreign income, and LRS limits can help taxpayers effectively manage and optimize their tax liabilities. Accurate reporting, utilization of foreign tax credits, and timely tax planning ensure compliance and help reduce the tax burden on foreign currency transactions. Consulting with a tax professional can provide further guidance on specific transactions and cross-border tax issues.

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