How Foreign Companies Are Taxed in India: A Complete Guide

Planning to expand your business into India? That’s a big step — and a promising one. India’s strong economy, large consumer base, and improving business environment make it a hotspot for global investments. But before jumping in, it’s important to understand how your foreign income, global income, or foreign source of income will be taxed in India.

At DSRV India, we help foreign companies navigate income tax rules, avoid double taxation, and file their income tax return (ITR) smoothly. In this blog, we’ll walk you through how foreign companies are taxed in India, when foreign tax credit can be claimed, and how to stay compliant with the Income Tax Act.

Who is a Foreign Company Under Indian Tax Law?

A foreign company is any company that is registered or incorporated outside India but operates a business or earns income in India. Even if you’re earning foreign income or interest income, if your operations are linked to India in any way, you're subject to Indian taxation laws. An experienced tax consultant in Gurgaon can guide you in understanding these rules and help you pay the right taxes.

You’ll also be considered taxable in India if you have a place of business, employees, digital presence, or assets in India.

What Income Is Taxable in India?

If you're a foreign company doing business in India, only the income that arises in India is taxed. That includes:

• Profits from selling products or offering services in India
• Payments received from Indian clients
• Fees for technical services or royalties paid by Indian businesses

Income earned outside India is not taxed here — unless it’s connected to your Indian operations.

How Much Tax Do Foreign Companies Pay in India?

Here’s a quick look at the current corporate tax rates for foreign companies:

• 40% base tax rate
• Add surcharge (2% or 5% based on income)
• Add health & education chess at 4%

This means the effective tax rate can go up to around 43.68%

Yes, that’s higher than what Indian companies pay. But with the right planning and advice from a trusted CA firm in Gurgaon, you can legally reduce your tax load and keep more profits in your pocket.

Must Read: Input Tax Credit (ITC) Issues for Exporters with Foreign Expenses

What If You’re Just Entering the Indian Market?

Not every foreign company sets up a full office in India right away. Here are a few common ways foreign businesses operate, and how they're taxed:

1. Liaison Office

You’re just here for communication, networking, or market research — not to earn money.

No taxes, but you must register and file annual returns.

2. Branch Office / Project Office

You’re carrying out actual business in India — maybe a contract or project.
Taxed like a foreign company at 40% on profits earned in India.

3. Indian Subsidiary (Private Limited Company)

This is the most popular route.
It’s treated as an Indian company and taxed at 25% or 22% — much lower!

Recommended: How to Set Up a Liaison Office in India – Step By Step Process

Is Foreign Income Taxable in India?

Yes — if you are a resident in India or your company has a Permanent Establishment (PE) in India, then your global income is taxable in India.

So even if your business earns income earned outside India, like income from a foreign source, it may still be taxable in India.

Here’s a simple way to look at it:

If your foreign income is also taxed in a foreign country, you can claim a foreign tax credit in India.

What is Foreign Tax Credit (FTC)?

India offers foreign tax credit relief to avoid the issue of paying tax on the same income twice — once abroad and again in India. According to Rule 128 of the Income Tax Rules, foreign companies and individuals can claim foreign tax credit in India on taxes paid in a foreign country.

So, if your company has income earned outside India but you’re a tax resident in India, don’t worry — FTC can help lower your tax payable in India.

To claim it, you must:

• Report foreign income in Schedule FSI of the ITR
• Fill Form 67 of the Income Tax Act
• Submit proof of foreign tax paid, such as certificates
• Mention details of foreign income and the source of income (i.e., where it was earned)

Foreign tax credit is available only in the year in which the foreign tax was paid.

Double Tax Avoidance Agreement (DTAA) — How It Helps

India has signed the Double Tax Avoidance Agreement with more than 90 countries. This ensures you don’t pay income tax on foreign income twice.

Under DTAA:

• You may be eligible for lower TDS rates
• You can claim a deduction of foreign tax
• You’ll receive credit for the foreign tax paid outside India

Just make sure you get a Tax Residency Certificate (TRC) from your home country and file it along with your ITR.

Also Read: Foreign Subsidiary Company Compliances in India

What Is TDS – And When Does It Apply?

TDS means Tax Deducted at Source. If an Indian company pays you (a foreign business) for services, interest, or royalties, they’ll deduct tax before sending the money.

Here are some common TDS rates (can be lower with DTAA):

Always clarify TDS in your contracts so there are no surprises!

Do Transfer Pricing Rules Apply to You?

Yes — if you’re dealing with related parties, such as your Indian subsidiary, parent company, or group entities. Under Transfer Pricing, all prices must be set at arm’s length — just like how unrelated businesses would deal.

You’ll also need to:

• Maintain documentation
• File Form 3CEB (certified by a CA)
• Stay ready for audits if needed

Incorrect pricing can attract penalties — so don’t take this lightly.

What is Permanent Establishment (PE)?

This is an important term in international tax.

A Permanent Establishment (PE) means you have a fixed presence in India — like a branch, office, or even employees working for a long period. If you have a PE, you’ll be taxed on your total profits in India.

If you don’t have a PE, you may only pay a small withholding tax — which is a huge plus!

Don’t Forget GST (Goods & Services Tax)

If you're offering goods or services in India, you may be affected by GST:

• Importing services into India? The Indian buyer must pay GST under the Reverse Charge Mechanism (RCM)
• Set up an Indian office or subsidiary? You must register for GST and follow monthly filings

DSRV Tip: Ensure you follow GST rules properly to avoid penalties or delays in operations.

How to File Your ITR with Foreign Income?

If you have foreign assets or income, you need to file your ITR carefully and disclose everything — even income earned by that person in a foreign country that may not be taxed locally.

Steps to follow:

• Include foreign income in Schedule FSI
• Report the foreign tax for which credit is claimed
• File Form 67 before or along with your return of income
• Mention amount of tax deducted or paid abroad
• Clarify whether the income is earned outside India

Not filing these details properly may result in penalties or rejection of your FTC claim.

Even if the income is not taxable in India due to DTAA, it must be reported.

Common Types of Foreign Income That May Be Taxable in India

• Interest income from overseas accounts or loans
• Dividends from foreign companies
• Royalties or licensing fees
• Capital gains from selling shares/assets abroad
• Income from foreign sources, including consultancy or professional services

If any of the above are received by a person or business that is a resident in India, they must pay tax in India — unless covered under DTAA.

Key Tax Compliance Requirements for Foreign Companies

Here’s what your company might need to stay compliant in India:

Important Forms & Schedules You Should Know

What If You Miss Claiming Foreign Tax Credit?

If you forget to file Form 67, or do not report details of your foreign income, you may:

• Lose the chance to claim a refund of foreign tax
• End up paying tax on the same income twice
• Face scrutiny from the Income Tax Department

💡 That’s why it’s best to speak to tax experts who understand both Indian and international tax systems.

DSRV India: Your Tax Experts for Foreign Income and Compliance

At DSRV India, we regularly help clients:

• Handle taxation on foreign income
• Structure foreign business operations in a tax-efficient way
• Claim foreign tax credits without hassle
• File their ITR with foreign source income and foreign assets
• Stay compliant with Rule 128 of the Income Tax Rules and DTAA

Our chartered accountants in Gurgaon are well-versed in the challenges faced by foreign companies and residents with overseas income.

Final Thoughts

India’s tax laws can feel overwhelming, especially when you’re dealing with foreign income, global assets, or foreign tax paid. But with the right planning and guidance, you can reduce your tax payable, stay compliant, and run your business smoothly.

Whether your income is taxable in India or taxed in a foreign country, it’s important to file everything accurately — and on time.