How freelancers in India are taxed on foreign payments

Being a freelancer means you have a reasonable degree of freedom and flexibility in making your work life. However, unlike traditional workers who receive structured tax deductions from their income, freelancers usually have to file their own taxes. This can be a challenge for many Indian freelancers and digital nomads who might be unaware of the country's taxation laws and processes.

Indian freelancers receiving foreign payments must navigate specific income tax and Goods and Services Tax (GST) regulations to ensure compliance. A tax-resident freelancer in India is liable to pay tax on their income, including earnings from foreign clients.

This article explains how freelancers in India are taxed on foreign income, the deductions they can claim, and how to remain compliant with Indian tax laws.

Also read: Safe ways to receive international payments in India

Understanding tax residency in India

Before we go ahead, you need to understand what it means to be a tax-resident freelancer in India to ensure these taxation laws and processes really apply to you. Tax residency status under the Income Tax Act 1061 stipulates that an individual is considered a resident in India if they:

• Spend 182 days or more in the country during the financial year, or
• 60 days in the year plus 365 days over the preceding four years.

If you reside in India, you are classified as:

• Resident and Ordinarily Resident (ROR): ROR individuals are taxed on global income, including foreign freelance earnings
• Resident but not ordinary Resident (RNOR): These residents are taxed only on income earned or received in India and from businesses controlled in India. If you have recently returned from abroad or spend significant time outside India, you may be considered RNOR for up to 2 years. This would exempt you from pure foreign income tax.

As a freelancer in India, you’re more likely to fall under the ROR category. This means that all your foreign payments are subject to taxation.

How foreign payments are taxed in India

In India, foreign payments from clients are considered income from a profession or business, rather than a regular salary. These are the taxation rules that apply:

• Tax rate: Freelance income is taxed according to the individual income tax slabs. The rates depend on your total annual income and whether you choose the old or new tax regime.
• Foreign currency payments: The amount you receive in USD, GBP, or any other foreign currency is converted into INR. This often applies when the transaction is processed through the State Bank of India (SBI). The telegraphic transfer buying rate (SBI TT rates) on the date you receive the payment will determine the amount.
• Double taxation relief: If tax is deducted in the client’s country, you can claim a credit under the Double Taxation Avoidance Agreement (DTAA) between India and that country. This ensures you are not paying taxes twice on the same payment. India has this arrangement with over 85 countries. Once you have a Tax Residency Certificate and submit the self-declaration Form 10fF, you can access DTAA benefits.
• Tax deducted at source (TDS): If your foreign client has a presence in India and the payment is subject to tax by the Indian government, it can be deducted at source under Section 195 as a form of withholding tax. Withholding tax on foreign payments also depends on the nature of the payment and whether a Double Taxation Avoidance Agreement (DTAA) exists with the recipient’s country. While it is uncommon for freelance services to pay withholding taxes, it is possible in principle.
• Good services tax: GST applies to freelancers if their annual earning exceeds ₹20 lakh (or ₹10 lakh in special category states). India considers services offered to foreign clients as 'export of services' under. This means they are zero-rated (0% GST) under certain conditions.

Also read: How to plan your taxes across multiple income sources

Managing deductions and expenses as a freelancer in India

Freelancers can reduce their taxable income by stating their business expenses. Subtract the total cost of these expenses from your foreign payments to get your taxable income. These expenses include office rent, utilities, software and subscription fees, travel, network provider charges, and other costs relevant to your operation. Different sections of the tax laws further allow deductions of up to ₹1.5 lakh for certain investments (Section 80C), health insurance (Section 80D), and voluntary donations (Section 80G).

Keep records of these deductible expenses, as you might need to provide proof when filing your taxes.

How to calculate your foreign income tax

So, how much tax are you required to pay on your foreign earnings?  Freelancers can choose between two methods to calculate their taxable income:

1. Presumptive taxation scheme (Section 44ADA)

This is a simplified scheme for freelancers who receive up to ₹75 lakh in a financial year, and their cash receipts don’t exceed 5% of their total receipts. With this scheme, you can declare 50% of your total gross receipts as your taxable profit. You are not required to maintain detailed books of accounts for this income. This can be a significant benefit if your actual expenses are less than 50% of your gross receipts.

2. Regular taxation scheme

Here, you must maintain proper books of accounts detailing your income and expenses. Your taxable income is calculated by subtracting all allowable business expenses from your gross receipts. This is a better option if your actual expenses exceed 50% of your earnings.

Reporting and filing your foreign income taxes

Schedule FA is the “Foreign Assets” schedule in Indian income tax, used to declare any foreign assets or foreign income. All foreign income must be reported in the Income Tax Return (ITR). Use ITR-3 for regular taxation, or ITR-4 for the presumptive taxation scheme. Schedule FA requires you to disclose foreign assets if you are a resident, including bank accounts used for foreign payments.

You should convert your earnings to INR using SBI TT rates and report under "profits and gains from business or profession". Don’t forget to claim deductions or FTC. File your taxes by 31 July using the e-filing portal. You have to complete your verification with Aadhaar OTP or net banking. Keep records such as invoices, receipts, bank statements, FIRCs, and exchange proofs for at least 7 years for auditing purposes.

Tips for staying tax compliant

As always, we have some secrets to help you manage your taxes better

• Maintain a dedicated business bank account (separate from your personal finances) to track freelance income.
• Use bookkeeping software or digital payment platforms that record each transaction.
• Consult a Chartered Accountant (CA) familiar with cross-border freelance income.
• File your income tax returns on time (by 31 July each year, unless extended).

Managing your taxes better with Grey

Receiving international payments as a freelancer is an incredible opportunity, but handling your taxes smartly ensures it remains sustainable. Taxation isn’t optional. Staying informed about tax laws, claiming eligible deductions, and using compliant payment methods will help you avoid penalties and retain more of your hard-earned money.

Relying on secure, transparent payment platforms can help you better manage international income. Grey makes it easier to receive funds in foreign currencies and transfer funds to your Indian account efficiently at fair exchange rates. Accepting payments in USD, GBP, and EUR on a single platform lets you separate your work and personal finances while managing multiple currencies in one place. This way, bookkeeping is easier and filing taxes is more convenient.

Get started with Grey today to streamline your finances.

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