Foreign Income Earned by Indian Entities: Income Tax and GST Impact (2026 Guide)
When an Indian company or firm earns money from abroad — whether from foreign clients, a foreign branch, dividends from an overseas subsidiary, or interest and royalties — two separate tax systems come into play: income tax and GST. They work on completely different logic, and confusing them is where most businesses go wrong.
This guide explains, in plain language, how foreign income earned by Indian entities is taxed in 2026 — what income tax applies, how to avoid being taxed twice, and how GST treats money coming in from outside India.
Quick Summary
- An Indian entity is a tax resident and is taxed on its worldwide income — foreign income is fully taxable in India.
- To avoid paying tax twice, India allows a Foreign Tax Credit for tax already paid abroad (claimed using Form 67).
- The new Income-tax Act, 2025 is in force from 1 April 2026 — it simplifies the language but keeps the core “global income” rule.
- On the GST side, most foreign income comes from export of services, which is zero-rated — meaning no GST on the invoice, and input credit is refundable.
- A major 2026 change turned intermediary services into zero-rated exports too.
What Counts as “Foreign Income” for an Indian Entity
Foreign income is simply income that arises or is received from outside India. For a typical Indian business, it shows up as:
| Type of Foreign Income | Common Examples |
|---|---|
| Export of services | IT, software, BPO, consulting, design work billed to overseas clients |
| Export of goods | Products shipped and sold abroad |
| Foreign dividends | Profit share received from an overseas subsidiary or shareholding |
| Interest | Interest on loans or deposits held abroad |
| Royalties / licence fees | Payment for use of IP, software, or brand outside India |
| Foreign branch income | Profit earned by the entity’s own branch located abroad |
| Capital gains | Gains on sale of foreign assets or shares |
Income Tax on Foreign Income: The Core Rule
India taxes based on residence. An Indian entity is a resident, and a resident is taxed on its global income — income earned anywhere in the world, not just in India.
A company is treated as an Indian tax resident if either:
- it is incorporated in India, or
- its Place of Effective Management (POEM) — where the key business decisions are actually made — is in India.
Because Indian companies are almost always resident, their foreign income is added to their total income and taxed at the applicable corporate tax rate, just like their Indian income. Foreign dividends, which once enjoyed a concessional rate, are now taxed at normal applicable rates.
The practical takeaway: earning money abroad does not keep it outside the Indian tax net. It must be reported and taxed in India.
Avoiding Double Tax: DTAA and Foreign Tax Credit
The obvious problem: if foreign income is taxed abroad and again in India, the entity pays twice. India solves this in two ways.
1. Double Taxation Avoidance Agreements (DTAAs). India has treaties with most countries that decide which country gets to tax what, and cap the tax rate on things like interest, royalties, and fees for technical services.
2. Foreign Tax Credit (FTC). Where income is taxed in both countries, India gives credit for the tax already paid abroad. The credit is the lower of the tax payable in India on that income and the tax actually paid abroad.
To claim FTC, the entity must:
- file Form 67 before filing its income tax return, and
- report the foreign income and the foreign tax paid, converted into rupees.
Miss the Form 67 step and the credit can be denied — a common and avoidable mistake.
What the New Income-tax Act, 2025 Changed
India replaced the six-decade-old Income-tax Act, 1961 with the Income-tax Act, 2025, in force from 1 April 2026. What entities should know:
- It is a simplification, not a new tax — the core rules on residence, global income, and foreign tax credit continue.
- The old “previous year” and “assessment year” are replaced by a single, simpler concept: the “tax year.”
- Disclosure of foreign assets, bank accounts, and shareholdings remains mandatory, and non-disclosure attracts heavy penalties.
In short: cleaner language, same principle — foreign income of an Indian entity stays taxable in India.
GST Impact on Foreign Income
Here’s the key shift in thinking: GST is not a tax on income — it is a tax on supply. So GST doesn’t care that money came from abroad; it cares whether the entity supplied a good or service and where that supply legally took place.
For most Indian businesses, foreign income comes from exporting services, and this is where GST is actually favourable.
Export of Services Is Zero-Rated
An export of services is a zero-rated supply — GST is charged at 0%, but the entity can still claim and recover input tax credit. To qualify as an export of services, all five conditions must be met:
| # | Condition |
|---|---|
| 1 | The supplier is located in India |
| 2 | The recipient is located outside India |
| 3 | The place of supply is outside India |
| 4 | Payment is received in convertible foreign exchange (or INR where RBI permits) |
| 5 | The supplier and recipient are not merely branches of the same entity |
Once it qualifies, the entity has two options:
| Option | How It Works | Effect |
|---|---|---|
| LUT (Letter of Undertaking) | File an LUT before the financial year and export without charging GST | No GST on invoice; input credit refundable |
| Pay and refund | Charge IGST, pay it, then claim a full refund | GST paid first, then recovered |
Most exporters file an LUT — it avoids blocking cash in a refund cycle. Note that an LUT is valid for one financial year and must be renewed before each new year begins.
The Big 2026 Change: Intermediary Services Now Zero-Rated
Until early 2026, “intermediary” services — where an Indian entity arranges or facilitates a deal between two other parties (common in IT support facilitation, commission agents, marketing support, and logistics) — were treated as supplied in India and taxed at 18% GST, even when the client and the money were foreign.
The Finance Act 2026 removed this rule (the deletion of Section 13(8)(b) of the IGST Act, effective 30 March 2026). Now the place of supply for intermediary services follows the normal rule — the location of the foreign recipient — so these services can qualify as zero-rated exports too, provided the five export conditions are met. This is a significant win for Indian IT, BPO, KPO, consulting, and logistics businesses earning in foreign exchange.
Two cautions remain: the distinction between being a true intermediary versus directly providing the service still matters, and payment must genuinely come in foreign exchange.
The Flip Side: Import of Services and Reverse Charge
Foreign transactions cut both ways. When an Indian entity buys a service from abroad (say, a foreign broker, software, or consultant), GST usually applies under the Reverse Charge Mechanism (RCM) — the Indian recipient must self-assess and pay the GST. This is easy to overlook and a frequent compliance gap.
A Note on Foreign Branches
If an Indian entity earns through its own branch abroad, that income is taxable under income tax as usual. But for GST, services between an Indian head office and its own foreign branch generally do not qualify as exports, because the two are treated as the same person — condition 5 above fails. This is a technical trap worth checking.
Compliance Checklist for Indian Entities Earning Foreign Income
| Area | What to Do |
|---|---|
| Report all foreign income | Include worldwide income in the Indian tax return |
| Claim Foreign Tax Credit | File Form 67 before filing the return |
| Apply the correct DTAA | Use treaty rates for interest, royalties, and technical fees |
| Disclose foreign assets | Report foreign accounts, property, and shareholdings |
| File LUT for exports | Renew the LUT before each financial year |
| Prove foreign exchange receipt | Keep FIRC / bank realisation records for GST refunds |
| Check reverse charge | Pay GST under RCM on services imported from abroad |
| Maintain transfer pricing docs | For transactions with related foreign group companies |
Frequently Asked Questions (FAQ)
Is foreign income taxable for an Indian company? Yes. An Indian company is a tax resident and is taxed on its global income, so foreign income is fully taxable in India along with its domestic income.
How do Indian entities avoid paying tax twice on foreign income? Through Double Taxation Avoidance Agreements (DTAAs) and the Foreign Tax Credit, which gives credit for tax already paid abroad. The credit is claimed by filing Form 67 before the tax return.
Do I have to charge GST on income from foreign clients? Usually no. If your service qualifies as an export of services (recipient abroad, payment in foreign exchange, and the other conditions met), it is zero-rated — 0% GST — and you can recover input credit.
What is an LUT and why do exporters need it? A Letter of Undertaking lets you export services without charging IGST upfront, so your cash isn’t stuck in a refund cycle. It must be filed fresh before each financial year.
Did the rules for intermediary services change in 2026? Yes. From 30 March 2026, intermediary services provided to foreign recipients can qualify as zero-rated exports, ending the earlier position that taxed them at 18% GST despite earning foreign exchange.
Does GST apply when an Indian entity buys services from abroad? Generally yes, under the Reverse Charge Mechanism — the Indian recipient must self-assess and pay the GST on the imported service.
Did the new Income-tax Act, 2025 change how foreign income is taxed? No major change to the principle. Effective 1 April 2026, it simplifies the law and introduces the single “tax year” concept, but residents are still taxed on their worldwide income with foreign tax credit relief.
This guide is for general information and reflects the position as of 2026. Tax law changes frequently and outcomes depend on specific facts — confirm the current rules and treaty position for your situation before acting.
