Merchant Navy officer Salary

Source: Supreme Court 

Why in News?  

Recently, the bench of Justices Pankaj Mithal and Prasanna B. Varale has held that the Court will examine whether Merchant Navy officers' foreign-earned income credited to Indian bank accounts is exempt from income tax under the Income Tax Act, 1961. 

• The Supreme Court held this in the matter of Vandana & Ors. v. Keshav & Ors. (2025). 

What was the Background of the Vandana & Ors. v. Keshav & Ors. (2025) Case? 

• The case arose from a motor accident compensation claim where the deceased was employed as a Merchant Navy Officer with British Marine PLC, London, earning USD 3,200 monthly.  
• The Motor Accident Claims Tribunal (MACT) initially awarded Rs. 36,04,000 as final compensation to the appellant, who was the wife of the deceased. However, the tribunal made a 30% deduction from the compensation amount, treating it as tax liability on the income earned by the deceased. 
• The appellant challenged this deduction, arguing that the income earned by her husband while working with a foreign entity should be exempt from Indian income tax. 
• The Punjab & Haryana High Court upheld the MACT's decision regarding the tax deduction but enhanced the overall compensation to Rs. 1.01 crores by adding 40% prospects. 
• The fundamental issue centred around whether a person employed in the merchant navy as an officer, whose salary is credited to accounts maintained in India, should be exempt from payment of income tax under Indian law.  
• The appellant contended that if such income is exempt from tax, then no deduction should have been applied while calculating the compensation amount. 

What were the Court's Observations? 

• The Supreme Court observed that this case presents a significant legal question regarding the taxation of foreign-earned income by Indian residents employed in merchant navy services.  
• The Court noted that one of the primary legal issues is whether a person employed in merchant navy as an officer and drawing salary in accounts maintained in India is exempt from payment of income tax under the Income Tax Act, 1961. 
• The Court observed that if such persons are indeed exempted from payment of tax, then the Tribunal ought not to have applied any deduction on account of income tax while computing the compensation.  
• The bench recognized that this issue has broader implications for similarly situated individuals and therefore expedited the hearing of the matter. 
• The Supreme Court granted leave in both the main petition and cross petition, deciding to take them up together for comprehensive adjudication.  
• The Court framed the central question as whether Merchant Navy officers' foreign-earned income is taxable in India, and if not, whether the Tribunal and High Court committed an error in deducting 30% income tax while calculating the motor accident compensation. 
• The Court's decision to expedite the hearing indicates the importance and urgency of resolving this taxation issue, which affects not only the present case, but potentially numerous other individuals employed in merchant navy services with foreign entities. 

How Foreign-Earned Income Tax Exempted? 

• India follows the residence rule under the Income Tax Act, 1961, which means Indian residents must pay tax on their global income regardless of where they earn it. Foreign source income is defined as income earned from sources outside India, provided the ultimate beneficiary conducts the activity outside India. 
• The location where income is first received is crucial, as income must be initially received outside India to potentially qualify for exemption. If foreign-earned income is received directly in India, it becomes taxable under domestic tax laws regardless of where it was originally earned.  
• The taxability of foreign income primarily depends on an individual's residential status under Section 6 of the Income Tax Act, 1961, which categorizes people as Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR).  
• Ordinary residents in India must pay tax on their global income, meaning all income is taxable in India even if it has already been taxed in the foreign country where it was earned.  
• For non-ordinary residents and non-residents, income becomes taxable in India only if it is accrued, arisen, or received in India. However, relief from double taxation is available through Foreign Tax Credit provisions under Sections 90 and 91 of the Act, and Double Tax Avoidance Agreements (DTAA) exist to prevent taxpayers from paying tax on the same income in multiple countries. 
• The mere fact that foreign-earned income is credited to an Indian bank account does not automatically exempt it from Indian income tax liability 
• Foreign-earned income credited to Indian bank accounts is generally not exempt from income tax under the Income Tax Act, 1961, particularly for Indian residents, as exemption depends primarily on residential status and the initial point of receipt rather than the banking location.