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Brief on Expatriate Taxation in India: Expat’s Salary and their Taxability

Brief on Expatriate Taxation in India: Expat’s Salary and their Taxability

Expatriates in India exhibit that while we talk about brain drain from our country, many times, a reverse trend happens where foreign nationals arrive in India for employment and work. In such cases, taxation cannot be neglected. Here’s a complete guide to expatriate taxation in India.

Who is an Expat?

An expat or expatriate is an individual who temporarily or permanently resides and/or works in a country other than the country of his residence or citizenship. He may or may not have relinquished the citizenship of his native country.

Expatriate Taxation in India – A Comprehensive Analysis

The taxability of expat’s income in India is governed by the Income Tax Act 1961 and rules made thereunder. Section 6, Section 7, and Section 9 of the Income Tax Act, 1961 are basic provisions of income tax that define the residential status and scope of total income for Expat in order to compute the income tax payable in India. While for ‘Resident Expats’, all their income is taxable in India, for ‘Non-Resident Expats’ or ‘Resident but not Ordinarily Resident Expats’, the following income is taxable:

Section 7: Income deemed to be received in India 

  • The annual accretion in the balance of Recognized Provident Fund of an employee as provided in Rule 6 of Schedule 04 – Part A
  • Transferred Balance in Recognized Provident Fund as provided in Rule 11(4) of Schedule 04 – Part A
  • Contribution to the pension scheme as referred in Section 80CCD by the Central Government or other employer

Section 9: Income deemed to accrue or arise in India

Section 9 comprehensively covers incomes that shall be deemed to accrue or arise in India and therefore, be subject to India Tax Laws. For expats in employment in India, the following points are relevant from Section 9:

  • Income earned from any asset, source or transfer of capital asset situated in India
  • Income under the head ‘Salaries’ earned in India. It includes income for services rendered in India and income during the rest or 
  • leave period before and after rendering of services in India forming part of the employment/service contract.
  • Income under the head ‘Salaries’ paid to Indian citizens by the Government for rendering services outside India.

Both the above sections are equally applicable to Resident Expats.

Some Notable Components of Expat’s Salary and their Taxability Analysis 

Rent Free Accommodation

An expat in India is provided with rent-free accommodation to meet lodging needs as their assignments may include short visits as well as deputation or secondment for longer durations. The rent-free accommodation is considered as a perquisite and therefore taxation of expatriate employees in India benefitting from such accommodations needs to be examined. Following provisions play an important role with regard to various components of a rent-free accommodation: 

House: Following shall be included in the salary income:

  • Unfurnished Accommodation:
% of Salary The Population of the City
15% 25,00,000
10% 10,00,000 – 25,00,000
7.5% Other cases
  • Furnished Accommodation:

In addition to the above, rent charges or 10% of the cost of furniture, equipment, and appliances or hire charges (if applicable) will also form part of salary in case of furnished accommodation.

If accommodation is taken on hire/lease by the employee, then the perquisite value shall be lower than the actual lease rental or 15% of the salary of the employee.

Any amount reimbursed by the employee shall be reduced from the above.

Car and Driver: In some cases, the employer may provide expats with the car as well to commute to the workplace. This again is considered as a prerequisite. In most cases, the car is owned by the employer and is restricted to official purposes only. In such cases, no tax liability arises. However, if the car is used for both official and personal purposes, then it will be added to the salary income as under:

Description Below 1600cc Above 1600cc
Expenditure reimbursed by the employer Rs. 1800 + Rs. 900 (if driver is provided)  Rs. 2400 + Rs. 900 (if driver is provided)
Expenditure met by an employee Rs. 600 + Rs. 900 (if driver is provided)  Rs. 900 + Rs. 900 (if driver is provided) 

Servant: Employers usually tend to provide a servant to assist the employees during their secondment/deputation. In such cases, only the specified employees will be chargeable to tax for such perquisite. Such specified employees include directors of the company, employees holding a substantial interest in the company, and employees with a salary exceeding Rs. 50,000. The value of the perquisite shall be the actual cost borne by the employer.

Some debatable issues in the case of Expat Taxation in India

While Income Tax Act, 1961 lays down explicit provisions for expat taxation in India, certain debatable issues merit consideration as they directly affect the taxation of expatriate employees in India:

Issue-1: Residential Status 

The residential status of the employee plays a major role in determining his taxability in India. If the employee becomes a resident in India, then all his income would become taxable in India irrespective of the source country. Section 6 determines the residential status under the Income Tax Act, 1961. An individual is a resident in India if he is in India for 182 days or more in that year or 365 days or more in 4 preceding years. Therefore, the residential status primarily depends upon the duration of deputation/secondment. This becomes especially important if the employee earns a partial salary outside India.

Issue-2: DTAA 

Whether India has entered into a DTAA agreement with the expat’s country of citizenship also becomes an important point for addressing expatriate taxation in India. The provisions need to be closely examined to provide the appropriate tax relief otherwise, it may lead to double taxation if the employee does not relinquish citizenship or residential status as per tax laws of the home country besides earning salary income in India.

Issue-3: Salary in Home Country

Where expats are deputed to another country, the salary expense is usually borne by the entity registered in the country of deputation instead of the entity in the home country and is, therefore, denominated in the deputed country’s currency.

For instance, an American deputed in India will receive a salary in INR that will form part of the Indian entity’s expense. However, the American expat may be unwilling to receive all his salary in INR, and in such case, only a partial salary is paid in INR by the Indian entity while the rest is paid by the USA entity directly in the expat’s American bank account. As this expense is to be borne by the Indian entity, eventually it reimburses the American counterpart. The conversion rate is decided as per the company’s policies and compliances. However, For the purpose of calculating taxable salary paid in foreign currency, TTBR issued by the State Bank of India on payment date shall be used.

Issue-4: Income Tax Deadlines – A Practical Outlook

Income tax deadlines are extended by the government to provide relief to the taxpayers. However, practically, expats need to intimate their tax compliance to the Foreigners Regional Registration Office (FRRO). This mandates expats to file their tax returns within the original due dates unless FRRO also provides the extension otherwise.

Issue-5: Who will bear the tax compliances?

Does this become an important issue as to who will ensure tax compliances while the employee is on deputation in another country? Employees are generally not expected to be well versed with the laws of their country of deputation and therefore, the compliances generally fall upon the shoulders of the employer organization. Usually, in India, Form No.- 30A is filed by the employer where it undertakes to bear all the tax compliances associated with the expat’s income and be liable for any defaults made therein. This makes it necessary to contact local professionals who are well versed with the laws of the land.

In case of any assistance, feel free to contact ASC Group.

 

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