Expatriate tax ebook - India

Basis of taxation

Charge to tax
Residence
Income from employment
Source of employment
Benefits (in kind)
Expatriate concessions
Relief for foreign taxes
Deductions against income

Charge to tax
Salary due to the expatriate to the extent the services are rendered in India is taxable in India. This is irrespective of the fact as to whether the salary is received in India or outside India.

However, in a scenario, the expatriate becomes a Resident and Ordinarily Resident (‘ROR’) as per his residential status in India, he shall be liable to tax on the income earned worldwide in addition to the income earned in India. In such a scenario, such individual shall be taxed on the income from services rendered outside India also.

Residence
The taxation of individuals is determined by their residence status. Under the income tax act (the Act), an individual can have the status of a 'resident and ordinarily resident' (ROR), a 'non-resident' or a 'resident but not ordinarily resident' (RNOR). While a RNOR is not liable to tax on the income which accrues to him outside India (except income derived from a business controlled in or a profession set up in India), a ROR is liable to tax on his worldwide income. Non-residents are liable in respect of income received in India or which accrues or arises in India. They are not liable in respect of income accruing or arising outside India even if it is remitted to India.

Income from employment
Income under the heading 'salaries' includes remuneration in any form due for personal service under an express or implied contract of employment or service. The contractual relationship should be between the employer and employee. Income from 'salaries' is chargeable to tax on a 'due' or 'receipt' basis, whichever is earlier and includes wages, annuity or pension, gratuity, fees, commission, perquisites or profits in lieu of salary, advance salary, leave encashment etc.

Source of employment
Salary received by the expatriate whether in India and outside India with respect to the services rendered in India shall be taxable in India. The place where the employer is situated or the salary is paid is immaterial for determining the tax liability. Relief under the relevant Double Taxation Avoidance Agreement may apply.

Benefits (in kind)
Certain benefits are taxed in the hands of the employees as perquisite such as the value of rent-free accommodation, reimbursement of fuel and maintenance charges incurred on motor car, , provision of sweeper, watchman, gardener, watchman or personal attendant, supply of gas, electric energy or water for household, free or concessional educational facility for any member of employees household, interest free/concessional loan for housing, free food and non alcoholic beverages, gifts/vouchers or token to employees, membership fees and annual fess, use of movable assets (other than laptop), transfer of movable asset to employee, provision of Employee Stock Options Scheme (‘ESOP’) And other benefits, ameities or services.

Prescribed rules are laid down for the valuation of perquisites. Certain perquisites are taxable in hands of specified employees..

Expatriate concessions
Except for provisions dealing with short stay exemptions, no specific expatriate concessions are available under the Indian tax laws.

Relief for foreign taxes
An expatriate can be a resident of two countries as per their domestic tax laws. In such a scenario, there could be double taxation of the same income. Where income has been subject to tax twice relief from double taxation may be available where provided for in the relevant Double Taxation Avoidance Agreement.  Such relief shall be available in the form of tax credit in the country of which he is a permanent resident. 

Relief from foreign taxes shall also be available if the expatriate is tax equalised. Tax equalisation is an arrangement between the employer and the employee where the employee pays no more and no less tax than what he would have paid in his home country. The additional tax liability (if any) is borne by the employer.

Deductions against income
Tax on employment (Profession Tax) is allowed as a deduction from salary income. In addition, the following are treated as allowances and exemptions are available from such allowances subject to the statutory conditions prescribed in this regard:

• pension,
• leave travel concession,
• gratuity,
• retrenchment compensation,
• voluntary retirement compensation,
• house rent allowance,
• leave encashment,
• medical benefits and certain special allowances.

There are some other significant deductions available against the total income chargeable to tax which include but are not limited to life insurance premiums, contributions to provident funds, certain payments for annuity or pensions, interest on higher education loan, medical expenses, donations to specified institutions etc.

Information about India:

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities