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
A charge to India tax is determined by the expatriate's tax residency position.

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
Where duties are performed in India, any remuneration received in respect of these duties is treated as Indian source income and subject to Indian tax. Relief under the relevant double taxation agreement may apply.

Benefits (in kind)
Certain benefits are taxed in the hands of the employees as perquisites while the employer is required to pay fringe benefit tax (FBT) on other benefits. FBT provisions intend to tax those benefits which are collectively enjoyed by the employees, and which cannot be attributed to a particular employee.

The employer is required to pay FBT @ 33.99% (for domestic companies) and @ 31.67% (for foreign companies) on the value of fringe benefits (other than perquisites). FBT is payable only with respect to certain specified expenses. FBT is in addition to income tax and is not allowed as a business deduction.

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
Where income has been subject to tax twice; in India and a foreign jurisdiction, relief from double taxation may be available where provided for in the relevant double taxation agreement. Relief is also available to expatriates under Indian tax laws provided he or she fulfils the criteria of residency status during the year.

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 are exempt subject to various rules and conditions:

Pension, leave travel concession, gratuity, retrenchment compensation, voluntary retirement compensation, housing rent allowance, leave encashment, medical benefits and certain special allowances.

The following perquisites are taxable in the hands of all employees:

• value of rent free accommodation
• value of concession in rent
  

Prescribed rules are laid down for the valuation of perquisites. As mentioned earlier, certain perquisites are taxable in the hands of specified employees, whereas certain benefits are taxable in the hands of the employer as FBT.

Information about India:

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