In India, an individual’s income is taxed at graduated rates, depending on his/her residential status in India and income level. Non-employment income is taxed at a variable rate according to income type.
In this article, we outline the rates and calculation methods for both income sources, and summarize common tax deductions and inclusions in income for foreign nationals working in India.
Who is foreign national in India?
Any individual who is not a citizen of India is considered a foreign national.
However, whether a foreign national is liable to pay Indian income tax is dependent on the individuals’s physical presence in India, regardless of their citizenship or the purpose of the stay.
According to India’s Income Tax Act (ITA), there are three levels of residency for tax purposes:
- Non-resident – these individuals are not liable to income tax;
- Resident but not ordinarily resident (RNOR) – these individuals are taxed on their worldwide income ; and
- Resident and ordinary resident (ROR)- these individuals are tax only on their Indian sourced income.
To qualify as a non-resident, an individual must not stay in India for more than 182 days during a fiscal year (FY) year, or more than 365 days in four consecutive FYs preceding the relevant FY. Any individual not meeting these conditions, becomes a resident for tax purposes either as a ROR or RNOR.
The Indian tax year runs from April 1 to March 31. Total income tax is calculated in accordance with the tax rates and rules that stand on the first day of April of the assessment year.
Income earned in a year is taxable in the next year. The year in which income is earned is known as the financial year, while the next year in which income is taxable is known as the assessment year (for more information, please see our earlier article on tax deadlines).
Employment income includes all amounts, either in cash or in kind, that arise from an individual’s employment. Wages, pensions, bonuses, commissions, perquisites in lieu of salary, reimbursement for personal expenses, securities or sweat equity shares, contributions to superannuation funds, etc. are all included in employment income.
India provides that certain perquisites and allowances must also be included in employment income. Perquisites and allowances are taxed differently under Indian law. Limited deductions from income also exist.
A perquisite is any benefit received by the employee that is in addition to salary. Perquisites increase taxable income. In general, the taxable value of the perquisites to the employee is their cost to the employer. However, India has given specific rules for the valuation of the following perquisites provided by the employer:
- Residential accommodations;
- Motor car;
- Free or concessional educational facilities;
- Free or concessional travel;
- Sweeper, gardener, security, or domestic help;
- Interest free loans;
- Gifts, vouchers, tokens; and
- Club memberships.
Perquisites exempt from tax are provision of medical facilities and provision of mobile phones used by the employee for business purposes.
An allowance is defined as a fixed quantity of money given regularly in addition to salary for employees to meet specific requirements. Allowances increase taxable income. Examples of common allowances for expatriates include:
- House rent allowance;
- Travel allowance; and
- Children’s education allowance.
Many allowances have a small exemption amount. For example, the children’s education allowance has an exemption for up to Rs 100 (US$1.55) per month for up to two children.
Other allowances are fully exempt as long as actual expenses are incurred by the employee. For example, reimbursement of expenses actually incurred in the performance of an individual’s employment is exempt.
Many other exemptions exist for allowances, and taxpayers should consult with a chartered accountant in order to take full advantage of such exemptions.
A deduction from income is available up to Rs 150,000 (US$2,330.10) for investments in life insurance, contributions to social security funds, and tuition and fees for the purpose of full-time education at a university, college or other educational institution.
There are special tax rates for expatriates on income arising from non-employment sources that includes long and short-term capital gains earned on the disposal of capital assets situated in India, interests earned and royalties payable by an Indian concern.
It should be noted that investments in shares by non-resident foreign nationals are governed by the Indian foreign direct investment policy.
India assesses a surcharge of 10 percent of the tax on taxpayers with income between Rs 50 lakh (US$77,000) to Rs 1 crore (US$154,000) and 15 percent for taxable income more than Rs 1 crore (US$154,000).
There is also an education cess assessed at 2 percent of the tax, and secondary and higher education cess assessed at 1 percent of the tax.
Double Taxation Avoidance Agreements
Most expatriates worry about “double taxation” – paying taxes to two different countries on the same income. A foreign taxpayer working in India may be able to reduce taxable income in their country of primary residence (and double taxation) under a double taxation avoidance agreement.
For U.S. citizens this is done using Form 1116, Foreign Tax Credit.
Opportunities for tax planning exist in how employers structure wages, perquisites, and allowances. In general, it is tax favorable to have expenses reimbursed rather than given as perquisites or included in wages. However, every situation is different, and foreign nationals should consult a chartered accountant to determine the best structuring of wages and benefits for their situation.