Income Tax regulations for foreign nationals/expatriates working in India

Income Tax regulations for foreign nationals /
expatriates working in India

India is an attractive destination for foreign nationals intending to work in the country, so knowing about Income Tax Regulations for Foreign Nationals is a must. The main attractions include the diversity in people, languages, culture, food, and the vibrancy of the country. The lower living costs and the incentives available to families are the key factors that contribute to a good quality of life, and hence, expatriates like to work in India. Another great benefit of working in India is that since English is one of the official languages, it is easier to live in the country for foreigners who know English.

However, there are few cons of living in India because it is a lot different from any western country and hence far off from the expectations of an expat. One of the disadvantages is the long working hours in India as compared to the global average. The InterNations’ Expat Insider 2018 survey reported a global average weekly working hour of 44.0 hours, while in India, it was recorded as 48.2 hours. Some of the other drawbacks include poor education options, lesser options for leisure, and restricted accessibility of digital life.

Nonetheless, the most critical areas, which expatriates need to understand, are the taxation rules and related regulatory provisions. It is better for expatriates to hire professional advice and guidance for understanding the tax compliances, consequences, and other related procedures and obligations. However, below is an overview of the basic concepts and regulations that exist for expatriates or foreign nationals seeking to work in India.

Defining tax resident

The income tax amount that an expatriate is liable to pay is dependent on his/her residential status in a fiscal year. The fiscal year in India runs from April 1 to March 31 of any year. An individual is considered to be a tax-resident in India in a fiscal year if he/she is in India for 182 days or more in the tax year or 60 days or more in a tax year and 365 days or more in the preceding four years. If both of these conditions are not satisfied, then the individual is called a non-resident. A non-resident is taxed only for the income sourced in India or received in India. Other than the basic conditions, there are advanced conditions to classify the residents as ROR (Resident and ordinarily resident) and RNOR (Resident and not ordinarily resident). If the individual has been a non-resident in nine out of the 10 preceding tax years or has been in India for 729 days or less during the preceding seven tax years, then he/she is considered to be an RNOR. If none of these conditions are satisfied, then the individual is a ROR. While the ROR is taxed on worldwide income, the RNOR is taxed on the income received or sourced in India. An expatriate arriving in India for the first time remains a non-resident or RNOR for the first two fiscal years. However, if there exists a DTAA (Double Tax Avoidance Agreement) between India and the home country of the expatriate, the DTAA provisions will be applicable and not the Indian tax laws. Some rules may lead to an expatriate considered a resident of both the home country and deported country, thereby leading to the ‘Rule of Tie-Breaker,’ under which different factors are considered for defining the tax residence in the following order:

Permanent home:
The country in which the expatriate has a permanent home

Centre of vital interest
The country with which the expatriate has closer social and economic ties

Longer duration of residence
The country where the expatriate has a longer duration of residence

Nationality
The country whose nationality he/she holds

Competent authorities
The country decided by the mutual agreement between the competent authorities of both the countries

Tax registration number

On arriving in India, an expatriate must immediately apply for PAN (Permanent Account Number) if he/she is liable to pay taxes in India. The details are filled in Form 49AA or Form 49A, whatever is applicable, and submitted to the Indian Income Tax authorities along with the required documents. It is also required for the registration of foreign workers with the Foreigners’ Regional Registration Office (FRRO). The registration with FRRO is mandatory to be obtained within 14 days of the individual’s arrival in India and must be renewed periodically during the working duration in the country.

Tax rates

The income tax rates that apply to expatriates for a specific range of taxable income are as follows:
  • With the taxable income of less than INR2,50,000.0 – There is no tax
  • Taxable income ranging from INR2,50,000.0 to INR5,00,000.0 – The tax rate is 5%
  • Taxable income ranging from INR5,00,000.0 to INR10,00,000.0 – The tax rate is 20%
  • Taxable income higher than INR10,00,000.0 – The tax rate is 30%
In addition to salary, employees receive benefits called perquisites, due to which the taxable income increases. There are rules for each of the perquisites provided by the employer including motorcar, free or concessional educational facilities, meals, club memberships, residential accommodations, utilities, free or concessional travel, gifts, vouchers, tokens, ad help of sweeper, gardener, security or domestic work, and interest-free loans. Medical facilities and mobile phone usage for business purposes are exempt from tax. The non-employment income is taxed at different rates depending on the type of income. The non-employment income includes interest earned, royalties payable, and long-term and short-term capital gains earned on the disposal of capital assets located in India.

Tax implication of various components of compensation of employees

An individual’s employment with an employer leads to income, which includes all types of amounts received in cash or kind. These include wage, bonus, profits in lieu of salary, pensions, commissions, contribution to superannuation funds, and reimbursement for personal expenses, securities, or any other. The following components of the salary are taxable on the full amount:
  • Base salary
  • Bonus or commission
  • Utilities (electricity, water, servants)
  • Children’s education
  • Tax borne by the employer
  • Allowances such as living allowance, hardship allowance

There are some components as follows, which are taxed on a concessional value:

  • Housing allowance
  • Rent-free accommodation
  • Furniture provided by the employer
  • Temporary accommodation on transfer
Home leave travel, reimbursement of specified relocation expenses, an employer-provided car with a driver are some of the fringe benefits provided by the employer to employees. The taxes on these are imposed on the employer and not on employees. Foreign companies having employees in India are required to pay the same taxes for these fringe benefits.

Social security benefits

If India has signed an SSA (Social Security Agreement) with the country of residence of the expatriate and if the expatriate has a COC (Certificate of Coverage) from the home country, then he/she is not required to make social security contributions in India. However, he/she must get that certified from the PF (Pension Fund) authorities of India after showing them the COC.

If no such SSA exists, then the expatriate is required to make the required contributions, and the employer company must contribute its part of the amount. Under the provisions of the PF scheme, both the employee and the employer contribute 12% of the monthly pay; this monthly pay is the total salary whether received in India or abroad. Of the 12% contributed by the employer, 8.33% is towards the Pension Fund while the balance 3.67% is towards the Provident Fund.

The expatriate can withdraw the pension after attaining the age of 58 years, provided the necessary conditions are satisfied. In the case of PF, the expatriate can withdraw the amount after attaining the age of 58 years or if the individual is retiring because of permanent incapacitation, as verified by a medical practitioner.

Daily allowances

When expatriates move to another country for a working assignment, they face a change in the living conditions and standards. Employers compensate their expatriate employees for these living changes through a daily allowance, which is an amount in addition to the salary paid to them. The daily allowance generally includes the expenses for local conveyance, lodging, and boarding that are incurred in India. If such a daily allowance provided to the expatriates for daily living expenditure is used for the said purpose, then it is exempt from income tax. If it is not used for those purposes but for some other reasons, then it becomes taxable. These allowances must be reasonable in comparison to the salary and the duties and responsibilities of the employee and must be used for the specified purposes while on deputation for the mentioned duties. However, it is mandatory for employees to:
  • Prepare and submit a statement of daily expenses incurred for the entire duration of stay in India
  • Submit the proofs of such expenses with the bills, receipts, invoices, etc

Employees Stock Option Plans (ESOPs)

ESOP is a type of employee benefit plan, which encourages employees to acquire ownership or stocks in the company. Employers provide ESOPs to retain the employees in the entity. At the time at which ESOPs are exercised, they are taxable in the hands of the employee.

Professional tax

There is a professional tax imposed on employees in certain states in the country. The employer withholds this tax amount from the salary, and it is also a deduction when calculating the employee’s taxable income.

Tax return filing

An expatriate who qualifies as a ROR in a fiscal year is required to file tax returns in India by July 31, following the end of every fiscal year. Whether the expatriate has taxable income or not for that fiscal year, the following components are required to be reported in the tax returns:
  • Movable and immovable assets held overseas
  • Financial interest or signing authority in any other country
  • Trusteeship in offshore trusts

Regulations for foreign exchange and remittance of funds

Most of the regulations related to foreign exchange and remittance of funds are liberal in India. However, in the case of specific remittances, exchange control authorities’ approval before the remittance is essential. Expatriates can open bank accounts with banks in India to credit their India-earned income.

Income Tax Clearance Certificate (ITCC)

At the time of departing India for the last time as an expatriate, individuals are mandated to submit the ITCC (Income Tax Clearance Certificate) to the immigration officials. The Income Tax authorities provide this certificate to the expatriate, thereby certifying that the individual has no pending tax dues or tax liabilities in India.

The expatriates coming to India must be careful of these regulations and rules, and the employers must provide the required guidance and support prior to expatriates’ deportation to the country.