Expatriate tax - India

Foreign nationals coming to India are required to obtain relevant visa depending upon the nature of activities they are going to undertake in India. Broadly, there are three types of visa which are generally applied for by a foreigner coming to India for business or employment purposes ie, i) Employment visa, ii) Business visa & iii) Project visa.

Generally, the validity of employment visa is one year. Extension can be obtained from Ministry of Home affairs (MHA) or Foreigners Regional Registration Officer (FRRO) of the relevant State government.

Registration with FRRO: All foreigners visiting India for more than 180 days are required to get themselves registered with the FRRO concerned having jurisdiction over the place where the foreigner intends to stay, within 14 days of arrival and this is applicable for all categories of visa.

However, registration is also required in the case of visa for period less than 180 days if there is a special endorsement on the visa to the effect “FRRO registration required”. No registration is required in respect of children below the age of 12 years.

Any change in information given for obtaining FRRO registration should be informed to FRRO in a timely manner.

e-FRRO services are applicable in 13 States which provides a centralized online platform for foreigners for visa related services. In such States, there is no requirement of taking appointment and in-person visit to an FRRO office unless specifically called upon by the FRRO.

The tax year in India is referred to as the ‘Financial Year’ (FY) and is different from the calendar year. The financial year runs from 1 April to 31 March of the next calendar.

An individual who meets the income threshold or other specified criteria is required to file a tax return in India. Tax returns for individual taxpayers are due by 31 July (30 September / 31 October in certain cases requiring audits) following the end of relevant financial year. Electronic filing of tax returns is mandatory except in few specified cases.

Individuals must pay 100% of the final tax due by the end of financial year, either via withholding at source or by quarterly advance tax payments (with interest payable on underpayments). Employer is responsible to withhold taxes from employment related income paid to its employees.

Further, for payment of taxes in India and filing tax return, an individual should mandatorily have a Permanent Account Number (PAN) in India.

The personal tax rates for the Financial Year 2021-22 are as follows:

Further, a tax rebate of up to INR 12,500 is offered to resident individuals earning an income of up to INR 5,00,000.

The amount of income-tax shall be increased by a surcharge on tax at the following rates:

The amount of income-tax and the applicable surcharge shall be further increased by Education and Secondary Higher Education Cess @ 4%.

With effect from FY 2020-21, an optional tax regime has been introduced for individual taxpayers wherein reduced tax rates may be opted for on forgoing specified deductions /exemptions by the individuals:

The rate of surcharge and cess will remain the same.

An individual is considered tax resident in India if he/she meets one of the following basic rules for stay in India:

• for 182 days or more during a FY; or
• for 60 days or more during a FY and and 365 days or more in the preceding 4 FYs.

However, for an Indian citizen who leaves India for specified purposes, the above criteria of 60 days is replaced by 182 days. Further, for an Indian citizen or person of Indian origin who visits India, such criteria of 60 days will be read as 120 days or as 182 days based on certain criteria.

A resident Individual is further classified as ‘ordinarily resident’ or ‘not ordinarily resident’ depending upon the Indian residential status of such individual in past seven ten financial years. Further an individual who does not fulfil any of the above basic conditions is regarded as Non-Resident in India.

W.e.f. FY 2020-21, the concept of deemed tax residency has been introduced for Indian citizens. Indian citizens not liable to tax in any other country by virtue of residency, domicile or any other similar criteria would be deemed tax residents of India.

An individual who is ‘resident and ordinarily resident’ in India is liable to tax on his /her global income earned, subject to the provisions of relevant tax treaty. A person who is ‘not ordinarily resident’ or ‘non-resident’ is liable to tax on only India source income and on income earned outside India if it is derived from a business or profession controlled or established in India.

In case of a non-resident, income from employment exercised in India is deemed to be India sourced and taxable in India. Relief under applicable tax treaty between India and individual’s country of residence may be applicable in such case.

Income from employment, including most of the employment benefits, is fully taxable in India after considering applicable deductions and exemptions.

Further, for an individual electing the optional tax rate regime (as applicable from FY 2020-21), most of the deductions /exemptions would not be available. Hence, it is required to carefully evaluate both the tax regimes before choosing any tax regime.

Generally, taxability arises in India on rendering of services in India.

An employment contract or a secondment contract issued by any Indian employer and based on valid visa, would be considered as a source of employment in India.

Specified benefits in kind or perquisites are considered as taxable compensation in India subject to limits and conditions.

Remuneration received by a foreign citizen as an employee of a foreign enterprise for services rendered in India may be claimed as exempt if:

• Foreign enterprise is not engaged in any trade /business in India
• The stay of individual in India does not exceed 90 days in aggregate during the FY
• Foreign employer is not eligible for tax deduction for of such remuneration in India.

Indian tax residents (including not-ordinary residents) who are taxable on global income would be eligible for credit against foreign tax paid on foreign-source income. In general terms the Foreign Tax Credit (FTC) provided in India will be limited to the lesser of the foreign tax paid or the Indian tax applicable to the foreign income.

In case of non-resident, benefit of tax treaty would be applicable subject to filing of tax return in India.

Apart from the deductions /exemptions as available against salary income, certain other deductions may also be claimed by an individual against total income earned based on specified payments /investments. For example, contributions to the Provident fund / Pension fund, payment for medical Insurance / life Insurance premium and investment in other eligible savings schemes, donations, etc., subject to the applicable limits.

However, for an individual opting for optional tax rate regime, most of the deductions /exemptions would not be available.

Employees working in India are subject to tax withholding on the employment income. The employer withholds tax from salary and wages and remits this to the Indian tax authorities as per prescribed timelines.

Expatriates working for an Indian employer would be required to file a tax return to report the employment income.

Every person whose estimated tax liability (after credit for taxes withheld by the employer or other payer) for the year is INR 10,000 or more, shall pay his tax in in the form of ‘advance tax’. However, a resident senior citizen (ie, an individual of the age of 60 years or above during the relevant financial year) not having any income from business or profession is not liable to pay advance tax.

Advance tax is payable during the year in four instalments:

Capital gain tax arises on transfer of any eligible capital assets. The tax treatment depends upon whether the gains are long term or short term in nature. Gains are long term if the capital asset is held for more than three years (one year in the case of listed shares and specified securities, and two years in the case of unlisted shares and immovable property ie, land, buildings, or both).

Long-term gains on listed shares and specified securities in excess of INR 100,000 is chargeable to tax at the rate of 10% (plus applicable surcharge and cess).

The applicable tax rate on long-term capital gains derived by a non-resident from the sale of unlisted securities is 10% (without the benefit of foreign currency conversion or an inflation adjustment). Capital gains on other long-term assets are taxed at 20%, with the benefit of an inflation adjustment.

Short-term capital gains on listed shares and specified securities that are subject to Securities and Transaction tax (STT) are taxed at 15%. Other short-term capital gains are taxed at the normal tax rates as applicable to any individual. This is further increased by surcharge and cess as applicable.

Long term capital gain may be claimed as tax exempt on investing the sales consideration /capital gain in other eligible assets or securities within specified period. This is subject to various further conditions.

In India, ESOP granted to employees are taxable at 2 stages i.e. first at the time of exercise of options and second at the time of sale of shares.

At the time of exercise of options, the Fair Market Value (FMV) of the shares as on the date of exercise as reduced by the exercise price paid by the employees is taxable in the hands of employees as ‘salary’ income on which the employer withholds taxes. Tax withholding in case of ESOP for employees of eligible ‘start-ups’ in India may be deferred for 5 years based on specified conditions.

Capital gains at the time of sale of shares shall be taxable in the year of sale of shares.

For expatriates, there is a need to carefully analyse and compute the ESOP taxes due in India as the same depends upon the residential status of the individual, vesting period related to employment exercised in India, date of exercise, etc.

Certain States levy monthly professional tax, the amount of which varies from state to state and also depends on the monthly gross salary.

Investment income arising on sale of investments is generally taxed as capital gains in India.

Further, w.e.f. FY 2020-21, it has been any dividend income earned by a shareholder from an Indian Company would be taxed in individual’s hands as per applicable slab rates.

Municipalities levy property taxes (based on assessed value) and states levy land-revenue taxes.

The inbound expats to India can obtain a Certificate of Coverage in case India has a Social Security Agreement with their home country in place and such expats shall not be required to contribute to Indian social security.

The employee and employer generally contribute 12% of eligible wages per month to the Employee Provident Fund (EPF) account as social security contribution. Contribution to the EPF is mandatory in case of employees whose monthly salary is less than INR 15,000.

As per social security law, there is no wage ceiling on PF contribution for International Workers (ie individual with foreign passport). Employer contribution to EPF in excess of INR 750,000 per annum would be considered a taxable perquisite in the hands of employee. Also, interest earned on employee contribution in excess of INR 250,000 in a financial year would also be taxable. Hence, it is important to carefully evaluate the compensation structure of expat employees so that it is tax and PF efficient /compliant.

There is no wealth tax in India.