Income Tax Guide for Expats
There is no separate tax structure for expatriates in India, and expatriates who qualify as residents will have to pay income tax at the same rate as Indians. The tax liability of an expat depends on the individual’s residential status. If you are a full-time resident of India, you will have to pay your worldwide income tax in India. If you are resident in India, but not an ordinary resident, you will still need to pay tax on all income in India. However if your home country happens to be one with which India has entered into a Double Taxation Avoidance Agreement (DTAA), the residency aspect may be resolved under the tie-breaker clauses of the relevant DTAA.
The Indian tax year starts on 1st April and ends on 31st March of the succeeding year. Individuals are taxed on a graduated scale after certain deductions and allowances:
- Up to Rs 200,000 – NIL
- Rs 200,001 to Rs 500,000 – tax rate: 10%
- Rs 500,001 to Rs 1,000,000 – tax rate: 20%
- Above Rs 1,000,000 – tax rate: 30%
A foreign national having income other than salary income taxable in India, is required to pay advance tax in three installments – on or before September 15, on or before December 15, and on or before March 15.
Typically, your employer should, by law, deduct the tax payable on your monthly salary check and deposit the tax amount with the government every month. This is referred to as Tax Deducted at Source (TDS). Your monthly salary slips, or any payments made to by the company will indicate the amount of TDS deducted. Provided you have no other sources of income, your company would have already paid your entire tax liability (allowing for deductions) to the government. You will still have to file a tax return with the Indian Tax Authorities on or before 31st July of each tax year even if all the taxes have been deducted at source. Your company’s accounts department will issue you a Form 16 (Statement of Salary and details of TDS paid to the government), usually in early June. Once you have this, you should appoint a Chartered Accountant (who will usually be recommended by the company) who will obtain and help you fill out a tax form, detailing your income and all deductions, and compute your final tax liability. You will need to provide details of any other income you might have received in India outside of your employment. The CA will then file your tax return with the Income Tax office and give you a stamped copy, along with your Form 16 and the CA’s certification. This is your proof of having filed your returns. CA’s charge a nominal fee for this service, usually not more than Rs. 2,000.
Bear in mind that you are required to get a Permanent Account Number (PAN) with the Indian Income Tax Authorities upon arrival in India. This is a one-time registration and will be quoted in all your correspondences with the tax authorities and is necessary in order for you to receive salary payments.
Getting a PAN Card
The Permanent Account Number (PAN) is a ten-digit alphanumeric identifier, issued by the Income Tax Department of India. Each entity – individual, firm, company – is issued a unique PAN. All existing taxpayers or persons who are required to file a return of income in India must possess a PAN.
As an expat, when you move to India, either your employer will pay taxes for you or you will pay your own taxes. In any case you will have to get a PAN card that shows that you are paying your taxes in India. This card is very important and can also function as your residency permit and is accepted by most people and institutions as a means of identification.
In the last few years, government has made it mandatory to list your PAN if you want to enter into any economic or financial transactions while in India. This has been done to prevent corruption and lessen the instance of people not paying tax.
Documents required for getting a PAN card:
- Copy of the passport as Identity proof.
- Copy of address proof: utility bill, driving license, bank statements, etc.
Expats will also need these documents to be attested by the Indian embassy in their country. Perhaps a tax advisor will be able to arrange all these details for you.
Preparing Yourself for the Indian Tax System
Professional advice may help to optimise your India tax burden. It is therefore important that before coming to India you seek professional advice on the preparation of your employment contract and also the date and time of arrival.
Some multinationals that hire expatriates to work in India pay two kinds of salaries to them – one paid in India and the other paid in their home country. Employees sometimes ask for a ‘tax equalised’ package where the tax payable in India on their salary and perquisites is borne by the employer. This is to ensure that they remain tax neutral in respect to their Indian assignment.
Some other important considerations you must know before you embark upon your assignment in India:
- Salary includes both cash components and perquisites provided to an employee in connection with his Indian assignment.
- Cash components are fully taxable in India. Certain perquisites such as housing and furnishings are taxable on concessional basis.
- India does not have any social security law in place. The tax laws in India do not provide for any special provision for taxation of contributions, if any, made by the employer towards social security or other pension/benefit schemes in the home country of the expatriates.
- Perks like employee stock options (Esops) also turn into a significant issue as some countries tax Esops when exercised, while India taxes Esops as soon as they are vested.
At the time of departure from India, you will be required to furnish to the Income Tax Authorities an undertaking from the employer to the effect that the tax payable by employee shall be paid by employer. On the basis of said undertaking, the Income Tax Authority will grant a “No Objection Certificate” to the employee to leave India.