Authors: Dezshira & Associates
Taxation of Foreign Nationals in India
In the year 1991, India moved towards liberalizing its economy and opened the doors for foreign investments in its various sectors. This move not only resulted in an influx of billions of dollars in form of foreign investments but also lead to migration of competent resources from around the globe to India. Taxation in India is based on the residential status of the individual and not on his/ her citizenship.
Residential status is determined by individual’s physical presence in India regardless of the purpose of stay. Residential status of an individual can be categorized as:
– Resident and ordinarily resident (R & OR)
– Resident but not ordinarily resident (R but NOR)
– Non-Resident (NR)
An individual who falls in the category of ROR is taxable on his worldwide income, in that given year. Hence, careful tax planning is required on the part of the individual to avoid paying taxes on global income. For individuals falling in Resident but not Ordinarily Residents and Non- Resident categories are liable to be taxed on the income received/ accrued in India or deemed to be received/ accrued in India.
It is not necessary that stay in India has to be continuous or at one place while determining the residential status. Important point is to check the number of days an individual has stayed in India during a particular financial year.
Salary for services rendered in India is taxable irrespective of the residential status and place of receipt of Income.
Indian Tax System
Indian taxation year starts from 1stApril and commences on 31stMarch. Residential status of an individual is determined for each taxation year separately.
Taxable Income in India for foreign nationals usually includes:
– salary, wages, allowances, and other cash compensations including incentives and bonus linked to sales or productivity or any other criteria;
– Income tax paid by an employer on behalf of his/ her employee;
– specific perquisites such as rent-free accommodation, car and a driver provided by the employer also form components of taxable compensation.
Subject to certain conditions, there are certain components of income which are exempt from taxation in India such as house rent allowance, employer provident fund contribution, gratuity, etc.
Income Tax Slab Rates for FY 2018-19
Income tax in India is calculated on the basis of the following tax slabs:
Also, following surcharge would be applicable in below mentioned cases:
– If total income is above INR 50,00,000 – Surcharge 10%
– If total income is above INR 1,00,00,000 – Surcharge 15%
An individual’s tax return should ideally be filed by 31stJuly following the end of taxation year on 31stMarch.
Double Taxation Avoidance Agreement (DTAA)
A situation where an individual is taxed in two countries for the same income is known as double taxation. A DTAA between two countries aids to avoid taxation of income in both the countries. India has double taxation agreement with over 90 countries.
Relief under DTAA can be availed by obtaining a Tax Residency Certificate (TRC) from the tax authorities of the resident country.
Social Security Agreements
Foreign nationals working in establishments in India, where provident fund regulations are valid, need to contribute to the provident fund unless specifically exempted. Both employer and employee would be required to contribute 12% of the employee’s monthly salary for social security obligations. The entire 12% of employee’s contribution goes to Employee Provident Fund (EPF) and out of 12% of employer’s contribution, 3.67% is contributed to EPF while remaining 8.33% goes to EPS (Employee Pension Scheme).
Social Security Agreements (SSA) are signed between countries to avoid instances of double social security liability for employees. Under this agreement, employees may continue to remain with their home social security scheme and request exemption from the host country social security scheme. SSA along with helping employees, also promote more investment flows between countries.
New SSA between India Germany came into force on May 1, 2017. This new agreement superseded the old agreement which was in place since 1stOctober 2009 and now includes totalization and export of pension related benefits.
Tax Registration Number
Foreign nationals liable to pay income tax in India are required to obtain a tax registration number i.e. Permanent Account Number (PAN) upon their arrival in India. PAN is usually given within 15 days of applying and submitting the documents. From 49AA/ Form 49A can be used to apply for PAN with Indian tax authorities. PAN is also used for extension of Visa and for FRRO registration in India.
Prior to departure from India, on completion of tenure in India, the foreign national is required to obtain an Income Tax Clearance Certificate from the Income Tax Department, signifying payment of all income tax dues.
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