Expatriate taxation in India

India is a popular destination for expatriates who want to work and live in a diverse and vibrant country. However, expatriates need to be aware of the tax implications of their income earned in India, as well as their tax obligations in their home country.

Residential status and taxability

The first step to determine the tax liability of an expatriate in India is to ascertain their residential status for tax purposes. The residential status depends on the number of days an expatriate stays in India during a fiscal year (“FY”), which runs from April 1 to March 31. There are three categories of residential status:

Resident and ordinarily resident (“ROR”): An expatriate is considered ROR if they satisfy both of the following conditions:

• They are present in India for at least 182 days in the relevant FY, or at least 60 days in the relevant FY and at least 365 days in the preceding four FYs; and
• They are resident in India for at least two out of the preceding 10 FYs, and they are present in India for at least 730 days in the preceding seven FYs.

Resident but not ordinarily resident (“RNOR”): An expatriate is considered RNOR if they satisfy either of the following conditions:

• They are resident in India for less than two out of the preceding 10 FYs: or
• They are present in India for less than 730 days in the preceding seven FYs.
• Non-resident (“NR”): An expatriate is considered NR if they do not satisfy any of the above conditions.

The residential status determines the scope of income that is taxable in India. An ROR expatriate is taxed on their global income, i.e., income earned or received anywhere in the world. An RNOR expatriate is taxed on their income earned or received in India, or income that accrues or arises from a source or business connection in India. An NR expatriate is taxed only on their income earned or received in India.

Income tax rates and deductions

The income tax rates applicable to expatriates depend on their age and income level. The following table shows the income tax slab rates for individuals opting for normal tax regime for FY 2022-23 (AY 2023-24):

A cess at the rate of four percent is added on the income tax amount. Surcharge is levied at different income tax rates – if the total income exceeds INR 5,000,000 in a financial year.

Expatriates can claim certain deductions from their gross income to reduce their taxable income. Some of the common deductions are:

• Deduction under section 80C for investments in specified instruments such as life insurance premium, provident fund contribution, tuition fees, etc., up to a maximum of INR 150,000.
• Deduction under section 80D for health insurance premium paid for self, spouse, children, and parents, up to a maximum of INR 25,000 (INR 50,000 for senior citizens).
• Deduction under section 80E for interest paid on education loan taken for higher studies of self or relative.
• Deduction under section 80G for donations made to certain charitable institutions.
• Deduction under section 80TTA for interest earned on savings bank account up to a maximum of INR 10,000.

Tax compliance and filing

Expatriates who earn income in India are required to obtain a Permanent Account Number (“PAN”), which is a unique identification number issued by the Indian tax authorities. PAN is mandatory for filing tax returns and making tax payments.

Expatriates who are employed in India are subject to tax deducted at source (TDS) by their employers on their salary income. The employers are required to deduct tax at the applicable rates and deposit it with the government monthly. The employers are also required to issue Form 16, which is a certificate of TDS, to the expatriates at the end of the FY.

Expatriates who have other sources of income in India, such as interest, rent, capital gains, etc., are also subject to TDS by the payers of such income. The payers are required to deduct tax at the prescribed rates and deposit it with the government on a periodic basis. The payers are also required to issue Form 16A, which is a certificate of TDS, to the expatriates at the end of the FY.

Expatriates who have taxable income in India are required to file their tax returns electronically by July 31 of the assessment year (“AY”), which is the year following the FY. For example, for FY 2022-23, the tax return filing deadline is July 31, 2023. Expatriates can file their tax returns online through the e-filing portal of the Income Tax Department.

Expatriates who have paid excess tax or have unclaimed TDS can claim a refund from the tax authorities by filing their tax returns. The refund amount will be credited to their bank account after processing of their tax returns.

Double taxation relief

Expatriates who have taxed on their global income in India as well as in their home country may face double taxation of the same income. To avoid or mitigate double taxation, expatriates can avail the benefits of the Double Taxation Avoidance Agreement (“DTAA”) that India has signed with various countries. DTAA is a bilateral treaty that specifies the rules for allocation of taxing rights and relief from double taxation between two countries.

Expatriates can claim relief from double taxation under DTAA in two ways:

• Exemption method: Under this method, the income that is taxed in one country is exempt from tax in the other country. For example, if an expatriate is taxed on their interest income in India as well as in their home country, they can claim exemption from tax in India under DTAA, subject to certain conditions.
• Credit method: Under this method, the income that is taxed in both countries is allowed as a credit against the tax payable in one country. For example, if an expatriate is taxed on their salary income in India as well as in their home country, they can claim credit for the tax paid in India against the tax payable in their home country under DTAA, subject to certain limits.

To claim relief under DTAA, expatriates need to furnish a Tax Residency Certificate (TRC) issued by their home country tax authorities, along with a declaration in Form 10F and other relevant documents.

Conclusion

Expatriate taxation in India is a complex and dynamic subject that requires careful planning and compliance. Expatriates should consult a professional tax advisor to understand their tax obligations and options in India and their home country, and to optimize their tax position.