The Income Tax Act of 1961 does not define the term “Expatriate Tax.” However, in general, an expatriate is someone who lives outside of his country of origin or in a country where he does not have citizenship. He may be residing in another country temporarily or permanently, depending on the terms of the deputation. In this article, we will learn “All about taxation of expatriate employees in India”.
The term “deputation” refers to the temporary assignment of an employee to a position outside his cadre. The incidence of tax under the Income Tax Act of 1961 is determined by the following factors: The taxpayer’s residential status Provisions in effect during the Assessment Year to which the incomes relate Whether the accrual or receipt of such income has any connection to India.
Expats are classified into two types:
- Inbound Expatriate, a citizen of another country who lives and works in India.
Outbound Expatriate is someone of Indian origin who lives and works in another country. Expatriate work requirements vary depending on whether the term assignment or Consultation for a Business Visit (Short-term, mid-term, and long-term) assignment Permanent transfer.
Taxation of Expatriate Employees in India: Complete Guide for Foreign Employees and Employers
All inbound expatriates (including minors over the age of 16) visiting India on a long-term visa for more than 180 days are required to register with the Foreign Regional Registration Office (FRRO) within 14 days of their arrival in India, if such a requirement has been raised as part of their visa endorsement. At the immigration checkpoint, such inbound expatriates must surrender their residential permits to the FRRO/FRO or the immigration officer.
The Income Tax Act also allows expatriates to obtain a “No Objection Certificate” by submitting Form 30A. Form 30A is an undertaking by the expatriate’s employer that any future tax liability incurred by the expatriate must be borne by the employer.
The income rates applicable to expatriates:
Determination of Residential Status of Expatriates in India
Residential Status: The residential status of an expat is determined by two perspectives: the Income Tax Act and the DTAA. According to the relevant taxation laws, the expat may be a resident of both countries in certain circumstances. This gives rise to the ‘Tie Breaker Rule.’ The following factors must be considered:
The fundamental rule of salary income taxation is that salary is taxable in the country where the employee is physically present while performing services.
Deemed Tax Residents: An Indian citizen is deemed to be a resident of India in the previous year if he is not required to pay tax in any other country or territory.
Resident and Ordinarily Resident (ROR)
An individual qualifies as Resident and Ordinarily Resident if:
• Stayed in India for 182 days or more in a financial year, OR
• Stayed 60 days in the relevant year and 365 days in preceding 4 years
Additionally:
• Resident in at least 2 of preceding 10 years
• Present in India for 730 days in preceding 7 years
ROR individuals are taxed on global income.
Resident but Not Ordinarily Resident (RNOR)
An expatriate becomes RNOR if:
• Resident but not satisfying additional conditions for ROR.
Tax implication:
Only income received in India or accruing in India is taxable.
This provision significantly impacts expatriate tax in India because foreign income may remain non-taxable in India under RNOR status.
Non-Resident (NR)
If an expatriate does not satisfy residential conditions, they are classified as Non-Resident.
Tax implication:
Only income that is:
• received in India
• deemed to accrue in India
is taxable.
Therefore, taxation of expatriate employees in India is limited to Indian sourced income for NR individuals.
Scope of Income Taxation for Expatriates
Provident Fund and SSA:
Provident Fund and SSA: Under the PF scheme, both the employer and the employee will contribute 12% of their monthly pay (as defined in the EPF and MP Act). The employer’s contribution will be 8.33 percent of monthly pay, with the remaining 3.67 percent going to the Provident Fund. For fiscal years 2020-21, the interest rate on EPF contributions is 8.5 percent. Salary will include all earnings, whether in India or abroad.
If an international worker is from a country with which India has signed a Social Security Agreement (SSA) and has a Certificate of Coverage from his home country, he does not need to contribute to social security in India as long as he provides the COC to the PF authorities.
Meaning of Expatriate Employee Under Indian Tax Law
Although the Income Tax Act, 1961 does not specifically define the term “expatriate”, the term is commonly used in international taxation to describe individuals working outside their home country.
Inbound Expatriates
Inbound expatriates are foreign citizens who come to India to work temporarily or permanently for an Indian company or multinational corporation.
Examples include:
• Foreign managers assigned to Indian subsidiaries
• Technical experts deployed for project implementation
• Directors of Indian companies appointed from overseas
The taxation of expatriate employees in India becomes applicable when such employees earn salary income for services rendered in India.
Outbound Expatriates
Outbound expatriates are Indian citizens who work in foreign countries for foreign entities or Indian multinational companies.
For outbound employees, income tax for foreign employees in India becomes relevant when income arises in India or when residential status requires global income taxation.
Tax Deduction at Source (TDS) Obligations for Employers
Indian employers must deduct TDS under Section 192 from expatriate salaries.
Compliance requirements include:
• PAN registration
• Salary estimation
• Inclusion of global compensation related to India
• Perquisite valuation
Failure to deduct TDS may lead to:
• Interest under Section 201
• Penalty under Section 271C
• Prosecution under Section 276B
Therefore proper compliance is critical in taxation of expatriate employees in India.
Employees Stock Option Plan (ESOP): In the case of ESOP, shares issued under the plan are taxable in the hands of the employees at the time they are exercised.
The taxability of expatriates, in general, is an intriguing topic that has seen numerous changes in recent years. Significant efforts have been made to provide greater clarity on the taxability of such individuals and other foreign nationals.
Per Diem Allowance/Daily Allowance: To compensate employees for the lifestyle changes they must endure while on assignment in foreign countries, a daily allowance is paid in addition to their salary. According to the Income Tax Rules, any ordinary daily allowance paid while on tour is exempt if incurred for the purpose of daily living expenses.
Employees Stock Option Plan (ESOP): In the case of ESOP, shares issued under the plan are taxable in the hands of the employees at the time they are exercised.
The taxability of expatriates, in general, is an intriguing topic that has seen numerous changes in recent years. Significant efforts have been made to provide greater clarity on the taxability of such individuals and other foreign nationals.
Compliance Requirements for Expatriates Entering India
Foreign employees must comply with several regulatory procedures.
These include:
FRRO Registration
Foreign nationals staying in India beyond 180 days must register with Foreigners Regional Registration Office (FRRO).
PAN Registration
Permanent Account Number is mandatory for:
• salary taxation
• TDS compliance
• filing tax returns
Income Tax Return Filing
Expatriates must file ITR if income exceeds basic exemption limit.
Frequently Asked Questions: -
Irrespective of the residential status of the expatriate employee, the amount received by him as salary, for services rendered in India shall be liable to tax in India being income accruing or arising in India, and also be subject to TDS regardless of the place where the salary is actually received.
An expatriate, or ex-pat, is an individual living and/or working in a country other than his or her country of citizenship, often temporarily and for work reasons. An expatriate can also be an individual who has relinquished citizenship in their home country to become a citizen of another.
What Does Resident Mean? For the record and to clarify, you don’t have to give up your citizenship to live in another country, and moving to another country, as a retiree, etc., has nothing to do with expatriation. Expatriation isn’t about where you live. It’s about where you’re a citizen and whose passport you carry.
Based on number of days stayed in India during the financial year and preceding years.
Yes, through DTAA provisions and foreign tax credit mechanisms.
Yes, if taxable income exceeds exemption limits.
Yes, unless covered under Social Security Agreement with certificate of coverage.
Disclaimer: The main goal of this article is to “assist investors in making informed financial decisions.” The above information is provided only for educational purposes. Readers are advised to exercise caution and seek professional counsel before relying on the above information. K M Gatecha & CO LLP is not liable for any loss or harm incurred by readers who take action based on the information provided in this article. “Please keep in mind that the opinions expressed in this Blog/Comments Section/Forum are clarifications intended for the readers’ reference and guidance as they investigate further on the topics/questions raised and make informed decisions. These are not intended to be investment advice or legal advice.”
