Tax Guide for US Expats Living and Working in India
Who Is Liable For Income Taxes In India
Residents are subject to tax on their worldwide income. Persons who are resident but not ordinarily resident are taxed only on Indian-source income, income deemed to accrue or arise in India, income received in India or income received outside India arising from either a business controlled, or a profession established, in India. Nonresidents are taxed only on Indian-source income and on income received, accruing or arising in India. Nonresidents may also be taxed on income deemed to accrue or arise in India through a business connection, through or from any asset or source of income in India, or through the transfer of a capital asset situated in India (including a share in a company incorporated in India).
Individuals are considered resident if they meet either of the following criteria:
- They are present in India for 182 days or more during the tax year (that is, the year in which income is earned; in India the tax year runs from 1 April to 31 March).
- They are present in India for 60 days or more during the tax year and present in India for at least 365 days in aggregate during the preceding four tax years (the 60 days’ condition is increased to 182 days in certain cases).
Individuals who do not meet the above criteria are considered to be nonresidents.
Individuals are considered not ordinarily resident if, in addition to meeting one of the above tests, they satisfy either of the following conditions:
- They were nonresident in India in 9 out of the preceding 10 tax years.
- They were present in India for 729 days or less during the previous 7 tax years.
All employees are subject to tax, unless they are exempt under the Income Tax Act, 1961 or applicable tax treaties.
Income subject to tax. In general, all income received or accrued in India is subject to tax.
The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. All salary income relating to services rendered in India is deemed to accrue or arise in India regardless of where it is received or the residential status of the recipient.
Employees of foreign enterprises who are citizens of foreign jurisdictions are not subject to tax if all of the following conditions are satisfied:
- The foreign enterprise is not engaged in a trade or business in India.
- The employee does not stay in India for more than 90 days in the tax year.
- The compensation paid is not claimed by the employer as a deduction from taxable income in India.
Similar exemptions are available under tax treaties if the stay is less than 183 days, but conditions vary. Nonresident foreign citizens employed on foreign ships who stay in India no longer than 90 days in a tax year are also exempt from tax on their earnings.
In general, most elements of compensation are taxable in India. However, the following benefits may receive preferential tax treatment, subject to certain requirements:
- Company-provided housing. If the accommodation is owned by the employer, the amount of the benefit from company-provided housing equals a specified percentage of salary. The percentage is 15% for cities having a population of more than 2,500,000, 10% for cities having a population of more than 1 million, but not more than 2,500,000, and 7.5% for other cities. The population figures are based on the 2001 census. The benefit computed above is reduced by the amount recovered from the employee. If the accommodation is leased by the employer, the amount of the benefit equals the lower of actual rent paid or 15% of salary, less the amount recovered from the employee. Furniture and appliances provided by the employer in the accommodation are taxed at a rate of 10% of the cost if the employer owns the items or 10% of the rent paid if the employer hires the items.
- Hotel accommodation. If an employee is provided with hotel accommodation, tax is imposed on the lower of charges paid by the employer or 24% of salary, reduced by any amount recovered from the employee, unless the accommodation is provided for up to 15 days on relocation. Such accommodation provided for relocation is exempt from tax.
- Interest-free or low-interest loans. The benefit of interest-free loans or low-interest loans exceeding INR 20,000 to an employee, to a person on behalf of the employee or to a member of an employee’s household is taxable based on the purpose of the loan. However, no amount is taxable if the loan is provided for medical treatment with respect to “specified’ diseases.” The interest rate is the rate notified by the banks as of the first day of the tax year.
- Employer-paid taxes on “nonmonetary” benefits. In general, the amount of tax paid by an employer on behalf of an employee is grossed up and taxed in the hands of the employee. The employer may pay taxes on “nonmonetary” benefits without taking into account the gross-up. However, in such a situation, the employer cannot deduct such taxes paid in computing its taxable income.
The following employer-paid items are not included in an employee’s taxable compensation to the extent that they do not exceed specified limits:
- Reimbursed medical expenses
- Contributions to Indian retirement benefit funds, including provident, gratuity and superannuating funds
Certain allowances, including house rent allowances and leave travel allowances, are either tax-exempt or included in taxable income at a lower value, subject to certain conditions. A bonus paid at the beginning or end of employment is included in taxable salary income.
Self-employment and business income. All individuals who are self-employed or in business in India are subject to tax. All income received or deemed to be received, or accrued or deemed to be accrued, in India is subject to tax.
A resident’s worldwide income is taxable. Persons who are not ordinarily resident are taxed only on Indian-source income, income received in India and income received outside India arising from either a business controlled or a profession established in India. Persons who are nonresidents are taxed only on Indian-source income and income received in India.
The computation of an individual’s income from a business is similar to the computation of income of a corporation. However, an individual may maintain accounts on a cash or accrual basis.
Investment income. Dividends are taxed in the following manner:
- Domestic companies are required to pay dividend distribution tax on profits distributed as dividends at a rate of 15% plus the applicable surcharge (7.5%) and education cess (3%).
- Amounts declared, distributed or paid as dividends by Indian companies are not taxable in the hands of the shareholders.
Dividends received from foreign companies are subject to tax in the hands of shareholders at the normal tax rates.
Interest payable on bank deposits in India is taxable and taxes are withheld at source by the banks if the interest exceeds INR 10,000 in the tax year. The rate of the withholding tax is 10% (plus an import or sales tax on a commodity cess). This withholding tax is not a final tax.
The following interest is exempt from tax:
- Interest earned on nonresident external (NRE) accounts of individuals who qualify as persons resident outside India according to the exchange control laws (see Section I) or who are permitted by the Reserve Bank of India (central bank) to maintain such accounts
- Interest payable by scheduled banks (on approved foreign-currency deposits) to nonresidents and to persons who are not ordinarily resident
Nonresident Indian nationals (including persons of Indian origin) may exercise an option to be taxed at a flat rate of 20% on gross investment income (without any deductions) arising from foreign-currency assets acquired in India through remittances in convertible foreign exchange.
Directors’ fees. Directors’ fees are taxed at the progressive rates listed in Rates. Expenses incurred wholly and exclusively for earning fees are allowed as deductions.
Sums received above INR 50,000. Any sum of money in excess of INR 50,000 received by an individual without consideration is taxable in the hands of the recipient. However, the following exclusions to the rule exist:
- Amounts received by an individual from a relative (as defined in the Income Tax Act, 1961)
- Amounts received on the occasion of the marriage of the individual
- Amounts received under a will, by way of an inheritance or in contemplation of death of the payer
Capital gains and losses
Capital gains on assets other than shares and securities listed on a stock exchange in India. Capital gains derived from the transfer of short-term assets are taxed at normal rates.
The sales proceeds from a depreciable asset must be applied to reduce the declining-balance value of the class of assets (including additions during the year) to which the asset belongs. If the sales proceeds exceed the declining-balance value of a relevant class of assets, the excess is treated as a short-term capital gain and is taxed at a rate of 30%.
Long-term capital gains are gains on assets that have been held for more than three years. Long-term capital gains are exempt from tax in certain cases if the gains are reinvested within six months in specified long-term assets. Exemptions are available for long-term gains derived from the sale of a residential house and other capital assets if the gains are used to acquire a residential house or specified bonds within the prescribed time. If, within three years after purchase, the new assets are sold or, in certain cases, used as a security for a loan or an advance, the capital gains derived from the sale of the original asset are subject to tax in the year the new assets are sold or used as a security.
If a taxpayer or a taxpayer’s parents use land for agricultural purposes for at least two years immediately preceding the date of transfer, capital gains arising from the transfer of the land is exempt from tax if the taxpayer uses the gains to purchase other land for agricultural purposes within two years after the date of the transfer. Gains from the sale of agricultural land that are not reinvested are taxed as short-term gains if the agricultural land is held for three years or less, or as long-term gains if the agricultural land is held for more than three years.
Capital gains on shares and securities listed on a stock exchange in India. Long-term capital gains (gains derived from listed securities held longer than one year) derived from the transfer of equity shares or units of an equity-oriented fund listed on a recognized stock exchange in India are exempt from tax if Securities Transaction Tax (STT) is payable on such transaction.
The purchase or sale of such shares (or units of an equity-oriented fund) are subject to STT at prescribed rates, payable on the value of the transaction. Different rates apply based on the nature of the transaction. STT is paid by the purchaser or seller of the shares or units or by both the purchaser and the seller, depending upon the type of transaction. For example, in the case of delivery-based transactions in equity shares or units of equity-oriented funds, STT is payable by both the purchaser and seller, while for non-delivery-based transactions, STT is payable only by the seller.
Short-term capital gains derived from the transfer of equity shares or units of equity-oriented funds on a recognized stock exchange in India are taxable at a reduced rate of 15% (plus cess) if STT is payable on such transaction.
Inflation adjustments. In calculating long-term capital gains, the cost of assets may be adjusted for inflation. For assets held on or before 1 April 1981, the market value on 1 April 1981 may be substituted for cost in calculating gains. However, this adjustment is not available in the following cases:
- • Transfer of shares of an Indian company acquired with foreign currency by nonresidents
- • Transfer of bonds or debentures by residents or nonresidents, regardless of the currency with which the acquisition is made Setting off capital losses.
Short-term and long-term capital losses may not offset other income. Short-term capital losses arising during the tax year can be set off against short-term capital gains or long-term capital gains. The balance of short-term losses may be carried forward to the following eight tax years and offset short-term or long-term capital gains arising in those years.
Long-term capital losses arising during the tax year can be set off only against long-term capital gains and not against any other income. The balance of long-term losses may be carried forward to the following eight tax years and offset long-term capital gains arising in those years. To claim a carry-forward and the set-off of losses, the tax return must be filed within the prescribed time limits.
Capital gains on foreign-exchange assets. Nonresident Indian nationals may be subject to a 10% withholding tax on long-term capital gains on specified foreign-exchange assets.
Nonresidents are protected from fluctuations in the value of the Indian rupee on sales of shares or debentures of an Indian company because the capital gains are computed in the currency used to acquire the shares or debentures. After being computed, the capital gains are converted into Indian rupees. Inflation adjustments are not permitted for this computation.
Fringe Benefit Tax. Fringe Benefit Tax (FBT) was abolished, effective from 1 April 2009. As a result, some of the employer provided benefits that were subject to FBT in the hands of the employer are now taxable in the hands of the employees.
Taxation of employer-provided stock options. Income arising from Employee Stock Option Plans (ESOPs) or other equity-based schemes, which was subject to FBT until 31 March 2009, is now taxed as a benefit in the hands of the employees. The value of ESOPs for the purpose of tax is the fair market value (FMV) as of the date on which the options are exercised by the employee, reduced by the amount of the exercise price paid by the employee. For this purpose, the FMV is the value determined in accordance with the method prescribed under the Income-tax Act, 1961.
In calculating the capital gains arising at the time of sale of shares acquired under schemes referred to in the preceding paragraph, the acquisition cost is the FMV as of the date of exercise that was taken into account to determine the taxable income at the time of allotment of shares.
The Indian government has prescribed the valuation rules to determine the FMV. The rules are similar to the rules that applied under the FBT regime and are effective from 1 April 2009.
Accordingly, securities allotted or transferred on or after 1 April 2009 must be valued in accordance with these rules.
Valuation of shares listed on a recognized stock exchange in India. If the shares of a company are listed on a recognized stock exchange in India on the date of exercise of the options, the FMV is the average of the opening price and the closing price of the shares on the stock exchange on that date. However, if the shares are listed on more than one recognized stock exchange, the FMV is the average of the opening and closing price of the shares on the recognized stock exchange that records the highest volume of trading in the shares.
If no trading in the shares occurs on any recognized stock exchange on the exercise date, the FMV is the closing price on the date closest to the date of exercise of the option.
Valuation of unlisted shares or shares listed only on overseas stock exchanges. If, on the date of exercise of the options, the shares in the company are not listed on a recognized stock exchange in India, the FMV of the share must be determined by a recognized merchant banker.
The FMV can be determined on the date of exercise of the option or any date that falls within 180 days before the exercise date.
Deductions
Deductible items. For individuals, a deduction of up to INR 100,000 from gross total income may be claimed for prescribed contributions to savings instruments, pension funds and schemes and certain other recipients. A deduction for contributions made by the employer and the employee for the New Pension System (NPS) account is allowed. This is covered by the cap of INR 100,000 mentioned above.
In addition, interest paid on loans obtained for pursuing higher education is fully deductible. However, no deduction is available for repayment of the principal amount.
A deduction of INR 20,000 may be claimed by individuals with respect to investment in long-term infrastructure bonds notified by the government. This deduction is in addition to the existing limit of INR 100,000 for specified investments referred to in the preceding paragraph.
Medical insurance premiums for recognized policies in India may be deducted, up to a maximum of INR 15,000 (INR 20,000 if the insured is a resident of India and is age 65 or older) against aggregate income from all sources. An additional deduction up to a maximum of INR 15,000 is allowed to an individual for medical insurance premiums paid by the individual for his or her parents (INR 20,000 if the insured is a resident of India and is age 65 or older). The above limit applies to the total amount paid for both parents.
Donations to religious, charitable and other specified funds are eligible for deductions from taxable income of up to 50% or 100%, as prescribed.
Business deductions and tax concessions. Taxpayers may generally deduct from gross business income all business-related expenses. Personal expenses and capital expenditure other than expenditure for scientific research are not deductible. Allowable depreciation must be claimed, up to the available limit.
Relief for losses. Business losses incurred in the current year can be set off against any other income under other heads except for income under the salaries head. If business losses in the current year cannot be wholly set off, such business losses may be carried forward for eight years if the income tax return for the year of the loss is filed on time. However, the losses carried forward can be set off against business income only. Unabsorbed losses from speculative transactions may be carried forward for four years only and can be set off against profits from speculative business only.
Unabsorbed depreciation may be carried forward indefinitely.
B. Other taxes
Net wealth tax. Indian wealth tax is payable at a rate of 1% if the taxable value of net wealth exceeds INR 3 million. Assets subject to tax include residential houses, cars, yachts, boats, aircraft, urban land, jewelry, bullion, precious metals, cash in excess of INR 50,000, any amount not recorded in the books of account and commercial property not used as business, office or factory premises. The above assets, other than urban land, are exempt from tax if they are owned as stock-in-trade or are used for hire. Productive assets, including shares, debentures and bank deposits, are not subject to wealth tax. A deduction is allowed for debts owed that are incurred in relation to the taxable assets. The tax is levied on net wealth as of 31 March preceding the year of assessment.
Estate and gift taxes. India does not impose tax on estates, inheritances or gifts. However, as mentioned in Sums received above INR 50,000 in Section A, any sum of money received by an individual in excess of INR 50,000 without consideration is taxable in the hands of the recipient.
C. Social security
Social security in India is governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act). The EPF Act contains the following two principal schemes:
- Employees’ Provident Fund Scheme, 1952
- Employees’ Pension Scheme, 1995
Coverage.
The Ministry of Labour and Employment has issued a notification extending the applicability of the Provident Fund and Pension Scheme rules to a new class of employees called “International Workers.” Under the EPF Act, the following employees are considered to be “International Workers”:
- An Indian employee (an Indian passport holder) who has worked or is going to work in a foreign country with which India has entered into a social security agreement and who is or will be eligible to avail of the benefits under a social security program of that country, in accordance with such agreement
- A foreign national who works for an establishment in India to which the EPF Act applies
The EPF Act applies to the following establishments:
- An establishment employing 20 or more persons engaged in a specified industry or an establishment or class of establishments notified by the central government
- An establishment employing less than 20 persons that opts voluntarily to be covered by the EPF Act
Covered employers must make a contribution towards the Provident Fund and Pension Scheme for their employees who are International Workers.
An “excluded employee” is not covered by the EPF Act. An employee is considered to be an “excluded employee” if the following conditions are satisfied:
- The employee is an International Worker who is contributing to a social security program of his or her country of origin, either as citizen or resident.
- The employee’s home country has entered into a social security agreement with India on a reciprocity basis and the employee is considered to be a detached worker under the social security agreement.
India has entered into social security agreements with Belgium, Germany and Switzerland. It has also signed social security agreements with Denmark, France, Hungary, Luxembourg and the Netherlands, but these agreements have not yet entered into force.
Contributions.
Every covered employer is required to contribute 24% (12% each for the employer’s and the employee’s share) of the employee’s “monthly pay” (as defined) towards the Provident Fund and Pension Fund. The employer has the option to recover the employee’s share from the employee.
Out of the employer’s 12% share of the contribution, 8.33% of monthly pay is allocated to the Employees Pension Fund. The balance of the contributions is deposited into the Employees Provident Fund.
Local employees drawing a monthly salary of INR 6,500 or more are excluded from the legislation, but this exclusion does not apply to International Workers. Consequently contributions are required for International Workers even if the monthly pay of the employee exceeds INR 6,500.
Refunds of Provident Fund contributions are possible, subject to the satisfaction of certain conditions.
The employer contributions are exempt from tax up to 12% of monthly pay.
Withdrawal. An International Worker can make a withdrawal from the Provident Fund only in the following circumstances:
- He or she retires or reaches the age of 58, whichever is later.
- He or she suffers permanent and total incapacitation.
However, for members covered under a social security agreement, a withdrawal can be made on such terms as may be specified in such agreement.
You can read more about the Indian Income Taxes and Procedures
We have been preparing US income tax returns for US Citizens and permanent residents living in India for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in India and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Indian tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Indian Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in India, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in India.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email