Taxes in India
Paying taxes in India can be a complicated matter, and it's recommended expats consult a tax specialist to facilitate the matter.
Am I a taxpayer in India?
Each taxpayer, whether expat or local, is allocated a unique identifying number called a Permanent Account Number (PAN).
All taxpayers, including non-residents, must apply for PAN if their taxable income exceeds the maximum amount not chargeable to tax, or any person carrying on a business or profession whose total sales, turnover, gross receipts exceed or are likely to exceed Rs. 500,000 in any previous year.
Every person who is required to deduct tax at source must apply for a tax deduction at source number (TAN), and quote this number on all certificates issued for tax deducted and remitted to the government and also on all returns relating to withholding tax.
India’s tax calculations follow the financial year from April to March. For example, the income earned for any period which falls between 1st April 2012 and 31st March 2013 (called the “Previous Year”) will be taxable in the next financial year (called “Assessment Year”) i.e. 1st April 2013 to 31st March 2014.
The tax returns have to be filed by either 31 July or 30 September of the assessment year, depending on the requirement of the tax audit for the individual.
Tax Residence Categories
Expats will fall into one of three tax residence categories in India. These categories are the primary criterion used to determine what income a person must pay tax on - their worldwide income or the income accruing and arising in India.
Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non Resident (NR)
An Individual is a Resident in India in any financial year if he/she:
Is in India in that year for a period of 182 days or more, or
Within four years preceding that year has been in India for 365 days or more and is in India for a period of 60 days or more.
If an individual's stay does not satisfy the resident requirements they are considered an NR. Alternatively, if an individual’s status as a resident in India is confirmed by the above rule, they must be categorised as a ROR or RNOR. To determine their status the following rule must be applied
An Individual who is a Resident is a RNOR in India if he/she
Has been a NR in India for nine out of ten years preceding that year, or
Has been outside of India for 729 days or less during the seven previous years preceding that year.
Foreign executives working in India on a continuing basis would be RNOR for the first two years of their employment, but from the third year they will become ROR and will be taxed in India on their worldwide income.
The administration usually verifies passports to determine the number of days an individual has been present in India.
Taxability of Tax Residents vs. Non Tax Residents
Once one has figured out which category of tax residence they satisfy, they can determine which portion of income will be taxed.
An ROR (Determined as per Rule 1 & 2) is subject to tax on their worldwide income (including capital gains).
A NRs (determined as per Rule 1) are subject to tax on Income received in India or accruing or arising (including deemed to be received or accruing or arising) in India.
An RNOR (determined as per rule 1 & 2) are subject to the same tax treatment as NRs, except that income accruing or arising outside India is also chargeable if it is derived from a business controlled in India or a Profession set up in India.
Residents (ROR) are subject to tax on their worldwide income, including capital gains. Income from abroad is taxable in India on gross basis and credit is provided for the taxes paid abroad; however, such credit cannot exceed the tax payable in India on such income.
Non residents (NR) are liable to tax in India on their Indian source income and income received or deemed to be received in India or deemed to be accruing or arising in India. Foreign source income of non residents is exempt from Indian income tax, subject to certain deeming provisions.
Individuals who are residents, but not ordinarily residents (RNOR), are subject to the same treatment as non residents, except that income accruing or arising outside India is also chargeable to tax in India if it is derived from business controlled in India or a profession set up in India.
What if, as an expat in India, I am a resident in two countries?
India has double taxation agreements, which override the Indian law, with virtually all its major trading partners. Meaning, expats are not liable to pay taxes in both countries of residence. Consult a tax specialist to determine if ones home country and India have such an agreement in place, and to determine in which country one should file taxes.
Can I use tax planning to accelerate or defer residence?
Expats can use careful tax planning to avoid becoming a tax resident in India, and can thus avoid paying taxes on a worldwide income.
Expatriates seeking to accelerate or defer tax residence in India should consider all the rules related to the residential status mentioned above. Pay special attention to the ROR criteria, noting the number of days for which it is necessary an individual remains in India to satisfy this status.
For example, splitting the time spent in India for a lengthy assignment between two financial years can help an individual avoid tax residence status.
Taxable categories in India
The following categories of income are taxable in India
Income from House Property
Profits and Gains from business or profession
Capital Gains, and
Income from other sources
Tax rates in India
The tax rates in India for the financial year 2013 to 2014 and 2014 to 2015 assessment year is as follows:
Up to INR 200,000 = NIL
INR 200,000 – INR 500,000 = 10 percent
INR 500,001 – INR 1000,000 = 20 percent
INR 1,000,000 and above = 30 percent
Non-resident women and senior citizens are subject to the same tax rates.
Income from Capital gains
Residents are subject to capital gains tax subject to specific rules applicable. These rules determine the rate of taxation and whether such income is to be taxed or not. Capital gains tax applies to all capital assets which have been defined as per Section 2(14) of the Income Tax Act, 1961. It must be noted that from Assessment year 2008-09 jewellery, archaeological collections, drawing, paintings, sculptures or any work of art became taxable under this catergory.
The capital gains are segregated into short term and long term capital gains. Generally gains are considered as long term only if the asset is held for more than 36 months with the exception in case of shares or listed securities or units of UTI/Mutual fund etc., where an asset becomes long term if it is held for more than 12 months.
The long term capital gains are chargeable at 20 percent rate of tax on the gains and in certain specified cases the rate is 10 percent. The gains are calculated by deducting the indexed cost of acquisition (only in long term) from the sales consideration. In the case of short term gains, the same are calculated at the normal rates of 30+ percent surcharge and education cess.
Long term capital gains arising on transfer of global depository receipts (which were issues in accordance with the notified Employee Stock option scheme, and purchased in foreign currency by a resident employee of an Indian company) are subject to tax of 10 percent. Benefits of indexation and calculating long term capital gains in foreign currency and then reconverting them into Indian currency are not available.
Non Residents are subject to capital gains tax in India only in respect of capital gains accruing or arising or received in India (including capital gains deemed to be accruing, arising or received in India).
In case of shares or debentures of an Indian company acquired in foreign currency by non residents, the cost of acquisition, expenditure incurred wholly and exclusively in connection with the transfer and full value of consideration are converted back into foreign currency and gains are calculated and taxed at a rate of 20 percent. Long term capital gains arising from sale of shares and securities through a recognised stock exchange are exempt from tax.
The benefit of cost indexation is not available to non resident Indians who claim special tax rate of 10 percent and to other non residents where capital gains on the transfer of shares in, and debentures of, Indian companies are determined in foreign currency.