Taxation for expatriates in India: An overview

In recent years, India has become more open to foreign companies wishing to expand their business. The growth possibilities have also propelled the rise of off-shore assignments for their existing employees. A foreign company must be conversant with taxation legislation for expatriates working in India. 

How is the taxation determined?

Under the Income Tax Act, 1961, expatriates are taxed based on their residential status, which depends on their duration of physical stay in the country. 

Tax Resident in India

A foreign national is viewed as a tax resident in India if the duration of their stay is either of the following –

• At least 182 days in a fiscal year (1 April to 31 March)
• A minimum of 365 days in the four years preceding the year of residency determination, including at least 60 in the current fiscal year.

Once the professional of foreign origins qualifies as a resident, the income tax liability is based on the criteria of being –

• A Resident Ordinarily Resident (ROR): One who has resided in the country for 9 of 10 preceding years or has stayed for 729 days or more in the seven years preceding the year in evaluation.

RORs are liable to pay tax on their global income accrued and received in or outside India. They must also declare their moveable and immovable assets held overseas and the capital gains, if any. 

• A Resident but Not Ordinarily Resident (RNOR):  One who does not meet the requirements of being an ROR.

RNORs are taxed only for the earnings accrued or received in India unless the source of income is a business that originates in or operates from India.

Non-Resident in India

An earner who does not satisfy the above conditions is considered a non-resident for taxation purposes and is not taxed for any income other than what is accrued or received in India. Employees of foreign companies who have just started working in India are considered non-residents for the two initial fiscal years. 

Are there any tax benefits?

Foreign individuals’ income accrued or received during their assignment in the country is taxed. It includes salary, emoluments honored before or after the appointment, remuneration for paid holidays, accommodation, car, employee stock option, and other benefits provided by the employer. However, provisions for deductions or exemptions are extended on some allowances and investments if they qualify for the specified prerequisites.  

If the foreign employees are from one of the 94 countries with which India has Double Taxation Avoidance Agreements (DTAA), they can pay tax in either of the countries or enjoy tax credits in their home country. However, they will require a tax residency certificate (TRC) to avail the tax return benefits of the treaty. Individuals who work in India only for a short period may also be eligible to claim a short-stay exemption under the Indian Income Tax Act 1961.

Arrival and departure

All professionals of foreign origins working in India must register with the Income Tax Authorities and obtain their Permanent Account Numbers (PAN). It is recommended to apply for a PAN immediately after they arrive in the country, as it is also one of the mandatory documents for registration with the Foreigners’ Regional Registration Office (FRRO). At the end of their term in India, foreign employees must procure an Income Tax Clearance Certificate from the Income Tax Authorities. The no-objection certificate is required for the immigration formalities to depart from India. 

Sending employees to work on-site not only fosters an understanding of the workforce dynamics in the country but also ensures seamless business operations. Understanding the taxation regulations before assuming work-related assignments and responsibilities in India is important to enhance the process further. Please feel free to contact us for any taxation-related assistance. We’ll be glad to be of service.