Tax returns and compliance
Termination of residence
Economic employer approach
Types of taxable compensation
Salary earned from working abroad
Taxation of investment income and capital gains
Additional capital gains tax (CGT) issues and exceptions
General deductions from income
Tax reimbursement methods
Calculation of estimates/prepayments/withholding
Relief for foreign taxes
General tax credits
Sample tax calculation
When are tax returns due? That is, what is the tax return due date?
An individual’s tax return must be filed by 31 July immediately following the end of the tax year on 31 March. There is no provision for extension of the filing date.
What is the tax year end?
The tax year begins on 01 April and ends on 31 March of the immediately following year. The income earned during a year is taxable in the relevant year. The year in which income is earned is known as the previous year or tax year or financial year. From a tax perspective, the 12 month period subsequent to the tax year is known as the assessment year.
What are the compliance requirements for tax returns in India?
An individual is required to obtain a registration with the tax authorities i.e. a Permanent Account Number (PAN). PAN is a unique ten digit identification number given by the Indian tax authorities. PAN is required to be quoted on all the correspondence with the tax authorities.
For Financial Year (“FY”) (may also be termed as tax year) 2015-16 , an individual is required to file a tax return in India only if his/her taxable income exceeds the maximum limit not chargeable to tax. (INR 250,000).
Further, for FY 2012-13 onwards, It is mandatory for every person (not being a company or a person filing return in ITR 7) to e-file the return of income, if total income exceeds INR 5,00,000 and for every person claiming tax relief under Section 90, 90A or 91 of the Indian Income Tax Act, 1961 (i.e. a person claiming Treaty benefits).
Further, every individual being a resident and ordinarily resident in India, having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India would be mandatorily required to furnish a return of income irrespective of the fact whether the resident taxpayer has taxable income or not.
As proposed in the Finance Bill 2016, tax return filing is mandatory in respect of taxpayers with exempt long-term capital gain arising from equity shares / equity-oriented mutual funds, where such exempt income and other income exceeds applicable tax threshold i.e. INR 250,000.
Tax is required to be withheld at source on salaries, professional fees, rent, interest, dividends, etc. at the time such income is credited to the account of the payee or at the time of payment, whichever is earlier. In case the amount of tax withheld at source is short of the actual tax liability, an individual is liable to pay advance/self assessment tax.
Advance tax is payable by the taxpayer during the tax year if the estimated taxes (net of taxes withheld at source) exceeds INR 10,000. Advance tax payable is the tax on estimated income of the tax year, reduced by tax withheld at source. As proposed in the Finance Bill, 2016, for the FY 2016-17 onwards, advance tax is payable in four installments by individuals as follows:
• 15 percent is payable by 15 June of the tax year
• 45 percent is payable by 15 September of the tax year
• 75 percent is payable by 15 December of the tax year
• 100 percent by 15 March of the tax year.
In case of default in filing of a tax return, interest is levied on the amount of unpaid tax at the rate of 1 percent for every month or part thereof for the period during which the default continues and is payable along with the self-assessment tax before filing of the tax return. In case of default in payment of advance tax, interest is levied on the shortfall of advance tax and the deferment of advance tax at the rate of 1 percent for every month or part thereof, during which the default occurs. Such interest is payable before filing of the tax return.
Further, a resident senior citizen (i.e. 60 years and above), not having any income from a business or profession, shall not be liable to pay advance tax (applicable from tax year 2012-13 onwards).
What are the current income tax rates for residents and non-residents in India?
Tax rates for individuals are common for all, irrespective of their residential status. The income tax rates proposed for assessment year 2017-18 (tax year 2016-17 ) are as follows:
Income tax rates table for the tax year 2016-17
|Taxable income bracket||Total tax on income below bracket||Tax rate on income bracket|
|From INR||To INR||INR||Percent|
|250,001||500,000||10% of the excess over INR250,000||10|
|500,001||1,000,000||INR25,000 + 20% of the excess over INR500,000||20|
|1,000,001||No limit||INR1,25,000+ 30% of the excess over INR1,000,000||30|
Surcharge at the rate of 15 per cent is payable where the total income exceeds INR 10 million and Education cess at the rate of 2 percent and Secondary and Higher Education Cess at the rate of 1 percent is payable on the amount of tax and surcharge, if applicable. Therefore, the effective maximum marginal rate would be 35.535 percent (with surcharge i.e. where income exceeds INR 10 million) and 30.90 percent (without surcharge i.e. where income is upto INR 10 million).
There is no provision for joint filing of the return of income. There is no distinction amongst individuals, whether married, unmarried, or having children and the same rate is applicable to all.
For the purposes of taxation, how is an individual defined as a resident of India?
An individual is said to be resident in India in any tax year if he/she is:
An individual who does not satisfy either of the above conditions is a non-resident (NR). A not ordinarily resident (NOR) is an individual who:
Resident and Ordinarily Residents are taxed on worldwide income. However, NR and NOR are generally taxed only on Indian-sourced income.
Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.
There is no de minimus number of days rule in respect of residency start/ end date. However an individual visiting India for the first time would remain NR if his stay during the tax year does not exceed 181 days.
In case his/her stay exceeds 181 days, he/she would be NOR. He/She is likely to maintain the NOR status generally for first two to three years of his/her stay in India.
What if the assignee enters the country before their assignment begins?
In India the residential status is determined based on the individual's total physical stay in India during the relevant tax year. Accordingly, the days spent in India prior to start of the assignment are considered for determining the residential status of the individual in India.
Are there any tax compliance requirements when leaving India?
Subject to notified exceptions, every person who is not domiciled in India; who visits India in connection with business, profession, or employment and who derives income from any source in India, is required to, prior to his / her departure, intimate the tax authorities about his / her departure in Form 30A along with other relevant documents so to obtain a No Objection Certificate.. The tax authorities may issue such a certificate once the person submits the said Form (which is an appropriate undertaking from his employer / payer of income, in respect of payment of taxes due from such person in India), along with the relevant documents.. However, there are no special formalities for terminating residence.
Further, every person who is domiciled in India, at the time of his departure from India, shall furnish Form 30C to the income tax authorities, which shall inter-alia, include the following :
What if the assignee comes back for a trip after residency has terminated?
In India, the residential status is determined each year based on the total physical stay of the individual in the concerned tax year. This is irrespective of the purpose of stay of the individual in India. Also, there is no concept of part/split residency in India.
Do the immigration authorities in India provide information to the local taxation authorities regarding when a person enters or leaves India?
There is no formal system under which immigration authorities in India provide information to local taxation authorities. However, recently tax authorities have started requesting such details from the immigration authorities on a regular basis.
Will an assignee have a filing requirement in the host country after they leave the country and repatriate?
An individual is required to file return of income if there is taxable income in India exceeding the prescribed exemption limit. This is irrespective of the presence of assignee in India.
Further, from FY 2012-13, every individual who is claiming benefits under Tax Treaty, and every resident and ordinary resident of India having any asset (including financial interest in any entity) located outside India or signing authority in any account located outside India would be mandatorily required to furnish a return of income disclosing details of such assets irrespective of the fact whether the taxpayer has taxable income or not.
As proposed in the Finance Bill 2016, tax return filing is mandatory in respect of taxpayers with exempt long-term capital gain arising from equity shares / equity-oriented mutual funds (where such exempt income and other income exceeds applicable tax threshold).
Do the taxation authorities in India adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in India considering the adoption of this interpretation of economic employer in the future?
There are no defined rules in this respect. However, Organization for Economic Cooperation and Development (OECD) commentary is commonly referred by tax authorities while interpreting the treaty provisions.
Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?
There is no de minimus number of days for applying the economic employer approach.
What categories are subject to income tax in general situations?
In general, income from employment includes all compensation, in-cash or in-kind, which is due to or received by an employee in a tax year. Taxable compensation includes the following:
Are there any areas of income that are exempt from taxation in India? If so, please provide a general definition of these areas.
Generally, subject to certain conditions, the following items of compensation are not taxable:
Allowances granted to meet the cost of travel on tour or on transfer, including sums paid in connection with the transfer, packing, and transportation of personal effects on such transfer, are exempt to the extent to which such expenses are actually incurred.
Reimbursement of medical expenses actually incurred by the employee for himself/herself or any member of his/her family is exempt up to INR 15,000 per tax year. However, any reimbursement of costs of hospitalization in a recognized hospital in India is fully exempt. Employers’ contributions to health insurance plans abroad would be taxable in India only to the extent the employee has an interest in the plan vested in him/her during the tax year.
Medical expenses of an employee or any member of his/her family incurred outside India is exempt to the extent permitted by Reserve Bank of India. The cost of a stay abroad of the employee or a family member and one attendant is also exempt to the extent permitted by the Reserve Bank of India.
Leave travel concession granted to the employee for himself/herself and his/her family for proceeding on leave to any place in India is exempt with respect to two journeys performed in a block of four calendar years, subject to fulfillment of certain conditions. The current block is 2014-2017.
Allowance granted to meet payment of rent in respect of residential accommodation occupied by the employee is exempt, subject to certain limits.
Tax borne by the employer on non-monetary perquisites provided to the employee is exempt from tax provided the employer does not claim it as a deduction against its taxable income.
Telephone (including the mobile phone) expenses, paid by the employer on behalf of the employee or reimbursed by the employer based on actual expenses of the employees, is exempt from taxation.
Are there any concessions made for expatriates in India?
Certain exemptions are available to foreign nationals and/or non-residents, subject to fulfillment of prescribed conditions. The exemptions available include the following:
Is salary earned from working abroad taxed in India? If so, how?
Compensation received outside India for work performed by an employee abroad, which is not in connection with the services being rendered in India, is not taxable in India, unless the same is received in India, where the employee is NR or NOR in India.
If the expatriate qualifies as a resident and ordinarily resident of India, the salary earned for working abroad will be taxable in India even if the same is received outside India and the same may be subject to Treat benefits or benefits under the domestic tax laws of India.
Are investment income and capital gains taxed in India? If so, how?
Income from the transfer of a capital asset situated in India is deemed to accrue in India. Hence, all individuals are liable for tax on capital gains arising from the transfer of capital assets in India. Securities Transaction Tax (STT) is leviable on transactions of equity shares in a company, units of an equity oriented Mutual Fund and derivatives which are routed through any recognized stock exchange in India.
Short-term capital gains (i.e., capital gains on shares or any other security listed on a recognized stock exchange in India or on units of specified mutual funds held for not more than one year, and in case of other assets held for not more than three years) are taxed in the same manner as ordinary income. Short-term capital gains arising on transfer of securities liable to STT are taxed at a rate of 15 percent (plus surcharge, if any plus education cess).
Long-term capital gains arising on transfer of Equity shares or units of Equity Oriented Mutual Funds liable to STT are exempt from tax.
Please note that till 10 July 2014, if units of debt oriented mutual funds or unlisted shares are held for more than 12 months then gain arising on the same was treated as Long term capital gains (< 12 months – Short Term).
From 10 July 2014 onwards, if units of debt oriented mutual funds or unlisted shares are held for more than 36 months then gain arising on the same shall be Long term capital gains (< 36 months – Short Term).
As proposed in the Finance Bill, 2016, in case of unlisted shares, the same shall qualify as a long term capital asset if the same are held for a period exceeding 2 years.
Long-term capital gains from transfer of other assets are taxed at a concessional rate of 20 percent plus surcharge, if any plus education cess. In determining such long-term capital gains, the cost of assets is indexed upwards for inflation as per the notified index table.
There are exemption provisions in respect of long term capital gains on re-investment in specified assets/ securities, subject to fulfillment of certain conditions.
Securities transaction tax leviable varies from 0.001 percent to 0.125 percent of the transaction value, depending on the type of securities transacted.
Dividend from shares held in Indian companies and specified mutual funds are exempt from tax. However in case of a Resident and Ordinary residents, dividend income from investments outside India is taxable, subject to treaty benefits. Expenses incurred specifically for earning such taxable investment income are deductible.
As proposed in the Finance Bill, 2016, dividends received (except deemed dividend) by a resident taxpayer from domestic companies, where the aggregate dividend received exceeds INR 1 Million in the tax year shall be taxed at 10 per cent (plus applicable surcharge and education cess) on gross basis.
Interest income earned in respect of the investments made in India is subject to tax in India. Also, in case of a Resident and Ordinary residents, interest income from foreign investment is taxable, subject to treaty benefits.
Rental income from a house property is taxable in the hands of its legal owner. The net rental income (i.e. gross rent less municipal taxes) is chargeable to tax after making the following deductions:
No other deductions are permissible from the said rental income.
Benefits from Employees Stock Option Plan (ESOP) are taxed as perquisite in the hands of employees. The taxability of a benefit arising out of ESOPs is triggered at the time of allotment of the specified securities. The perquisite value is determined as the Fair Market Value (FMV) on the date on which the “option” is exercised by the employee as reduced by the amount actually paid by, or recovered from the employee in respect of such ESOPs. FMV means the value determined in accordance with the method prescribed by the Central Board of Direct Taxes.
Further, if after exercising the options, the employee holds the shares for some time and sells the same subsequently, the difference between the sale consideration and the FMV considered for calculating the perquisite value would be subject to capital gains tax. Depending on the period of holding the capital gains would be considered as short-term/long-term.
There is no specific provision governing the taxability of gains and losses of principal residence.
Subject to certain conditions, the capital losses incurred by the assignee in India can be set-off only against the capital gains during the tax year. If the loss cannot be set-off, the amount can be carried forward to subsequent tax years to be set-off against capital gains.
Any sum(s) received (except for sums received from specified relatives and in certain other specified situations) by an individual from any person in cash/cheques/draft/any other mode or by way of credit or otherwise than as consideration for goods and services, the whole of the aggregate value of such sums received during the tax year is taxable in the hands of the recipient as "income from other sources." However, where the total of such receipts does not exceed INR 50,000 in the aggregate during the tax year, the said sums are exempt from taxation.
Are there additional capital gains tax (CGT) issues in India? If so, please discuss?
For non-residents, capital gains arising from transfer of shares or debentures of an Indian company are calculated in the same foreign currency as was initially used to purchase such shares or debentures and the cost inflation index is not applied to such gains. Long-term capital gains arising from the transfer of specified bonds or Global Depository Receipts issued in foreign currency are taxed at the rate of 10 percent.
Exemption from long-term capital gains may be claimed by making investment in a residential house property in India and/or certain bonds, and / or equity of an Eligible Business subject to specified conditions.
It is proposed in the Finance Bill, 2016 that capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains is invested in subscription of shares of a company which qualifies to be an eligible start-up subject to other specified conditions.
Are there capital gains tax exceptions in India? If so, please discuss?
Deductions from income, subject to fulfillment of certain conditions, include the following.
• Donations to specified institutions in India: 50 percent of donation amount, which may / may not be subject to limit of 10 percent of gross total income. Donations to certain institutions are eligible for 100 percent deduction.
Further, deduction in respect of donations made to specified funds, charitable institutions, scientific research, or rural development institutions, in excess of INR 10,000, will be allowed only if the donation is made other than in cash.
• Health insurance premium payments to specified insurers made in any mode other than cash: Deductions of up to INR 25,000 in respect of health insurance of the individual and / or his/her family members**. (Up to INR 30,000 in case the person insured is a senior citizen i.e. individual of age 60 years or more during the FY). Additional deduction of up to INR 25,000/INR 30,000 is available in respect of health insurance premium paid for parents of the individual.
Further, the afore-mentioned health insurance payments include payments made up to INR 5,000 per annum (including cash payment) towards preventive health check-up of the individual and his / her family members and parents.
It may be noted that the aggregate deduction available in respect of payments made towards health insurance payments cannot exceed INR 60,000
** Family members includes spouse of the individual and dependent children of the individual.
• A deduction of up to INR 75,000 is available to a person resident in India in respect of maintenance including medical treatment of a dependant who is a person with disability (INR 125,000 in case the dependant is a person with severe disability) subject to certain conditions.
• Deduction of up to INR 40,000 is available in respect of medical treatment of himself/herself or his/her dependents, for specified diseases (up to INR 60,000 in case of senior citizens i.e. individual of age 60 years or more but below 80 years during the FY, and up to INR 80,000 in case of very senior citizens i.e. individual of age 80 years or more during the FY)
• A deduction of up to INR 75,000 is available to a person resident in India suffering from disability (INR 125,000 for persons with severe disability) subject to certain conditions.
• Deduction of actual Interest paid on loan taken for the purpose of higher education.
• A deduction of up to INR 10,000 per annum has been allowed for interest on deposits (excluding time deposits) in a savings account with specified banks, co-operative societies, and post offices, for individuals/ Hindu undivided family (HUF).
• A Income- tax deduction of 50 percent for investments up to INR 50,000 made by retail investors (whose annual income is below INR 12 lakhs from FY 2013-14) with a lock-in period of three years has been allowed under a new investment scheme called Rajiv Gandhi Equity Savings Scheme.
• Additional Deduction in respect of interest on loan taken for residential house property - As proposed in Finance Bill, 2016, for the tax year 2016-17 onwards, an additional deduction of INR 50,000 is available in respect of interest payable on loan taken for the purpose of acquisition of residential house property subject to fulfillment of the following key conditions:
A deduction from the income of an individual not exceeding INR 150,000 is allowed with respect to sums paid or deposited in the tax year out of income chargeable to tax, in certain specified schemes.
The following are some of the investments/payments qualifying for this deduction:
• Life Insurance Premium, subscription to National Savings Certificate Scheme, contribution to recognized Provident Fund or to a Public Provident Fund in India, subscription to notified Deposit Scheme, subscription to Sukanya Samriddhi Account.
• Repayment of a loan taken for purchase/construction of new residential house, amount paid as Stamp Duty and Registration charges at the time of purchase of a residential house
• Subscription to units of mutual fund under specified schemes or to approved issues (proceeds to be used for development, and so on of infrastructure facilities) of equity shares/debentures made by public sector undertakings or public financial institutions in India.
• Employee’s contribution to National Pension System.
• Employer’s contribution to the National Pension System (NPS) to the extent of 10 per cent of base salary (this is not subject to monetary limit of INR 150,000).
• Term Deposit for a fixed period of not less than 5 years with a scheduled bank as per the scheme framed and notified by Central Government.
• Contribution to Unit Linked Insurance Plan of LIC Mutual Fund
It may be noted that the various payments / contributions which are eligible for deduction in the afore-mentioned bracket of INR 150,000 may be subject to fulfillment certain specified conditions.
Further, additional deduction of up to INR 50,000 is available on account of employees’ contribution to NPS.
What are the tax reimbursement methods generally used by employers in India?
As per the provisions of Indian company law, an Indian company is not allowed to bear any tax on behalf of its employees. In case of individual employed with foreign companies the company normally deposits the tax directly with the tax authorities by way of withholding taxes.
How are estimates/prepayments/withholding of tax handled in India? For example, pay-as-you-earn (PAYE), pay-as-you-go (PAYG), and so on.
The India tax system runs on pay-as-you-earn basis in respect of salary payments. Accordingly, tax needs to be withheld and deposited with the tax authorities on a monthly basis. If the taxes are not deducted interest is levied at the rate of 1 per cent per month or part of the month for the months for which tax has not been deducted. If the taxes deducted are not deposited into the Government treasury, there would be an interest charged at the rate of 1.5 percent per month or part of the month leviable for all the months for which taxes have not been paid till date of the payment of tax. The tax withheld needs to be deposited within seven days from the end of the month (for the month of March tax may be deposited on or before 30 April and 7th April where tax on non-monetary perquisites are borne by employer).
Every person responsible for making payment of employees' remuneration has an obligation to deduct tax on a monthly basis from the employees' remuneration at the time of payment thereof. Tax is to be deducted on the estimated income of the employee after allowing certain permissible deductions.
Even foreign employers are not exempt from such withholding tax obligations.
In case the amount of tax being withheld at source is short of the actual tax liability, an individual is liable to pay advance tax. Advance tax provisions have been discussed earlier above under “Tax Returns and Compliance”.
When are estimates/prepayments/withholding of tax due in India? For example: monthly, annually, both, and so on.
As discussed earlier, an employer is liable to deduct tax at the time of payment of salary to its employees. The tax deducted is to be deposited with the central government within seven days from the end of the month in which tax is deducted (except the tax deducted in the month of March may be deposited on or before 30 April), and 7 April where tax on non-monetary perquisites are borne by employer)..
Furthermore, an annual salary certificate (namelt Form 16) is required to be issued to the employee in respect of tax deducted at source, within two months from the end of the tax year. The employer is also required to submit quarterly withholding tax statements in respect of the tax deducted at source during the year on or before 15th of the month following the quarter, and on or before 15th May in case of quarter ending on 31 March.
Is there any Relief for Foreign Taxes in India? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?
A resident and ordinary resident in India is entitled to claim credit for foreign taxes paid on foreign-sourced income against the Indian tax payable on such income:
India has Double Taxation Avoidance Agreement (DTAA) with more than 100 countries (Comprehensive and limited).
There is no specific provision for the employee to consider FTC benefit at the time of withholding taxes from salary income. In the absence of aforesaid specific provision, the employee may consider to claim the said treaty benefit at the time of filing his/her personal tax return.
Relief under the DTAA will be available only if a Tax Residency Certificate (‘TRC’) is obtained by a Non- Resident taxpayer from the Government of other country or specified territory of which he/she is a resident and the TRC contains prescribed particulars (of the taxpayer being a resident in any country or specified territory outside India. Additionally, the taxpayer is required to provide such other documents and information as may be prescribed in Form 10F.
Further TRC would be regarded as a necessary but not sufficient condition to avail the benefits under the DTAA.
What are the general tax credits that may be claimed in your country? Please list below.
The Indian tax law does not have any specific provisions for tax credit. Deductions from the taxable income, subject to certain limits are available (as discussed in the earlier sections).
This calculation3 assumes a taxpayer non-resident in India with two children, whose three-year assignment begins 1 January 2014 and ends 31 December 2015. The taxpayer’s base salary is USD 100,000 and the calculation covers three years.
|Moving expense reimbursement||0||20,000||0|
|Interest income from non-local sources||6,000||6,000||6,000|
Exchange rate used for calculation: USD1.00 = INR60.00.
Indian tax year runs from 1 April to 31 March.
|Days in India during year||90||365||275|
|Earned income subject to income tax|
|Taxable housing allowance||160,274
|Moving expense reimbursement||0
|Total earned income||2,301,818
|Other income (Income earned outside of India is not taxable in India in case od non-resident)||0||0||0|
|Total taxable income||2,110,515||8,859,600||6,449,085|
Calculation of tax liability
|Taxable income as above||2,301,818
|Indian tax thereon||536,162
|Domestic Tax rebates (dependent spouse rebate)||0||0||0|
|Foreign tax credits||0||0||0|
|Total Indian tax (rounded off)||536,162
Taxable housing allowance
|Actual rent (assumed INR700,000 per year)||195,000||780,000||585,000|
|Actual housing allowance||195,000
|Least of the following is exempt:|
|Excess of rent paid over 10% of salary||34,726
|50% of basic salary*||801,370
|Actual housing allowance||195,000
|Housing allowance exempt||34,726
|Taxable Housing Allowance||160,274
*Assuming that the expatriate is residing in a Metro city. In case of a non-metro city, the percentage is 40 percent.
Calculation of perquisite value in hands of employee
Total tax burden
|Total Indian tax||536,162
1 Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home.
2 For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.
3 Sample calculation generated by KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative, based on the tax rates applicable as per the Indian Finance Acts 2012, 2013 and 2014 for the tax year 2012-13, 2013-14 and 2014-15 respectively.
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