India - Income Tax

India - Income Tax

Taxation of international executives

1000

Related content

Tax returns and compliance

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 concept of extended return in India. However, belated return (i.e., after due date) can be filed. From Tax Year (TY) 2016-17 onwards, belated tax return can be filed at any time before (1 year from the end of TY or before the completion of assessment (audit of India tax return), whichever is earlier.

Where a taxpayer files a return after the due date, interest is levied at 1 percent per month (or part thereof) for each month of delay on the balance tax payable. The Finance Bill, 2017 has proposed a levy of late filing fee ranging from INR 1000 to INR 10,000 in case of tax returns filed after the due date.

Further, any losses (excluding losses under the head Income from House Property) cannot be carried forward where the return is filed belated (i.e. post the due date).

What is the tax year end?

The TY 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 TY 2016-17 and 2017-18 , 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 TY 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.

From TY 2016-17 onwards, ax 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. From TY 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).

Tax rates

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 2018-19 (tax year 2017-18) are as follows:

Proposed Income tax rates table for the tax year 2017-18

Taxable income bracket Total tax on income below bracket Tax rate on income bracket
From INR To INR INR Percent
0 250,000* 0  
250,001 500,000 0 5% of the excess over INR250,000
500,001 1,000,000              INR12500  20% of the excess over INR500,000
1,000,001 No limit         INR11,25,00  30% of the excess over INR1,000,000

  • * 300,000 in case of a resident individual of the age of 60 years or above (below 80 years).
  • * 500,000 in case of a resident individual of the age of 80 years or above.

Surcharge at the rate of 15 per cent is payable where the total income exceeds INR 10 million. 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 where the income does not exceed INR 10 million.

The Finance Bill has proposed to levy a surcharge of 10% where the income exceeds INR 5 million. Surcharge at the rate of 15 per cent would continue to be payable where the total income exceeds INR 10 million. Further, education cess at the rate of 2 percent and Secondary and Higher Education Cess at the rate of 1 percent would continue to be payable on the amount of tax and surcharge, if applicable. Therefore, the effective maximum marginal rate would be as under:

  • 35.535 percent (with surcharge i.e. where income exceeds INR 10 million).
  • 33.99 percent (with surcharge i.e. where income exceeds INR 5 million but does not exceed INR 10 million).
  • 30.90 percent where income does not exceed INR 5 million.
  • Tax rebate of up to INR 2,500 per annum for resident individuals, with total income up to INR 3,50,000 per annum.
  • A taxpayer can claim marginal relief from the amount of surcharge, subject to certain conditions. The concept of marginal relief is designed to provide relaxation from levy of surcharge to a taxpayer where the total income exceeds marginally above INR 5 million/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.

Residence rules

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:

  • present in India in that tax year for a period or periods totaling 182 days or more or
  • present in India for at least 60 days or more during the tax year (182 days or more for a citizen of India/person of Indian origin on a visit to India; 182 days or more for a citizen of India who leaves India for employment abroad or as member of a crew of an Indian ship) and 365 days or more during the preceding four tax years.

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 qualifies as resident but:

  • has been non-resident in India in nine out of the ten tax years preceding that tax year or
  • has during the seven tax years, preceding that tax year, been in India for a total period of 729 days or less.

Resident individual not qualifying as NOR will qualify as Resident and Ordinarily Residents (ROR) and 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 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 during tax year, 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 (irrespective of purpose of stay) are considered for determining the residential status of the individual in India.

Termination of residence

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 under indian tax law. 

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 :

  • his / her PAN;
  • purpose of his / her visit outside India;
  • the estimated period of his / her stay outside India.

What if the assignee comes back for a trip after residency has terminated?

In India there is no concept of termination of residency, 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 under the Indian Tax Law.

Communication between immigration and taxation authorities

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.

Further, since local taxation authorities and immigration authorities are moving towards online process, same may be integrated in due course of time.

Filing requirements

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 TY 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.

Also, 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).

Economic employer approach

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.

De minimus number of days

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.

Types of taxable compensation

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:

  • salary, wages, bonuses, allowances, and other cash compensation;
  • income tax paid by the employer on behalf of the employee;
  • specified perquisites (such as Rent Free Accommodation, club membership, reimbursement of utilities, etc.) 

Tax-exempt income

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:

  • House Rent Allowance
  • certain travel/tour allowances
  • reimbursement of medical expenses up to specified limits
  • medical expenses of an employee or any member of his/her family incurred outside India
  • leave travel concession
  • allowance granted to meet payment of rent towards accommodation
  • tax borne by the employer on non-monetary perquisites
  • reimbursement of telephone expenses including cost of the telephone.
  • Gratuity
  • Leave encashment
  • Gift from employer upto specified limit
  • Superannuation Employer contribution
  • Employer Provident Fund contribution 

House Rent Allowance (HRA):

HRA is an allowance granted to meet the housing costs of the employee.
Direct tax implications

  • A tax exemption is available to employee towards HRA, limited to least of the following1 :
  • 40 per cent of salary2 (50 per cent in case the house is situated in Mumbai, Delhi, Kolkata or Chennai);
  • HRA actually received by employee; and
  • Excess of actual rent paid over 10 per cent of salary.
  • HRA exemption is not available if the employee resides :
  • in his own house; or
  • in a house for which he does not incur any rent (this could cover instances where the house is available to an individual even without payment of rent)
  • HRA exemption may be availed only for the period during which the employee occupies the house during the relevant tax year.

It is proposed that taxpayer (other than those covered under audit of books of account) paying rent exceeding INR 50,000 per month or part of the month to a resident tax payer is required to deduct Tax Deducted at Source (TDS) @ 5% (proposed to be effective from 01 June 2017).

Certain travel/tour allowances

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

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

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

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. Upcoming block is 2018-21.

Subject to specific conditions, one unutilized eligibility of Leave Travel concession of current block can be carried forward to first year of subsequent block.

Tax borne by the employer on non-monetary perquisites

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.

Certain travel/tour allowances

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

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

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

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.Upcoming block is 2018-21.

Subject to specific conditions, one unutilized eligibility of Leave Travel concession of current block can be carried forward to first year of subsequent block.

Tax borne by the employer on non-monetary perquisites

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 expenses

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.

Gratuity

Gratuity received (in accordance with Payment of Gratuity Act, 1972) by employee on retirement/ termination of employment or by family on death of employee tax-payer from employer is exempted from tax subject to specified limit (presently INR 1,000,000).

Leave encashment

Leave encashment received by employee on retirement from employer is exempted from tax subject to specified limit (presently INR 300,00).

Gift from employer

Any gift received by employee from employer in cash / Kind is taxable in the hands of employee, subject to aggregate amount of gift is INR 5,000 or above.

Superannuation Employer contribution

Employer’s contribution towards specified approved Superannuation is taxable, subject to amount of aggregate contribution exceeds INR 150,000.

Employer Provident Fund contribution

Employer’s contribution towards Provident Fund is exempt from tax subject to fulfillment of certain conditions. Alternatively, same would be taxable in the tax year of withdrawal at specified tax rates.

Expatriate concessions

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:

  • Remuneration for services rendered by a foreign national, employed by a foreign enterprise during his/her stay in India, is exempt if:
    1. the total period of the stay in India does not exceed 90 days in a tax year;
    2. the foreign enterprise is not engaged in any trade or business in India; and
    3. the remuneration is not cross charged to an entity subject to Indian income tax.
  • Remuneration received by or due to a non-resident foreign national for services rendered in connection with employment on a foreign ship, where the total period of the stay in India does not exceed an aggregate period of 90 days in a tax year, is exempt from tax.
  • Remuneration received by a foreign national working as an employee of a foreign government is exempt from tax, if the remuneration is received in connection with training activity in an undertaking, office, or company owned by the government.
  • Remuneration from any cooperative technical assistance program in accordance with an agreement entered into by the central government with a foreign government is exempt from tax, provided:
    1. the remuneration is received from the foreign government
    2. the employee is required to pay income tax to another foreign government on income arising outside India.

In addition, concessions / benefits such as short-stay or exclusions are also available under the Double Tax Avoidance Agreement between India and host country.

Salary earned from working abroad

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 qualifies as NR or NOR in India.

If the expatriate qualifies as a resident and ordinarily resident of India, the salary earned for working abroad may be taxable in India even if the same is received outside India and the subject to Treat benefits or benefits under the domestic tax laws of India.

Taxation of investment income and capital gains

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.

TY 2016-17:

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 or unlisted shares (from TY 2016-17) and in case of other assets held for not more than 3 years) are taxed in the same manner as ordinary income. Short-term capital gains arising on transfer of securities and specified units liable to STT are taxed at a rate of 15 percent (plus surcharge, if any plus education cess).

TY 2017-18:

It is proposed in the Finance Bill 2017 that immovable property (Land or building or both) would need to be held for 24 months (earlier 36 months) to be treated as long term capital asset.

Long-term capital gains arising on transfer of Equity shares or units of Equity Oriented Mutual Funds, liable to STT on sale, are exempt from tax.

Further, it is proposed in Finance Bill, 2017 that exemption under this section shall be available only if STT was payable at the time of acquisition of shares / Equity Oriented Mutual Funds.

From 10 July 2014 onwards, if units of debt oriented mutual funds are held for more than 36 months then gain arising on the same shall be Long term capital gains (< 36 months – Short Term)

Long-term capital gains from transfer of assets (other than equity shares and equity oriented mutual funds) 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.

Further, Long term capital gains on specified capital assets are taxed at a rate of 10% plus surcharge, if any plus education cess. This is an option available to tax payer where the cost of assets is not indexed upwards while calculating capital gains. It is proposed in the Finance Bill 2017 thatimmovable property (Land or building or both) would need to be held for 24 months (earlier 36 months) to be treated as long term capital asset.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 0.017 percent to 0.25% percent of the transaction value, depending on the type of securities transacted.

The Finance Bill 2017 has proposed to shift the base year to compute capital gains from 1981 to 2001.

Dividends, interest, and rental income

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.

From TY 2016-17, 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.
It is proposed in Finance Bill, 2017 that interest would not be leviable on account of shortfall in advance tax payment on account of dividend taxable in excess of INR 1 million.

Interest income earned in respect of the investments made in India is subject to tax in India. Also, in case of Resident and Ordinarily 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:

  • Standard deduction – 30 per cent of the net rental income;
  • Interest on loan taken for purchase of House property. – INR 200,000 / INR 30,000 / Amount of interest paid or payable during the tax year, depending on the facts and circumstances of each case.

No other deductions are permissible from the said rental income.

As proposed in the Finance Bill 2017, the maximum amount of loss which can be set off against other income is capped at INR 2,00,000. The balance loss can be carried forward of 8 subsequent tax years and set-off against house property income only.

Gains from stock option exercises.

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 of the shares, capital gains would be considered either as short-term or long-term.

Principal residence gains and losses

There is no specific provision governing the taxability of gains and losses of principal residence.

Capital losses

Subject to certain conditions, the capital losses incurred by the assignee 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 eight Tinancial Years to be set-off against specified capital gains.

Gifts

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 adequate consideration for goods and services, aggregate of inadequate 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 not taxable.

Additional capital gains tax (CGT) issues and exceptions

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.

Are there capital gains tax exceptions in India? If so, please discuss?

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.
Further, from TY 2016-17 capital gains arising on account of transfer of a residential property shall not be charged to tax if such capital gains are invested in subscription of shares of a company which qualifies to be an eligible start-up subject to other specified conditions.

Pre-CGT assets

Not applicable.

Deemed disposal and acquisition

Not applicable.

General deductions from income

What are the general deductions from income allowed in India?

Deductions are allowed in India against the taxable income (restricted to taxable income) based on nature of investments, expenses incurred, income earned, etc.

1. 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 based on payments / investments made. 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.
  • 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
  • Employee’s contribution under annuity plan of Insurer (approved by regulator) 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).

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.

2. 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 TY).

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.

**Family members includes spouse of the individual and dependent children of the individual.

Payment made up to INR 5,000 per annum (including cash payment) towards preventive health check-ups for self, spouse, dependent children, parent(s) included within the current overall deduction limits for health insurance premium/contribution payments.

For very senior citizens (80 years of age or above) not covered under health insurance, medical expenditure incurred qualify for deduction within specified limit of INR 30,000 per annum.

3.Deduction for specified tax resident individual for investment in specified listed equity shares or listed units of equity oriented fund, with lock in period of 3 years. Deduction restricted to 50 percent of investment or INR 25,000; whichever is lower. It is proposed in Finance Bill, 2017 that deduction under section 80CCG shall not be allowed from TY 2017-18.

4.Deduction of INR 75,000 available to resident person for expenditure incurred towards medical treatment and maintenance of a dependent who is a person with disability and INR 125,000 in case the said dependent is a person with severe disability

5.Deduction up to INR 40,000 or 60,000 or 80,000 (depending upon the age of person for whom expenditure is incurred) available to resident person for expenditure incurred towards medical treatment of specified disease / ailments for himself / dependent.

6.Deduction for amount paid by the individual (out of his / her income chargeable to tax) by way of interest on loan taken by him from specified financial institutions (including banks) / charitable institutions for the purpose of higher education of himself / his relatives is an eligible deduction for specified period. Individuals paying rent in excess of 10% of taxable income for an accommodation (furnished / unfurnished) but not receiving a house rent allowance from employer, can claim a deduction of lower of following:

  • Rent Paid – 10% of taxable income; or
  • INR 5,000 per month (or INR 60,000 per annum); or
  • 25% of taxable income

7.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.

As proposed in Finance Bill 2017, the above threshold is revised to INR 2,000.

8.Additional deduction up to INR 10,000 per annum towards interest on deposits (excluding time deposits) in a savings account with specified banks, co-operative societies and post offices, for individuals/ HUFs from tax year 2012/13 onwards.

9.Additional Deduction in respect of interest on loan taken for residential house property - As per the Finance Act, 2016, for the TY 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:

  • the loan is sanctioned between 01 April, 2016 and 31 March, 2017;
  • the amount of said loan does not exceed thirty-five lakhs rupees;
  • the value of the said property does not exceed fifty lakhs rupees;
  • the individual does not own any residential property on the date of sanction of loan
  • No deduction is claimed under any other section / provision.

10. Deduction of INR 75,000 available to resident person with disability and INR 125,000 to a resident person with severe disability certified with medical authority.

Tax reimbursement methods

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.

Calculation of estimates/prepayments/withholding

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).

Pay-as-you-earn (PAYE) withholding

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.

Advance tax installments

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.

Any person making the payment of salary, 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). The employer is also required to file quarterly withholding tax statements with Indian Revenue Authorities in respect of the tax deducted at source during the year as below

Quater Due Date
1 – April to June 31 July 
2 – July to Sep 31 October
3 – Oct to Dec 31 January
4 – Jan to March 31 May

Furthermore, an annual salary certificate (namely Form 16) is required to be issued to the employee in respect of tax deducted at source.

Relief for foreign taxes

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:

  • where agreement for avoidance of double taxation exists between the two countries, in accordance with the terms of that agreement.
  • in other cases, at the lower of the foreign or Indian rates of tax, or at the Indian rate of tax, if both the rates are equal.

Rules have been notified in India for availing Foreign Tax Credit (FTC) in India and the same are applicable from TY 2016-17. Accordingly, tax payer availing FTC needs to provide declaration in Form 67 along with specified documents justifying taxes paid / deducted at source in foreign country.

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 (i.e. exclusion of income, lower tax rate, etc.) will be available only if a Tax Residency Certificate (‘TRC’) is obtained by a Resident taxpayer (under the tax treaty) from the Government of other country or specified territory of which he/she is a resident. 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.

General tax credits

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).

Sample tax calculation

This calculation assumes a taxpayer non-resident in India with two children, whose three-year assignment begins 1 January 2016 and ends 31 December 2018. The taxpayer’s base salary is USD 100,000 and the calculation covers three years.

  2016
USD
2017
USD
2018
USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 0 20,000 0
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = INR65.00.

Indian tax year runs from 1 April to 31 March.

Other assumptions

  • All salary income is attributable to services rendered in 
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to India.
  • The company car is used for business and private purposes and originally cost USD 50,000. The cubic capacity of the car exceed 1.6 liters and chauffeur is also provided by the 
  • Moving expense reimbursement are paid at the time 
  • The employee is deemed resident throughout 
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.
Year-ended 2015-2016
INR
2016-2017
INR
2017-2018
INR
Days in India during year 90 365 275
Earned income subject to income tax      
Salary 1,602,740
6,500,000
4,897,260
Bonus 320,548
1,300,000
979,452
Cost-of-living allowance 160,274
650,000
489,726
Taxable housing allowance 160,274
650,000
489,726
Moving expense reimbursement 0
1,300,000
0
Home leave 0 325,000
0
Education allowance 48,082
195,000
146,918
Motor car 9,900
39,600
29,700
Total earned income 2,301,818
10,959,600
7,032,782
Other income (Income earned outside of India is not taxable in India in case od non-resident) 0 0 0
Total income 2,301,818
10,959,600
7,032,782
Deductions: 0 0 0
Total taxable income 2,301,818 10,959,600
7,032,782

 

Calculation of tax liability

  2015-2016
INR
2016-2017
INR
2017-2018
INR
Taxable income as above 2,301,818
10,959,600
7,032,782
Taxes 515,545 
3,112,880
1,922,335 
Surcharge NIL 466,932 
192334
Education Cess 15,466
107394
63437
Indian tax thereon 531011
3687206
2178005
Less:      
Domestic Tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Total Indian tax (rounded off) 531010
3687210
2178005

 

Taxable housing allowance

  2015-2016
INR
2016-2017
INR
2017-2018
INR
Actual rent (assumed INR700,000 per year) 195,000 780,000 585,000
Actual housing allowance 195,000
780,000
585,000
Least of the following is exempt:      
Excess of rent paid over 10% of salary 34,726
130,000
95,274
50% of basic salary* 801,370
3,250,000
2,448,630
Actual housing allowance 195,000
780,000
585,000
Housing allowance exempt 34,726
130,000
95,274
Taxable Housing Allowance 160,274
650,000
489,726

*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

  2015-2016
INR
2016-2017
INR
2017-2018
INR
Company car 97,500
390,000
292,500
Perquisite value 9,900
39,600 29,700

 

Total tax burden

  2015-2016
INR
2016-2017
INR
2017-2018
INR
Total Indian tax 531,010
3,687,210
21,78,005

1Certain 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 Act 2015, Finance Act 2016 and Finance Bill 2017 for the tax year 2015-16, 2016-17 and 2017-18 respectively..

© 2017 KPMG, an Indian registered partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG International has created a state of the art digital platform that enhances your experience, optimized to discover new and related content.