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An individual is taxed in India on the basis of his/her residential status under the Income Tax Act of 1961 (the Act). Residential status, per the Act, is determined, inter alia, on the basis of physical presence of the individual in India during a particular financial year (April 1 to March 31).

Income tax

Residential status under the Act

An individual can be a resident and ordinarily resident (ROR), a resident but not ordinarily resident (NOR), or a non-resident (NR) for Indian tax purposes.

Taxability of income

Taxation varies based on the residency status of the individual in a financial year.

  • ROR – liable for tax on worldwide income
  • NOR – liable for tax on income sourced /deemed to source from India or received/deemed to be received in India, or from income derived from a business controlled or set up in India
  • NR – liable for tax only on income sourced /deemed to source from India or received/deemed to be received in India

Foreign nationals may be exempt from tax in India if their stay in India does not exceed 90 days, as prescribed in the Indian domestic law, or the number of days prescribed (generally 183 days) under various double taxation avoidance agreements (DTAA) into which India has entered with other countries, subject to satisfaction of all other conditions.

Definition of source

Salary for services rendered in India is deemed to accrue in India and hence, is taxable in India for all individuals, irrespective of the place of receipt and residential status, subject to benefit, if any, under the DTAA. Generally, services rendered are equated with physical presence in India. Salary entitlements paid for leave periods before or after services rendered in India, in line with an individual’s employment contract, are also deemed to have been earned for services rendered in India.

Tax trigger points

As mentioned above, salary for services rendered in India is taxable in India for all individuals. Further, salary received in India is taxable in India, irrespective of residential status of the individual and place of rendering services, subject to benefit, if any, under the DTAA/domestic tax laws of India. 

Remuneration for services rendered by a foreign national, employed by a foreign enterprise during the individual’s stay in India, is exempt from tax in India if:

  • The total period of the stay in India does not exceed 90 days in a financial year
  • The foreign enterprise is not engaged in any trade or business in India
  • The remuneration is not liable to be deducted from the income of the employer chargeable in India

To the extent that the individual qualifies for relief in terms of the dependent personal services article of the applicable DTAA, there will be no tax liability. The DTAA exemption will not apply if the Indian entity is the individual’s economic employer. In addition, any salary or local benefits received in India are not eligible for relief under the DTAA. Additionally, subject to satisfaction of conditions, credit of taxes against juridical double taxation can be claimed under Article Relief from Double Taxation. 

Tax Residency Certificate (TRC) has been mandated for claiming Treaty Benefits while filing India tax return from financial year 2012-13. A taxpayer is required to produce a TRC issued by the Government of the respective country or specified territory in which such taxpayer is resident. 

The requirement of obtaining the TRC in the prescribed particulars has been done away with. In other words, the taxpayer can continue to obtain the TRC as issued by the foreign authorities. Separately, the taxpayer would also be required to furnish such other information as required in Form 10F.

Types of taxable income

Individuals are taxable on income from one or more of the following categories:

  • Salaries
  • Income from house property
  • Profits and gains of a business or profession
  • Capital gains
  • Income from other sources

Income under each category is computed separately. The net result of all categories is aggregated to arrive at gross total income. Taxable income is determined by subtracting specified deductions from the gross total income. The benefits/amenities provided by employers to their employees are taxed as perquisites in line with the income tax rules.

Tax rates

Financial year 2014–2015:

The maximum tax rate for the financial year 2014–2015 (April 1, 2014 to March 31, 2015) continues to be 30 percent on income earned over and above INR 1,000,000. Additionally there is a levy of surcharge at the rate of 10 percent where the total income exceeds INR 10 million and education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000.

Financial year 2015-2016:

The maximum tax rate for the financial year 2015–2016 (April 1, 2015 to March 31, 2016) continues to be 30 percent on income earned over and above INR 1,000,000. Additionally, there is a levy of surcharge at the rate of 12 percent where the total income exceeds INR 10 million and education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000

Financial year 2016-2017 (as per proposed Finance Bill 2016):

The maximum marginal tax rate for the financial year 2016–2017 (April 1, 2016 to March 31, 2017) continues to be 30 percent on income earned over and above INR 1,000,000. Additionally there is a levy of surcharge at the rate of 15 percent where the total income exceeds INR 10 million and education cess at the rate of 3 percent on the amount of tax plus surcharge, if any.

The maximum amount not liable to tax in case of all individuals (below 60 years) is INR 250,000; in the case of an individual aged 60 years and above (below 80 years), the maximum amount not liable to tax is INR 300,000. Further, in the case of individual aged 80 years and above, the maximum amount not liable for tax is INR 500,000

It may be noted that the Finance Bill 2016 will go through all its Parliamentary stages in the coming weeks of March 2016. Once approved by both houses of the parliament and by the President of India, the legislation will come into force immediately.
 

Social security

Liability for social security

The Ministry of Labor and Employment, in a notification dated October 1, 2008, amended the “Employees Provident Fund Scheme, 1952,” and the “Employees’ Pension Scheme, 1995,” collectively referred to as the Indian Social Security Scheme. Accordingly, the scope of the Indian Social Security Scheme was extended to specifically include a new concept of “International Workers”(IWs). 

IWs include expatriates working for an employer in India to which the Provident Fund Act and Indian employees who have worked in a country that has a social security agreement (SSA) and are eligible for benefits under these SSAsis applicable. Accordingly, all the expatriates holding foreign passports will qualify as IWs in India. Consequently, all employees who fall within the definition of IWs are required to become members of the Schemes under the Provident Fund Act unless they qualify as ‘excluded employees’. 

Accordingly, all the expatriates holding foreign passports will qualify as IWs in India.

Consequently, all employees who fall within the definition of IWs are required to become members of the Schemes under the Provident Fund Act unless they qualify as ‘excluded employees’.

IWs are excluded from contributing towards PF:

  • If they are contributing to social security in their country of origin; and Obtained a Certificate of Coverage (COC) under the relevant SSA;

Or

  • Deputed from a country with which India has entered into a bilateral comprehensive economic agreement before 1 October 2008

IWs (other than excluded employees) are required to contribute 12 percent of the specified salary to the Indian social security scheme. Employers are also required to contribute 12 percent of their employees’ specified salary to the scheme. A portion of employer’s contribution i.e. 8.33 percent of salary is mandatorily contributed into the pension scheme. The contribution must be deposited on a monthly basis by the 15th of the subsequent month. Necessary forms and returns must be filed with the authorities by the prescribed deadlines. 

Amendments in the Employees’ Pension Scheme, 1995

• As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014, the employee who is joining and becoming the member of the fund for the first time on or after 1st Sep 2014 and has salary exceeding INR 15,000 at the time of joining the fund is not eligible to become member of Employees’ Pension Scheme, 1995.

• Therefore, the employer’s entire PF contribution of 12% will be contributed towards Provident Fund account and there will be no diversion of employer’s share to the Pension Fund.

• Thus, all International Workers who would be becoming the member of the Provident Fund for the first time on or after on or after 1st Sep 2014 and have salary exceeding INR 15,000 at the time of joining the fund are not eligible to become member of Employees’ Pension Scheme, 1995.

Amendments in the Employees' Deposit Linked Insurance Scheme, 1976

• As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014; the wage ceiling has been enhanced from INR 6,500 to INR 15,000.

• The contribution towards EDLI and its administrative charges will be subject to a salary cap of INR 15,000 in case of International Workers.

• The contribution must be deposited on a monthly basis by the 15th of the subsequent month. Necessary forms and returns must be filed with the authorities by the prescribed deadlines.

As on 1 January 2016, India has signed Social Security Agreement (‘SSA’) with 19 countries viz., Belgium, Germany, Switzerland, Denmark, Luxembourg, France, Korea, Netherlands, Hungary, Norway, Czech Republic, Sweden, Canada, Japan, Portugal, Finland Austria, Quebec and Australia. Out of the 19 countries, the countries with which India has SSAs which are currently effective are as follows:

Sr. No Name of the country Effective Date
1 Belgium 1 September 2009
2 Germany 1 October 2009
3 Switzerland 29 January 2011
4 Denmark 1 May 2011
5 Luxembourg 1 June 2011
6 France 1 July 2011
7 Korea 1 November 2011
8 Netherlands 1 December 2011
9 Hungary 1 April 2013
10 Sweden 1 August 2014
11 Finland 1 August 2014
12 Czech Republic 1 September 2014
13 Norway 1 January 2015
14 Austria 1 July 2015
15 Canada 1 August 2015
16 Australia 1 January 2016 

Apart from these SSAs, other SSAs have not yet become effective/ operational.

Withdrawal of social security contribution 

The IWs who are covered under an SSA between India and any other country can withdraw their accumulated PF balances on ceasing to be an employee in an establishment covered under the PF Act. 

However, where a person is not covered by SSA, he may withdraw the PF balance on retirement from service in the company at any time after 58 years of age or is faced with certain contingencies (death/ specified illnesses/ incapacitation). 

In relation to pension withdrawal, the lump sum refund will be available only to those employees who are covered under an SSA in force and who have not completed the eligible service of 10 years even after including the totalisation of service under the respective SSAs. Employees not covered under an SSA will not get the lump sum refund. 

All employees would qualify to receive a monthly pension if their contributory service in India is 10 years or more.

Recent Amendments in the Employees’ Pension Scheme, 1995

  • As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014, the employee who is joining and becoming the member of the fund for the first time on or after 1st Sep 2014 and has salary exceeding INR 15,000 at the time of joining the fund is not eligible to become member of Employees’ Pension Scheme, 1995.
  • Therefore, the employer’s entire PF contribution of 12% will be contributed towards Provident Fund account and there will be no diversion of employer’s share to the Pension Fund.
  • Thus, all International Workers who  would be becoming the member of the Provident Fund for the first time on or after on or after 1st Sep 2014 and  have salary exceeding INR 15,000 at the time of joining the fund are not eligible to become member of Employees’ Pension Scheme, 1995.

Recent Amendments in the Employees' Deposit Linked Insurance Scheme, 1976

  • As per notification issued by Government of India, Ministry of Labour & Employment dated 22nd August, 2014; the wage ceiling has been enhanced from INR 6,500 to INR 15,000.
  • The contribution towards EDLI and its administrative charges will be subject to a salary cap of INR 15,000 in case of International Workers.

Compliance obligations

Employee compliance obligations

Upon arrival in India for employment purposes, employee should apply in the prescribed form for allotment of a Permanent Account Number (PAN) which is the individual’s India tax registration number.

Individuals are liable to discharge tax by way of advance tax if the tax liability (net of taxes deducted at source) exceeds INR 10,000 in a particular financial year (per the due dates mentioned under the Act). Shortfall/delay in payment of advance tax will attract interest. As per the Finance Bill, 2016, the advance tax payments should be made in four installments - 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March.

Further, a resident senior citizen, not having any income from a business or profession, shall not be liable to pay advance tax.


As per the domestic tax law in India, every individual, whose income exceeds the maximum annual amount not chargeable to tax, is required to file annual return of income for the respective financial year with the Indian-tax authorities by 31 July following the financial year end.

Extensions of the filing deadline are not permitted. 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. Further, the tax officer may levy a penalty of INR 5,000 if the return of income is not filed up to the end of the assessment year. The rate of penalty is 50 per cent of tax for under-reporting of income and 200 per cent of tax for mis-reporting of income

Further, from FY 2012-13, 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 (Treaty benefits).  

Further, every resident 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.

Furthermore, as per the Finance Bill 2016, filing of a return of income 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 limit.

Employees are required to obtain a no objection certificate from the Indian tax authorities at the time of leaving India.

Employer compliance obligations

As per the domestic tax law in India, any person responsible for payment of salary is required to withhold tax at appropriate rates on salary paid to the employees. 

Further, the tax deducted must be deposited with the central government within seven days from the end of the month of deducting the tax (for the month of March the tax needs to be deposited by 7th April, in case where taxes on non-monetary benefits are borne by employer or 30 April in other cases). 

A certificate (namely Form No. 16 and Form 12BA) must be issued to the employee for the tax deducted within two months from the end of the financial year. 

The employer also must submit on a quarterly basis, a return of tax deducted at source with the tax authority.

Immigration

Immigration Updates

To boost tourism in India, the Government of India has made positive changes in the original Tourist Visa on Arrival (TVoA) scheme which was introduced in 2010. This facility is now available to nationals of 43 countries.

As per the amended scheme, eligible foreign nationals need to obtain Electronic Travel Authorisation (ETA) as per the procedure laid down under the TVoA scheme before coming to India.

The facility is available to foreign nationals whose sole objective of visiting India is for recreation, sight-seeing, casual visit to meet friends or relatives, short duration medical treatment or casual business visit.

The TVoA facility can be availed twice in a calendar year and the foreign national should possess onward journey ticket or return ticket and have sufficient money to spend during his stay in India.

A foreign citizen (not being a citizen of Pakistan, Bangladesh, Afghanistan, Sri Lanka, Bhutan, Nepal and China) who is a person of Indian origin (PIO) may be allotted a PIO card under the PIO Card Scheme, 2002. The said card allows the foreign citizen to enter India without a visa.  The PIO card shall now have lifelong validity. Earlier, the PIO card was issued for a maximum period of 15 years. PIO cards issued prior to 30 September 2014 shall be deemed to have lifelong validity provided that the card holders have a valid passport. PIO card holder would not be required to register with the FRRO/FRO even if his stay in India on a single visit exceeds 180 days.

The Government of India recently promulgated an ordinance to the Citizenship Act, 1955 merging the Overseas Citizenship of India (OCI) and Person of Indian Origin (PIO) schemes and thereby fulfilling their earlier promise. 

Under the new scheme, no further PIO cards shall be issued. Existing PIO card holders will enjoy the same benefits as that of OCI card holders. Individuals who were earlier eligible only for a PIO card may now be eligible for an OCI card.

The Ministry of Home Affairs has liberalized several visa guidelines through introducing favorable changes to the employment, business and project visa guidelines which include certain relaxations and grant of additional powers to the jurisdictional Foreigners’ Registration Office.

Work permit/visa requirements

A visa must be applied for before the individual enters India. The type of visa required will depend on the purpose of the individual’s entry into India. Every foreign national arriving on a visa that is valid for more than 180 days in India must ensure that the individual is registered with the Foreigners Regional Registration Officer of the city in which the individual lives. 

The Ministry of Home Affairs (MHA) has issued certain “frequently asked questions” on work-related visas being issued in India clarifying the purpose, duration, and various scenarios under which business and/or employment visas may be granted to foreign nationals. 

Further, the government of India has mandated that an employment visa may be granted to a foreign national only if the individual’s salary is in excess of USD 25,000 per annum. However, the threshold salary limit is not applicable to ethnic cooks, language (other than English) teachers/translators, and staff working for a high commission/consulate in India.

Other issues

Double taxation treaties

In addition to India’s domestic arrangements that provide relief from international double taxation, India has entered into double taxation treaties with more than 100 countries (comprehensive and limited) to prevent double taxation and allow cooperation between India and overseas tax authorities in enforcing their respective tax laws.

Permanent establishment implications

There is a likelihood that there could be Permanent Establishment exposure, for overseas company in India (due to presence of secondees in India) and this may need a separate examination from corporate tax perspective.

Wealth tax/indirect tax

Wealth Tax has been abolished from the tax year 2015-16 onwards. Up to the tax year 2014-15, the Wealth tax law was as follows.

India does not impose an estate duty, but does impose wealth tax on specified assets. The assets liable for wealth tax are:

• residential house (more than one)
• motor car
• jewellery, bullion, utensils of gold, silver, and so on
• yachts, boats, and aircrafts
• urban land
• cash in hand in excess of INR 50,000.

Wealth-tax is chargeable at the rate of 1 percent (inclusive of education cess) of the net wealth of the individual, exceeding INR 3 million, as on the last date of the relevant tax year (that is, 31 March). Individuals having taxable wealth are required to also file the wealth tax return annually.

In addition, customs duty is payable on certain specified goods brought into India, and other indirect taxes, such as value-added tax (VAT)/sales tax, expenditure tax, and service tax, are payable on purchases of goods and services.

Goods and Service Tax (GST)

GST - a comprehensive tax levy on supply of goods and services is proposed to be implemented in India. The implementation of GST will lead to the abolition of other taxes such as Central Excise, Service tax, Octroi, Central Sales Tax, State-level sales tax, Entry tax, Luxury tax, Entertainment tax, etcetera, Thus avoiding multiple layers of taxation that currently exist in India. The Government is working towards implementing GST by April 2017.

Transfer pricing

India has a transfer pricing regime. A transfer pricing implication could arise to the extent that the employee is being paid by an entity in one jurisdiction but performing services for the benefit of the entity in another jurisdiction, in other words, a cross-border benefit is being provided. This would also be dependent on the nature and complexity of the services performed.

Local data privacy requirement

Currently, there are no data privacy laws in India.

Exchange control

Per the Exchange Control Regulations, a foreign citizen resident in India or an Indian citizen employed by a foreign company having an office/branch/subsidiary/joint venture/group company in India may open, hold, and maintain a foreign currency account with the bank outside India and receive the whole salary payable to the individual in that account provided that income tax is paid on the salary accrued in India. 

A foreign citizen resident in India employed with an Indian company can open, hold, and maintain a foreign currency account with a bank outside India and can remit the whole salary received in India to such an account overseas provided the income tax is paid on the entire salary in India.

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