Determining Tax Liability for Foreign Nationals Working in India

Posted by Reading Time: 5 minutes

By Tracie Sloop Frost

In general, foreign nationals working in India are liable for Indian income tax.  They may also be liable for capital gains tax on disposal of capital assets in India.  Whether an individual is liable to pay Indian income tax is dependent on the foreign national’s physical presence in India, regardless of citizenship or the purpose of the stay. 

India has three levels of residency for tax purposes:

1 – Non-resident

2 – Resident but not ordinarily resident (RNOR)

3 – Resident and ordinary resident (ROR)

Professional Service_CB icons_2015RELATED: Pre-Investment Services from Dezan Shira & Associates

Non-Resident

Non-residents for income tax purposes are taxed only on India-sourced income.  In order to qualify as a non-resident, the individual must have spent less than 182 days in India during the tax year.  Additionally, the individual cannot have been present in India for more than 365 days during the last four years preceding the relevant tax year.

Resident

Residents pay income tax based on whether they meet the qualification for RNOR or ROR.  The distinction between RNOR and ROR is an important one because RORs are taxed in India on their worldwide income, while RNORs are taxed only on their India-sourced income. 

In general, if an individual spends 182 days or more during the tax year in India, that person will be considered an Indian resident for tax purposes.  Additionally, a foreign national who has been present in India for at least 60 days but less than 182 days in the relevant tax year, and has been present in India the last four tax years preceding the relevant tax year for an aggregate of 365 days or more, will be considered a resident for Indian tax purposes during the relevant tax year.  Since the Indian tax year runs from April 1 to March 31, a foreign national who comes to India on or before September 3o will be a resident for that tax year, since that individual will be in India for 182 days during the tax year.

Resident but not Ordinarily Resident

A person who qualifies as a resident for any tax year is treated as a RNOR if the following two conditions are met:

1 – the individual has been a non-resident in India for nine of the past 10 tax years; and,

2 – the individual has during the 7 tax years preceding the relevant tax year been in India for a total of 729 days or less. 

An individual who has RNOR status is taxed only on India-sourced income.

Resident and Ordinary Resident

Any resident who fails to meet both conditions for RNOR is considered a resident and ordinary resident for the relevant tax year and is taxed on world-wide income.

Foreign nationals should use careful tax planning to avoid becoming a ROR in India in order to avoid paying taxes on worldwide income.

Professional Service_CB icons_2015RELATED: Tax Planning Services from Dezan Shira & Associates

Source of Income

Salary

Taxable compensation includes salary, wages, allowances (such as reimbursement for personal expenses like housing, transportation, and education payments), and other cash compensation for services rendered in India, regardless of whether salary is received in India or whether the employer is outside India.  Taxable compensation also includes income tax paid by the employer on behalf of the employee and certain perquisites such as a car and driver provided by the employer.

Income that is received or accrued in India may also be subject to income tax.  Additionally, income that arises outside India is subject to income tax for individuals who are ROR in India. 

Non-employment Income

Foreign nationals are permitted to maintain foreign currency accounts outside India and receive their entire salary outside India as long as full taxes are paid on any salary accrued in India.  Foreign nationals may also open bank accounts in India, and funds can be moved into those accounts from sources outside India.  However, individuals must use care when making transactions involving non-employment income and their Indian bank accounts. If non-employment income is earned on investments outside India and is subsequently transferred to an Indian bank account, it will not be taxable in India. If the non-employment income is directly remitted to an Indian account, it is likely to become taxable in India. 

Other types of non-employment income taxable in India include long and short-term capital gains earned on the disposal of capital assets situated in India, royalties payable by an Indian concern, and payments of interest on Indian infrastructure debt funds.

About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

Related Reading-IB

Cover 90 x 126

Managing Your Accounting and Bookkeeping in India
In this issue of India Briefing Magazine, we spotlight three issues that financial management teams for India should monitor. Firstly, we examine the new Indian Accounting Standards (Ind-AS) system, which is expected to be a boon for foreign companies in India. We then highlight common filing dates for most companies with operations in India, and lastly examine procedures and regulations for remitting profits from India.

Tax, Accounting, and Audit in India 2014-2015
Tax, Accounting, and Audit in India 2014-2015 offers a comprehensive overview of the major taxes foreign investors are likely to encounter when establishing or operating a business in India. This concise, detailed, yet pragmatic guide is ideal for CFOs, compliance officers and heads of accounting who need to be able to navigate the complex tax and accounting landscape in India in order to effectively manage and strategically plan their India-based operations.

An Introduction to India’s Audit Process
In this issue of India Briefing Magazine, we provide readers with an overview of India’s annual audit process and offer important tips for the smooth navigation of the country’s audit regulations and accounting standards. We begin by first explaining the two most common types of audit in India, statutory and internal audits, and then outline the standard steps and procedures an Indian auditor will follow in each.