Most countries tax their residents based on citizenship and residency for tax purposes. Thus, people with high purchasing power who reside in countries with a high tax burden, in many cases, seek relief by moving from citizenship/residence to a jurisdiction with more the favorable taxation, such as, for example, India.
The income you generate in one year is carried over to the following year and is subject to taxation. The year in which income is earned is referred to as the financial year, and the next year is referred to as the assessment year, in which it is taxed.
There is no official definition of “Expatriate” under the Income Tax Act (ITA), but it commonly refers to a person who is employed overseas and who comes to India i.e. US citizens living in India for a brief time to work (6 months to 5 years).
According to Section 6 of the ITA, one’s Residential Status is decided by one’s physical presence in India. Determining the expat’s Residential Status under the Double Tax Avoidance Agreement (Treaty) with that country is just as critical. Under the tax regulations of both nations, an ex-pat employee may be the considered a resident in both.
Income Tax Act 1961
The Income Tax Act, 1961 determines a person’s residency status in India and tax rate based on the amount of income the individual earns. Non-employment income is taxed at a different rate depending on the type of income.
When a foreign national comes to India to work, he or she usually has to report the income earned while there as taxable wages back home. When a taxes expatriates services employee works in India, their full salary-related income is subject to tax, even if it is paid outside of India.
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Moving an expatriate to or from India, as well as airfares for home-leaves, are not considered taxable expenses in India. Expatriate retirement benefits received outside of India are not counted as income earned in India. For tax reasons, remuneration includes the base salary, cost-of-living allowances, bonuses, ex-gratia, reimbursement of school fees, utilities, housing rent, transportation, tax reimbursements, and other payments the company makes on behalf of the employee. Some in-kind perks, such as company-provided lodging, security guards, and the provision of a vehicle with a driver, are all taxed at a reduced rate.
- In India, foreigners’ income tax rates are based on their resident status.
- Employees from outside India are subject to Indian income tax.
- Foreign nationals who qualify as non-residents are exempt from paying income tax.
Because of rising globalization, India’s economy opening up, and the Make in India Campaign initiative, instead of company registration in USA, many foreign companies are looking to expand operations in India. In India, they can either open a liaison office, a branch office, a subsidiary company, or a joint venture company, depending on their business needs. In any case, they choose to deploy their foreign employee in India to manage and oversee Indian business, especially during the first time of their business’s establishment in India.