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The term Expatriate is not defined under the Income Tax Act, 1961. However, in general terms, expatriate means a person living in a country other than his or her country of citizenship, often temporarily and for work reasons. The person takes a position outside his or her home country, either independently or as a work-related assignment arranged by the employer, which can be a university, company, non-governmental organisation, or government.

In the Indian context, expatriate means (i) Resident of a foreign country working in India (inbound expatriate) and (ii) Indian resident working abroad (outbound expatriate). The taxation of such persons is known as “Expatriate Taxation”

Under the Income Tax Act, 1961 the incidence of tax depends on the following:

  • The residential status of taxpayer
  • Provisions prevailing in the Assessment Year to which the income relates.
  • The place and time of accrual and receipt of any income.

Taxability of Expatriates in India

The extent of Indian Tax Liability depends on the residential status of an individual based on his physical stay in India and the extent to which their income is taxable in India.

Residential Status Income accrued/ deemed to accrue in India Income received/ deemed to be received in India Income accrued and received outside India
Resident and Ordinarily Resident (ROR) Taxable in India Taxable in India Taxable in India
Resident but Nor Ordinarily Resident (RNOR)/ Non- Resident (NR) Taxable in India Taxable in India Not Taxable in India*

* unless it is derived from a business controlled in India or profession set up in India

Determination of Residential Status

Residential status of a person is determined on the basis of the physical presence in India and as per Section 6 of the Income Tax Act. For the taxation of expatriates, the residential status has to be determined as per the Income Tax Act as well as the Double Taxation Avoidance Agreement (DTAA).

Resident

A person would qualify as a resident of India if he satisfies one of the following 2 conditions :

1. Stay in India for 182 days or more in the previous year or

2. Stay in India for the immediately preceding 4 years is 365 days or more and 60 days or more in the previous year

In the event an individual who is a citizen of India or person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay in India. However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh.

In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature.

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.

From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakh. Also, a citizen of India who is deemed to be a resident in India (w.e.f FY 2020-21) will be a resident and ordinarily resident in India.

Non-Resident

An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year.

Taxation of Expatriates in India

Residential Status under Treaty

Resident of a Contracting State means any person who, under the laws of that State, is liable to tax therein by reason of his

  • domicile, residence, place of management or any other criterion of a similar nature
  • It does not include any person who is liable to tax in that State in respect only of income from sources in that State. e.g. Resident but Not Ordinary Resident (RNOR) in India [or Non-Domiciled Residents in UK]

It is equally important to determine the Residential Status of the expat under the Double Tax Avoidance Agreement (Treaty) with that country. At times, an expat employee may be a resident of both the countries under the taxation laws of respective countries. Under such situation, ‘Tie Breaker Rule’ as mentioned in the Treaty has to be applied to determine his residential status. Factors to be considered for this rule are as followed in the same pattern.

Factors

Description
(I) Permanent Home The country in which he/she has a permanent home available to him/her
(II) Centre of vital interest The country with which his/her personal and economic relations are closer
(III) Habitual abode The country in which he/she has a habitual abode
(IV) Nationality Country of which he/ she is a national
(V) Competent authorities As determined by mutual agreement between both the countries competent authorities

Income from Salary

The income arising on account of employee- employer relationship is taxable as “Salary” and it includes salary, allowances, perquisites, provident fund contributions, income received from previous employers, retirement benefits, salary arrears, profits in lieu of salary, income on termination of employment etc.

Income from salary shall be deemed to be accrued in India if it is “earned” in India

  • services rendered in India; and
  • rest period and leave period which is preceded and succeeded by services rendered in India and forms part of contract of employment.

If the Recipient is entitled to the benefit of the DTAA with any country, then the provisions of the DTAA will have to be seen for determining the scope of taxation of salary.

The basic rule of taxation of Salary income is that Salary is taxable in the country where the employee is physically present while rendering services. However, both the Income Tax Act  and Treaty provide exemption to this basic rule if following specified conditions are satisfied.

Exemption u/s 10(6)(vi) of ITA

Benefit under DTAA

Income From Employment (Art 15 OECD)

Type of arrangement Stay in India<=90 days in the PY Present in India for less than 183 days in 12 months period commencing or ending in PY
Status of employee Not a Citizen of India Resident of Treaty Country (other than India)
Status of employer Foreign enterprise-not engaged in trade/ business in India Foreign resident
Treatment of Salary in India No deduction of expense claimed from Income chargeable to tax in India Remuneration not borne by PE in India

Other Exemptions u/s 10:

  • 10(6)(ii) – Remuneration as part of embassy, consulate, trade representation, etc. subject to reciprocity and no other engagement in India
  • 10(6)(viii) – Expats also entitled to ship stay exemption
  • 10(6)(xi) – Employee of Government of Foreign State for Training in India – subject to certain conditions
  • Exemption from certain allowances u/s 10(14) and perquisites u/s 10(10CC)

Author Bio

Shubhi Khandelwal, a fellow practicing Chartered Accountant, running her own venture in the name of M/s Shubhi Khandelwal and Associates with specialization in the field of Taxation and Audit. With post graduation degree in commerce (M.Com), completed certificate course in CSR from ICSI and in GST f View Full Profile

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