In today’s interconnected world, the movement of professionals across borders has become commonplace. India, as a prominent global hub for industries, has witnessed a significant influx of expats contributing to its economic and social fabric. As of 2023, this article sheds light on the formalities and tax obligations applicable to expats residing or working in India, emphasizing the taxation framework implemented to ensure fairness and compliance.
To determine the tax liability of expats, India follows a residence-based taxation system. According to the Indian Income Tax Act, an individual, irrespective of their nationality, is considered a resident of India if they fulfill any one of the following conditions:
(a) Resident in India –
1. They are present in India for a minimum of 182 days during the financial year.
2. They are present in India for a minimum of 60 days during the financial year and have spent a cumulative 345 days or more in India during the preceding four financial years.
In the case of a person who is a citizen of India or an Indian leaving India for the purpose of the employment during an F.Y., then he will be eligible as an Indian resident if he is living in India for 182 days or more. Such persons are allowed to stay in India for longer than 60 days but less than 182 days. However, from the FY 2020-21, the period is reduced to 120 days or more for such a person whose total income (except non-foreign income) exceeds Rs15 lakh.
In another important change from FY 2020-2021, a person who is living in India and does not liable to pay tax in any country will be considered an Indian resident. The requirement for residence status is applicable if the total income (not foreign currency) exceeds Rs. 15 lakh and tax liability is nil in other country’s territory due to his residence or something else of similar nature.
(b) Resident not ordinarily resident in India-
If a person qualifies as a resident, the next step is to consider whether they are an ordinary resident (ROR) or RNOR. It will become a ROR if it meets the following two conditions:
1. Lived in India for at least 2 out of the last 10 years and
2. Stayed in India for at least 730 days in the previous 7 periods.
Therefore, if a person cannot fulfill one of the above conditions, he will be RNOR.
From FY 2020-2021, an Indian citizen or an Indian national who left India for work outside India during the year will be ROR if he stayed in India for a total period of 182 days or more. However, this condition applies if his total income (not from foreign sources) exceeds Rs. 15 lakhs. Also, a citizen of India who is deemed to be an Indian resident (FY 2020-21) must be ROR in India.
Non-resident-
A person who does not fulfil one of the conditions mentioned in (a) or (b) above will be NR for the year.
Taxation of Income:
Once a person qualifies as a resident under the aforementioned criteria, their global income is subject to taxation in India.
Expats are liable to pay taxes on their income earned from Indian sources such as employment, business, or investments. Additionally, income derived from a foreign source may also be taxed if it is received in India or deemed to be accrued or arise in India.
Double Taxation Relief:
To avoid double taxation for ex-pats, India has various Double Taxation Avoidance Agreements (DTAA) with several nations. These agreements entitle individuals to claim relief on taxes paid in their home country against the tax liability in India. Expats can seek an exemption or a reduced tax rate, depending on the provisions of the specific DTAA applicable to their country of residence.
Tax Deductions and Exemptions Expats are entitled to avail themselves of various deductions and exemptions available under the Indian tax system, provided they meet the specific requirements. These include deductions for housing allowances, education expenses, medical expenses, and contributions to specified savings schemes, among others. However, to claim such benefits and exemptions, expats must comply with the necessary conditions stipulated by the Indian tax authorities.
Goods and Services Tax (GST):
Foreigners of India can also be subject to the Goods and Services Tax (GST), which has been implemented in the country since 2017. The GST is a tax that is imposed on the supply of goods and services and aims to replace many taxes, simplifying taxation. The Goods and Services Tax Act in India is a general, multi-level, value-added tax and it is a single tax code for all countries.GST Expats registration is required for non-resident taxpayers carrying out taxable activities in India. With India developing as an economy, many NRIs are eager to start a business in India. Therefore, if a non-resident taxpayer engages in transactions involving the importation of goods or services, or both, he must apply for GST registration.
Tax Compliance and Reporting:
To ensure adherence to taxation norms, expats must diligently maintain accurate records of their income, expenses, and tax deductions. These records serve as an essential basis for filing their annual tax returns. Non-compliance or inaccurate reporting may result in penalties and legal repercussions, thus underscoring the importance of proper tax compliance.
Taxation of Expats in India-
The extent of Indian tax liability depends on the residential status of a person based on his stay in India and the taxable limit on his income 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 |
Tax Payment slab of Expats-
| Annual Income (INR)
0-2,50,000 |
Tax Rate
0% |
| 2,50,000-5,00,000 | 5% |
| 5,00,000-10,00,000 | 20% |
| 10,00,000 and over | 30% |
Important Tax Forms for US Expats in India-
When you are a US expat living in India, there are several tax laws that you must be aware of to ensure that you stay in compliance with US tax laws. Here are some of the most necessary types of taxes:
This is a tax form that must be filed by US citizens and residents every year, regardless of where they live. As a US expat in India, you need to file US tax returns through Form 1040.
Foreign Income Tax (FEIE), which allows you to deduct certain income from your US tax return. To qualify for FEIE, you must meet certain residency and physical requirements.
Foreign tax return (FTC), which allows you to use the tax paid in India to pay US taxes. The FTC is very useful if you are facing a higher tax rate in India than in the US.
The Foreign Bank Account Report (FBAR) is used to report foreign bank accounts if the total value of the foreign bank account is more than $10,000 at any time during the fiscal year.
The Foreign Tax Compliance Act (FATCA) requires US citizens and residents to report certain foreign financial assets on Form 8938 if they are worth more than certain limits.
Here are some important tax types for US expats in India. It’s important to work with tax professionals like Greenback to make sure you’re filing all the necessary documents and complying with US tax laws.
Conclusion:
The taxation framework for expats in India, as of 2023, endeavors to achieve equity, transparency, and compliance. By aligning with the principles of residence-based taxation, India aims to tax income earned within its boundaries while providing avenues for double taxation relief through DTAA. The availability of exemptions, deductions, and compliance requirements further facilitates ex-pats in meeting their tax obligations effectively. A comprehensive understanding of the taxation system enables ex-pats to navigate the Indian tax landscape smoothly, fostering economic growth and harmonious integration.
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About the Author :
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closing businesses in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office in New Delhi.
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