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The concept of taxation has always left most of us often lost and quite befuddled as well. Most of us also find the matter of taxes scary and quite stressful, especially when it comes to the matter of foreign income. There is one specific area of taxation that is relatively complex, yet is vital to be understood, especially by persons who deal with MNCs, the area being the taxation of expatriates.
Tax Rates: The income rates applicable to expatriates is as follows:-
|Taxable Income||Income Tax Rates|
|Up to Rs. 2,50,000||Nil|
|Rs. 2,50,000 – Rs, 5,00,000||5%|
|Rs. 5,00.000 – Rs. 10,00,000||20%|
|Rs. 10,00,000 and above||30%|
Residential Status: For an expat, the residential status is to be determined as per two views, that is, the Income Tax Act and the DTAA. There are certain instances where the expat may be a resident of both countries as per the relevant taxation laws. This gives rise to the ‘Tie Breaker Rule’. The factors to be considered for this are as follows:-
|(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|
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.
Deemed Tax Residents: An individual who is an Indian citizen shall be deemed to be a resident of India in the previous year if he is not liable to pay tax in any other country or territory.
Scope of Income:
|Resident||Not Ordinarily Resident||Non Resident|
|All income earned globally||Income received in India||Income received in India|
|Income sourced from India||Income sourced from India|
|Income from a business that is controlled from India|
Provident Fund and SSA: According to the provisions of the PF scheme, the employer, as well as an employee, will contribute 12% of monthly pay (as defined in the EPF and MP Act). Out of the employer’s contribution, 8.33% of monthly pay will be towards the pension fund, and balance 3.67% will be towards Provident Fund. The interest rate applicable to the EPF contributions is 8.5% for FY 2020-21. Salary will include the total salary whether received in India or abroad.
For an international worker, if he is from a country with whom India has signed a Social Security Agreement (SSA) and has a Certificate of Coverage from the home country, he need not contribute to the social security in India provided he furnishes the COC to the PF authorities.
|Basis||PF Withdrawal||Pension Withdrawal|
|Where an SSA exists||As per the SSA provisions||As per the SSA provisions|
|No SSA exists||· On retirement from services after attaining an age of 58 years· On retirement on account of permanent incapacitation specified by a medical practitioner||· After the attainment of 58 years of age subject to the satisfaction of the necessary conditions|
Per Diem Allowance/Daily Allowance: In order to compensate employees for the living changes, they have to endure as they take on an assignment in foreign countries, a daily allowance over and above the salary is paid to them. The Income Tax Rules state that any ordinary daily allowance paid, while on tour, is exempt insofar as it is incurred for the purpose of daily living expenses.
Employees Stock Option Plan (ESOP): As far as ESOP is concerned, shares issued under ESOP are taxable in the hands of the employees at the time at which they are exercised.
Taxability of expatriates, as a whole, is a rather interesting area which has seen various amendments take place over the past few years especially. Significant efforts have been made to ensure that more clarity has been provided regarding the taxability of such persons and other foreign nationals.
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