Meaning of Expatriate (Expat)
An expatriate is an individual who temporarily resides and works in a foreign country while maintaining citizenship in their home country. The taxation of expatriate employees involves a slightly different computation compared to regular employees of an Indian organization.
Taxation of Foreign Expats Working in India
For any foreign expatriate employed in India, their salary is considered earned in India if it is paid for services rendered in India, as per Section 9(1)(ii) of the Income Tax Act. This rule applies irrespective of the residential status of the expatriate employee.
Additionally, the income of expatriates is subject to Tax Deducted at Source (TDS), regardless of where the salary is credited. Even if the salary is deposited in the expatriate’s home country, it remains subject to Indian TDS.
If the salary is paid in foreign currency, it is converted into Indian Rupees (INR) for tax computation purposes. The conversion is done using the telegraphic transfer buying rate of the State Bank of India (SBI), in accordance with Rule 26 and Section 192(6) of the Income Tax Act. Tax is calculated based on the applicable rate on the date of deduction.
Tax Grossing-Up for Expatriates
When a foreign expatriate receives salary in India, only the net salary after tax is credited to their account. The Indian employer bears the tax liability, which means the expatriate’s gross salary includes both the net salary and the tax payable. This mechanism is known as tax grossing-up.
Computation of Tax on Expatriate Salary in India
- The highest income tax rate applicable in India is 30%.
- An additional 4% health and education cess is levied.
- The effective total tax rate comes to 31.2%.
Avoidance of Double Taxation for Expats
Expatriates often face the risk of being taxed both in their home country and in India. In cases where the expatriate’s home country does not have a Double Tax Avoidance Agreement (DTAA) with India, tax relief can still be claimed under Section 91 of the Income Tax Act.
Under this provision, expatriates can claim a deduction from Indian income tax for taxes already paid in the foreign country. The deduction is limited to the lower of the following:
- The Indian income tax payable on such income
- The actual tax paid in the foreign country
Expert Expatriate Taxation Services by TwinDesk Accounting and Legal Advisors LLP
Taxation of expatriates in India is complex and requires specialized knowledge and compliance expertise. At TwinDesk Accounting and Legal Advisors LLP, we offer comprehensive expatriate taxation services, including:
- Repatriation assistance for expatriate employees
- Annual tax equalization calculations
- Tax compliance services
- Tax return preparation and filing
- Representation in tax assessments, appeals, and litigation
- Advisory on double taxation and tax planning
Additional Financial and Tax Services
In addition to expatriate taxation, we provide a wide range of financial services such as accounting and bookkeeping, auditing and assurance, tax audits, management audits, statutory audits, income tax planning, and direct and indirect taxation services.
For expert assistance with expatriate taxation and related services, contact TwinDesk Accounting and Legal Advisors LLP today.