Mastering Tax Returns: A Guide for Expatriates in India
As the monsoon clouds gather over India, bringing with them the promise of rain-soaked chai and pakoras, another season quietly arrives—the income tax filing season. In this article, we’ll delve into essential aspects of tax filings specifically tailored for expatriates working in India. Whether you are a mobility professional supporting expatriate compliance or an expat yourself, understanding these key points will help you navigate the tax landscape more effectively and ensure correct filing with accurate reporting and disclosures.
Income tax returns for expatriates in India can be complex, requiring a closer analysis of tax residency, global income taxability, and additional reporting of foreign assets and incomes. In this article, we simplify these requirements for expatriates.
Summary
Residency and Taxation
As an expatriate's stay in India lengthens, their tax residency status evolves. Initially taxed as non-residents, extended stays can lead to reclassification as not ordinary residents (NOR) or even ordinary residents (ROR). As RORs, expatriates are subject to tax on their global income, including overseas rental income, investment income such as dividends, capital gains, and interest, in addition to their Indian-sourced income.
Understanding these residency rules is crucial for expatriates, particularly in determining the scope of taxable income in India, reporting requirements, and availing relief under the Double Taxation Avoidance Agreements.
Availing Benefits under DTAA
Double Taxation Avoidance Agreements (DTAA) are bilateral agreements between India and other countries aimed at preventing double taxation of income and offering clarity on tax obligations for expatriates with global income sources:
- Preventing Double Taxation: DTAA ensures that expatriates do not pay tax on the same income in both India and their home country. Taxes paid in one country can be credited against taxes due in the other, reducing the overall tax burden.
- Favorable Tax Rates: DTAA often provides for beneficial tax rates on specific types of income, such as interest, dividends and capital gains. This can result in lower tax liabilities for expatriates by applying the more favorable tax rates stipulated in the agreement.
Claiming Foreign Tax Credit (FTC)
As mentioned earlier, expatriates qualifying as ordinary residents and having their global income taxable in India are entitled to claim credit for taxes paid overseas. To claim this credit along with reporting such income and taxes in their return, expatriates must submit an additional Form 67.
Form 67 captures details of overseas income, taxes paid on such income, applicable taxes on such income in India, and, most importantly, the credit for overseas taxes claimed in the tax return. To support the FTC claim, expatriates must also provide copies of their overseas tax returns, tax payment receipts, and tax certificates.
It is not mandatory to submit Form 67 along with the tax return. Sometimes, the supporting documents might not be immediately available. In such cases, Form 67 can be furnished by 31st March of the following year. This flexibility ensures that expatriates can still claim the foreign tax credit without the pressure of gathering all documents immediately. This approach helps expatriates manage their tax obligations efficiently while ensuring compliance with Indian tax laws.
Assets and Liabilities Disclosures
Expatriates, regardless of their tax residency, who have income exceeding INR 5 million, must report their Indian assets and liabilities in the AL Schedule of the tax return. This includes details such as bank balances, immovable properties, investment assets, and corresponding loans and liabilities.
For expatriates qualifying as ordinary residents, the reporting requirements are more extensive. They must furnish details of their global assets and liabilities in the AL Schedule and separately report their overseas bank accounts, immovable properties, and other assets in the FA Schedule of the tax return.
However, any overseas asset acquired by the expatriate before taking up the Indian assignment, and which does not generate income, is not required to be reported in the tax return.
Reporting the AL Schedule and FA Schedule can be complex, particularly regarding the dates on which details of bank balances, assets, and liabilities are to be reported.
Navigating Specific Situations
Expatriates on global assignments often manage responsibilities in multiple countries, which can complicate their tax situation. They may have exercised Employee Stock Options (ESOPs) granted by their home employer or worked in India on a business visa without the Indian entity withholding taxes on payroll processed overseas. Taxation and reporting of such income in India require a clear understanding of each specific situation to accurately apportion and tax the income related to the Indian assignment and avail all beneficial credits, rates and tax reliefs.
For correct tax filing, it is also crucial to keep all required information and supporting documents handy, such as Form 16 from employers, bank statements, interest certificates, and Capital Gains statements.
Conclusion
Professional tax advice can greatly assist expatriates in figuring out ESOP taxation effectively, optimizing their tax liabilities, and managing their finances during their assignment in India. At Expat Orbit, we embody this spirit of preparedness and support expatriates with our comprehensive 360-degree expat management solutions.
