How your global income is taxed

With filing of taxes in full swing, professionals who travelled abroad on deputation this financial year are having to work a bit harder.

A large number of professionals, especially from the software sector, are sent abroad on deputation. While abroad, they are given an allowance in foreign currency to meet their basic expenses. This is over and above the salary that they get in India.

Earlier, allowances for basic expenses such as food, conveyance, laundry, etc, would come under fringe benefit tax (FBT) and taxed at the employer’s end. But after FBT was abolished last year, deputation allowances are taxable in the hands of the employee.

There are two ways to compute the tax liability for professionals on the basis of the time period that they stay abroad.

Taxation for residents: According to the Income Tax (I-T) Act, an individual deputed in a foreign country on work assignment for less than 180 days or six months is considered an Indian resident. And, all incomes, Indian salary as well as the allowance earned in the foreign country, are totalled and taxed in India.

Homi Mistry, tax partner, Deloitte Haskins & Sells, said, “Such individuals come under the Resident and Ordinarily Resident (ROR) category and their global income is taxed.”

But, the good part here is that according to the I-T Act, if you spend the entire allowance in the foreign country, you will not be taxed, as you used the money for the intended purpose. You will be taxed only if you save any part of the allowance.

“The allowance will be added to the individual’s Indian income and taxed according to the applicable tax slab,” said Kaushik Mukherjee, executive director, tax and regulatory practices, PricewaterhouseCoopers.

In some cases, this deputation allowance could be taxed under the host country’s taxation norms. This means an individual on deputation to a foreign country may face a double tax whammy. But respite comes in the form of foreign tax credit and tax treaty benefits.

Individuals, who pay tax in two countries at the same time, can claim foreign tax credit in the home country. Suppose an individual is taxed $1,000 (Rs 46,000 at $1 = Rs 46) abroad and his total tax liability in India comes to Rs 1 lakh. He will have to pay only Rs 54,000 tax in India after claiming the foreign tax credit. For getting this credit, he needs a foreign tax certificate.

NC Hegde, tax partner, Deloitte Haskins & Sells, said, “But, the flip side is that if the tax in the home country is less than what has been paid in the foreign country, the person concerned will not be refunded the differential.”

Taxation for non-residents Indians: Individuals who are on deputation for more than 180 days are considered non-residents Indians (NRIs), according to the I-T Act.

Therefore, the salary or the deputation allowance earned by these individuals is considered global income and does not come under the Indian tax regime. “Such individuals will be taxed only in the host country,” said PwC’s Mukherjee.

As a result, tax experts ask their clients to send executives abroad for over 180 days, as no tax is levied on the income abroad.

Earlier, when a person became an NRI, he continued to remain one for nine years. Now, a person remains an NRI only for the financial year(s) that he has been out of the country.