How you are taxed for your work stints abroad :: Business Line

Tax treatment of your earnings hinges on your residential status for the year in which you're leaving India.

You landed your dream job on the first day of campus placements. You worked hard for the company. And, now after a year, that much-awaited stint abroad has arrived.

While you are busy revamping your wardrobe, spare a thought to the new tax environment you will find yourself in. After all, as the adage goes, aren’t taxes and death the only certainties of life?

As a first step towards understanding how you will be taxed, you have to determine your residential status in India.

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RESIDENTIAL STATUS

You need to determine if you are a ‘resident’ or ‘non-resident’ for the year in which you are leaving India as the tax treatment of your earnings will vary depending on your residential status. Assuming you are going on such a deputation for the first time, if your stay in India in a financial year (April 1 to March 31) exceeds 182 days, you will be a resident.

Take the case of a programmer who works onsite in Canada from October 15, 2012 to January 22, 2013. For the year ended March 31, 2013, he will be a resident as he has been abroad only for about 100 days during that year and has stayed in India for the remaining 265 days.

But say he is sent abroad from January 22, 2012 to say, February 22, 2013. Then, for the year ended March 31, 2013, he will be a resident. For the year ended March 31, 2014, he will become a non-resident.

HOW INCOME IS TAXED

When an employee goes abroad, the Indian company could retain him on its payrolls and continue to credit salary to his local bank account. In addition, the employee could receive an allowance to meet personal expenses during the period of stay.

In other cases, companies may transfer the employee from the Indian payroll to the foreign payroll.

So what will you be taxed on in India? It is here that the residential status comes into play.

The golden rule to remember is that a resident should pay tax on his global income. If you are a non-resident, only the income received, accrued, arising in India or deemed to be so, will be taxed in your hands.

So, if you are a resident for a financial year, you will pay tax in India even if you have received the salary abroad. If you are a non-resident for that year but receiving Indian salary, you could still be taxed in India.

DOUBLE TAXATION

While there could be several scenarios in which you could be doubly taxed, let us consider the case of Shilpa.

She went abroad for the first time on assignment in December 2011 and will return on January 10, 2013. For this period, let us assume she was paid salary abroad after withholding taxes according to laws there.

Now for the year 2011-12, she will be a ‘resident’ and will be liable to pay tax in India on the income received abroad from December 2011 to March 2012. But for the year 2012-13 (in which she is returning), she may still become a resident by virtue of another provision in the IT Act.

This says that if a person is in India for 60 days in a year along with a period of 365 days in the previous four years put together, they will be considered a resident.

Shilpa fulfils both criteria, having been in India for 80 days in 2012-13 and having gone abroad for the first time in December 2011.

In this case, she could end up being taxed on the same income twice. However, India has signed Double Taxation Avoidance Agreements (DTAA) with several countries.

She can claim a relief in India on the doubly taxed income.

PER DIEM ALLOWANCES

In many cases, employees receive per diem or living allowances to take care of their daily expenses in the foreign country.

While there are several interpretations of the law in this scenario, what it basically says is that if you are able to justify you are in a business trip/tour away from the regular place of work, the allowance is exempt from tax. But if you make any savings out of this, it will be taxable.

While what a ‘tour’ constitutes may be slightly easier to determine in manufacturing companies, it could be tough in IT companies, say tax experts.

Here, someone could be abroad for 5 months, but he could still be on ‘tour’; or someone could shift base of employment for 5 months and help get business for his employer in which case, he cannot be said to be on ‘tour’ and the allowance could be fully taxable.