Simple Tax Guide for Americans in India
US Expat Taxes - India
At Taxes for Expats we have been preparing U.S. tax returns for U.S. Citizens and green card holders working in India for over 8 years. We have been checked by the State Department and are listed on the list of approved Tax Preparers by the US Consulate in Mumbai. Our clients hail from all parts of the country - Mumbai and Delhi, Bangalore and Kolkata, Chennai and Hyderabad. We have been approved by the State Department and are listed on the list of Tax Preparers approved by the Mumbai Consulate: http://mumbai.usconsulate.gov/media/pdf-acs/accountants-list--updated-july-1.pdf
As a U.S. Citizen or green card holder you are legally required to file a U.S. tax return each year regardless of whether you already pay taxes in your residence country.
We offer professional tax services. That means we figure out the best and most optimal way to file your U.S. tax return and avail you of all possible exclusions and deductions. But just as importantly - avoid the errors that would allow IRS to disallow your return and levy fines & penalties on top. You can also do them yourself - not that we recommend it. For more information please see IRS.
The expatriate Foreign Earned Income Exclusion can only be claimed if you file your tax return on a timely basis. It is not automatic if you fail to file and can even be lost.
We have many clients living in India and know how to integrate your U.S. taxes into the local income taxes you pay. Any Indian income tax you already pay can be claimed as against the tax liability on your U.S. return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the calendar year as is standard in India for U.S. tax purposes). You must, however, pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these form or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
We have helped hundreds of expats around the world catch up with their past U.S. taxes because they have failed to file U.S. tax returns for many years. This is, in fact, our specialty and we offer a 10% discount to clients to wish to file multiple tax returns at once and get in full compliance with the IRS.
Work with a recognized expert to help you prepare your American tax return. We can also provide tax planning and advice with other expatriate tax; we look forward to working with you.
Below we include information on the Indian Tax System for the American Expatriates.
Personal tax rates in India are progressive up to 30%, plus the applicable cess of 3 % (2% for Primary Education Cess and 1% for Secondary Education Cess).
For resident men below the age of 65 yrs:
|Up to 250,000||Nil|
|250,001 - 500,000||5%|
|500,001 - 1000,000||12,500 + 20% of total income exceeding 500,000|
|Above 1000,001||112,500 + 30% of total income exceeding 1000,000|
Above rates does not include Surcharge and Cess.
- 10% surcharge is applicable on income tax if income exceeds 50 lacs but upto 1 crore
- 15% surcharge is applicable on income tax if income exceeds 1 crore
- 4% Health & Education Cess is applicable on the income tax and applicable surcharge.
Tax rates and slabs are same for Male and Female as per above table
Individuals having total income below 5 lakhs, are eligible for full tax rebate under section 87A
Residents of India are normally taxed on worldwide income. Persons not ordinarily resident generally do not pay tax on income earned outside India unless it is derived from a business controlled in India, or the income is accrued or first received in India or is deemed to have accrued in India.
Nonresidents are liable for tax on income sourced in India. The first INR 240,000 is exempt for resident senior citizens (65 and older). For non-seniors, the first INR 190,000 is exempt for resident women and INR 160,000 for others.
Residence – An individual is resident in India if he/she spends at least 182 days in the country in a given year, or 60 days if the individual has spent at least 365 days in India in the preceding 4 years. For Indian citizens leaving India for employment or as members of the crew of an Indian ship, and for an Indian citizen/person of Indian origin working abroad who visits India while on vacation, the threshold for the 5-year test is 182 days in the given year instead of 60 days. A "not ordinarily resident" individual is one who has either not been a resident in 9 out of the 10 preceding years or who has been in India for less than 730 days during the preceding 7 years.
Non-resident Indians (NRIs) earning long-term capital gains on specified assets acquired in convertible foreign exchange are taxed at 10% and on other assets at 20%. Any other income from investments is taxed at 20%. As far as investment income and LTCG is concerned, NRIs can opt to be taxed under the normal provisions of the Act.
The assessment year is the period of 12 months from 1 April to 31 March. Income earned in the period of 12 months or less immediately preceding the assessment year is taxed in the assessment year.
In certain cases, income is taxed on a presumptive basis, wherein the income under each head is computed separately and aggregated to arrive at the gross total income, after allowing permissible deductions under each head.
Tax Filing status – All individual taxpayers are required to file an individual tax return and are assessed separately.
Taxable income – Income from employment, including most employment benefits, is fully taxable. Profits derived from the carrying on by an individual of a trade or profession generally are taxed in the same way as profits derived by companies.
Tax Deductions and tax allowances – Deductions are granted for medical expenses and insurance, retirement annuities, mortgage interest, education loans, etc.
India Company Tax Rates
The Corporate Tax Rate in India stands at 35%.
The amount of tax payable is computed after reckoning income tax at prescribed rates and Surcharge (SC) computed on income tax at 10% (2.50% for non-Indian companies) for companies having income over Rs 10m . The aggregate of income tax and surcharge (wherever applicable) is further increased by 3% (2% Education cess (EC) and 1% Secondary and Higher Education Cess (SHEC)).
Where the total income of the domestic or foreign company does not exceed Rupees ten million, no surcharge is levied. In such cases, the effective rate of tax for domestic companies and foreign companies is 30.9% and 41.2% respectively. However, the following income of foreign companies is taxed at lower rates on a gross basis and not at 42.23%.
Domestic companies are subject to income tax on all sources of income and capital gains wherever arising. Foreign companies are subject to income tax only on their income from Indian sources.
The Indian tax year is a financial year from 1 April to 31 March.
SECURITIES TRANSACTION TAX
Securities transaction tax (STT) is applicable to the purchase or sale of equity shares derivatives, units of equity-oriented funds through a recognised stock exchange or the sale of a unit of an equity-oriented fund to a mutual fund.
With effect from 1 June 2006, the STT is payable equally by the purchaser and seller at 0.125% of the transaction value on delivery based transactions. On non-delivery based transactions in equities or units of an equity oriented fund it is payable by the seller at 0.025%. In case of sale of options in securities, STT is levied at the rate of 0.017% of the option premium to be paid by the seller. In case of sale of options in securities where the option is exercised, STT is levied at 0.125% of the settlement price and is paid by the purchaser. In case of sale of futures in securities, STT at 0.017% is to be paid by the seller. In the case of sale of units of an equity oriented fund to the mutual fund, it is payable by the seller at 0.25%.However, with effect from Oct 1,2009 STT will not be applicable in respect of transactions entered into by any person for or on behalf of New Pension System Trust.
The transaction value is determined as follows:
- options - aggregate of strike price and option premium
- futures - traded price
- other securities - purchase / sale price
STT is to be collected by the Recognised Stock Exchange for taxable securities or prescribed person the mutual funds in case of sale of units to the mutual funds and paid to the Government.
STT so paid is allowable as deduction in computation of taxable income under the head profits or gains from business or profession with effect from 1 April 2009.
CAPITAL GAINS TAX
Gains arising from transfer of a long-term capital asset, i.e. assets held for a period of more than three years (one year in case of shares/securities of companies/mutual funds listed on a recognised stock exchange in India) are regarded as long-term capital gains. Long-term capital gains are computed by deducting the cost of the capital asset (adjusted for inflation as per the prescribed factors) from the sale value of the asset.
Gains arising from the transfer of capital assets held for a period less than three years (one year in the case of shares, securities of companies listed on a recognised stock exchange in India, a unit of the Unit Trust of India or a unit of a Mutual Fund or a Zero Coupon bond) are regarded as short-term capital gains. Short terms capital gains are calculated in the same way as long-term gains except that no adjustment is allowed for indexation.
Long-term capital gains arising from sale of equity shares, units of equity-oriented funds on a recognised stock exchange or sale of a unit of an equity-oriented fund to mutual fund (chargeable to STT) are exempt.
Long-term capital losses can only be set off only long-term capital gains. Short-term capital losses can be set off against any capital gains. Capital losses can be carried forward for a period of eight years for set off against capital gains of the same type in subsequent years. There are no provisions for carrying losses backwards.
TONNAGE TAX FOR SHIPPING INDUSTRY
The tonnage tax scheme for eligible shipping companies (dredgers included) was introduced with effect from 2005/06 and provides for a tonnage-based presumptive tax. Indian shipping companies now have the option to pay taxes on tonnage income in place of normal taxable income. There is a lock in period of 10 years. If a company opts out, it is debarred from re-entry for 10 years.
Tonnage income is to be taxed at the normal corporate tax rate. Tax is payable even if there is a loss in a year. Tonnage income is separately calculated for each qualifying ship by multiplying the number of days in the previous year with the daily tonnage income as per specified slab rates.
DIVIDEND DISTRIBUTION TAX
Domestic companies that declare, distribute or pay dividends are subject to dividend distribution tax at 17.00% on the amount of such dividends.
However, income distributed by a specified company or mutual fund is taxable at differential rates as follows:
- Income distributed from the Money market / liquid funds is taxable at 28.33%
- Income distributed from other mutual funds to individuals or HUFs is taxable at 14.16% and to others at 28.33%.
However, no additional tax is payable on income distributed to unit holders of equity oriented funds.
BRANCH PROFITS TAX
Indian branches of foreign companies are taxed in India on income received and/or accrued in India (net of allowable expenses) at the rate applicable to Foreign Companies, namely 42.23%.
Stamp Duty is payable at the prescribed rates on instruments recording certain transactions, including transfers of immovable property, shares, etc. Generally, stamp duty is levied by respective states as per the state Act. In the absence of such a state Act, the provisions of the central Act (i.e. Indian Stamp Act) apply.
LAND AND PROPERTY TAX
Land and Property Tax is levied by each state separately.
This duty is a municipal levy, levied on entry of goods into municipal areas for use, sale or consumption within the municipal limits. Octroi rates differ for different local areas. Goods are classified into groups for levying the octroi at different rates. Currently, octroi is being levied only in certain states.
Like octroi, entry tax is levied upon entry of specified goods within state limits for use, sale or consumption within the state. Presently, it is levied only by certain states on specified goods. The rate of levy varies from state to state and is VATable in the VAT states.
EXCISE DUTY OR CENTRAL VALUE ADDED TAX (CENVAT)
CENVAT is payable on the manufacture of goods in India. CENVAT is generally applicable on an ad valorem basis at the prescribed rates on the 'transaction value' of the goods. Most goods are subject to basic excise duty of 8 % (with effect from 24 February 2009) which is likely to go up to 12%. There may be other duties applicable on the manufacture of certain specified goods. Concessional rates are prescribed or exemptions granted for certain category of goods.
Service Tax is levied at 10.3% of the value of various categories of services (presently more than 100 services are covered). Generally, the liability to pay service tax is on the service provider. However, in certain services (such as when the service provider is outside India and the recipient is a business in India), the tax liability arises on the recipient of the service. Service tax paid on input services used by the service provider for rendering taxable output service is eligible for credit.
Customs Duty is payable on goods imported into India. The normal rate of Customs Duty is 10%. However, in some cases such as liquor and tobacco, special rates in excess of 10% are also charged. In addition to basic Customs Duty, an Additional Duty (as equivalent to CENVAT duty of 8-12%) and a Special Additional Duty at 4% are also levied on imports. Further, Anti-Dumping and Safeguard Duty is also levied on import of certain specified products.
DETERMINATION OF TAXABLE INCOME
In the case of non-resident taxpayers engaged in certain businesses, income is assessed on a presumptive (deemed income) basis as follows:
- Services in connection with exploration of mineral oils 10%
- Operation of aircrafts 5%
- Civil construction or erection of plant and machinery or testing/commissioning in connection with turnkey power projects (for companies only) 10%
- Operation of ships 7.5%
In computing business income, several deductions are allowed which include the following.
Certain capital expenditures qualify for deduction. For instance, capital expenditure on research and development (other than land) qualifies for full tax write off and sometimes at weighted deduction of 125% and 150%. Expenditure incurred on merger/demerger of an undertaking is allowed as a deduction in five equal instalments beginning with the year in which the merger/demerger takes place.
A depreciation allowance is available as per the following rates depending on the nature of the asset:
- Buildings (depending upon its nature) 5%, 10%, 100%
- Furniture and fixtures 10%
- Plant and machinery 15%, 30%, 40%, 50%, 60%, 80%, 100%
- Intangible assets (patents, trademarks know-how, licences, copyrights, etc.) 25%
- Ships 20%
Additional depreciation of 20% on the cost of new plant and machinery (other than ships or aircrafts) is allowable only in the year of commissioning for manufacture. Assets used for less than 180 days in the year of acquisition are entitled to half of the normal depreciation allowance (including additional/enhanced depreciation). Depreciation not set off against current year's income can be carried forward for set off against any future income for an unlimited period.
The valuation of closing stock is normally done on the basis of cost or market value, whichever is lower. The accepted valuation methods include FIFO and weighted average cost method. The valuation basis is to be consistently followed.
Interest paid on the borrowings used for business purposes is tax deductible. For new businesses, interest incurred prior to commencement of commercial production is to be capitalised. Interest paid on amounts borrowed for investment in securities is allowed as a deduction from interest income.
Expenditure (other than balances) from which tax is to be deducted but not done would be allowable only in the year of remittance of tax deduction.
EXPENDITURE INCURRED FOR EXEMPT INCOME
Expenditure incurred in earning an income exempt from income tax is not allowed as a deduction.
Business loss can be set off against any other income in the same assessment year and against business profits in subsequent assessment years subject to certain conditions. However, business losses cannot be set off against salary income with effect from the year 2005/06.
Speculative losses can be set off only against speculative income. Unabsorbed business losses can be carried forward for adjustment against future business profits/speculative income for a period of eight assessment years following the year of loss. However, speculative losses can be carried forward for four years only.
Transactions carried out electronically on a recognised stock exchange in derivatives will not be regarded as speculative.
There are no provisions for carrying losses backwards.
MINIMUM ALTERNATE TAX (MAT)
In the case of companies, if the tax payable on their taxable income for any assessment year is less than 15% of their 'book profit', an amount equal to 15% of the book profit is regarded as their tax liability. The tax so paid could be carried forward and set off against normal tax (in excess of MAT for that year) of future years up to seven years.
'Book profit' means net profit as per the profit and loss account as adjusted (increased or reduced) by certain specified items which includes income tax paid or payable and the provisions made for unascertained liabilities, amounts carried to any reserves, provisions for meeting unascertained liabilities, losses brought forward or unabsorbed depreciation, deferred tax, interest on tax , surcharge, education cess, income exempt from tax, non-taxable profits from export of goods, computer software etc.
However, the following are included within book profits, despite being exempted from normal income tax:
- profits of undertakings located in free trade zones, software and hardware technology parks
- profits from the export of computer software
- long-term capital gains arising from the transfer of listed equity shares / units
Specific provisions have been made in the Income Tax Act 1961 (the Act) in relation to corporate merger/amalgamations. Corporate restructuring is tax neutral subject to the fulfilment of certain conditions.
Under the Act, 'demerger' means any transfer by a demerged company of one or more undertakings to another company (resulting company) pursuant to a scheme of arrangement under sections 391 and 394 of the Companies Act. With effect from 1 April 2000, the transfer of shares in a scheme of demerger has been made tax neutral subject to fulfilment of certain conditions.
The Act defines 'slump sale' to mean the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities. Profits or gains arising from slump sale are taxable as long-term capital gains if the undertaking is owned and held by the assessee for more than 36 months prior to transfer. Otherwise, they are taxable as short-term capital gains.Net Worth of the undertaking so transferred shall be deemed to be the cost of acquisition, No Indexation benefit is allowed on case of a Slump sale.
Buyback refers to the purchase of own shares by a company from its shareholders in lieu of consideration. Consideration received by a shareholder from the company for purchase of its own shares is taxable as a long-term capital gain, if shares were held for more than 12 months prior to transfer to the company.
Indexation benefit is available for long term capital gains. Otherwise, they are taxable as short-term capital gains in the year in which the shares are purchased by the company.
FOREIGN SOURCED INCOME
Profits derived by a foreign branch of an Indian enterprise are taxable in India. However, credit is allowed for foreign taxes paid by the branch in India either under the tax treaties or under the Act.
A tax holiday is available in respect of profits derived from exports by a 100% export oriented undertaking, or an undertaking located in a free trade zone, export processing zone, special economic zone (SEZ), software technology park, etc. The tax holiday is available in respect of profits derived by non-SEZ units up to years ending 31 March 2012.
In the case of an undertaking located in a SEZ commencing activities on or after 1 April 2003, the tax incentives are available as follows:
- First five years: 100% of profits
- Next two years: 50%of profits
- Last three years: 50% of profits or amount transferred to credit of SEZ Re-Investment Allowance reserve whichever is lower
In the case of new units located in a SEZ commencing activities on or after 1 April 2006, the tax incentives available are as follows:
- First five years: 100% of profits
- Next five years: 50% of profits or amount transferred to credit of SEZ Re-Investment Allowance reserve whichever is lower.
FOREIGN TAX RELIEF
UNILATERAL TAX CREDIT WHERE THERE IS NO TAX TREATY
Where a resident of India has paid tax in any country with which India does not have a tax treaty, credit is available in India for such tax payments.
TAX CREDIT UNDER TAX TREATIES
India has entered into tax treaties with several countries. Under the applicable tax treaty, Indian residents paying taxes in other countries can claim credit in India for foreign tax payments.
There are no provisions in India for consolidation of accounts for tax purposes or provisions for group taxation.
RELATED PARTY TRANSACTIONS
Related party transactions with non-residents are required to be reported separately and the tax authorities are given power to consider whether transactions are at an arm's length. Where prices paid for the purchase of goods or services are excessive or unreasonable, the assessing officer can disallow a deduction for the excess portion.
A detailed set of transfer pricing regulations are provided in Indian domestic tax laws for computing income from international transactions between associated enterprises on an 'arm's length basis'.
Tax at the prescribed rates is required to be deducted at source from payments of rent (for use of land, building, machinery, plant, equipment, furniture or fittings), salary, professional fees, fees for technical services, royalty, interest , commission, etc to residents.
Tax is also required to be deducted from payments to non-residents, of salaries, rent, interest, capital gains, royalties, dividends, fees for technical services or other taxable income. The rates are the same as those listed in Section A in respect of company taxation receipts.
In order to determine the tax liability in India in advance, and thereby to avoid litigation and uncertainty in tax matters, a mechanism of 'Advance Rulings' is available to non-residents in relation to Indian transactions. Indian residents can also seek advance rulings on transactions undertaken or proposed to be undertaken with non-residents.
For this purpose, an 'Authority for Advance Rulings' (AAR) has been constituted which is headed by a retired judge of the Supreme Court of India. The advance ruling is binding on the applicant and on the tax authorities. Application can be made to the AAR seeking a ruling on any question of fact or law on payment of a prescribed fee.
An advance ruling cannot be sought on a question which is pending for adjudication before the tax authorities, appellate tribunal or a court of law in India. The ruling is generally delivered within six months of making the application and is made in writing giving reasons for the decision of the AAR. A similar mechanism is available to nonresidents under excise, customs, service tax and sales tax laws.
The foreign exchange regulations have been substantially liberalised in India whereby no licence is required for setting up an industry except in a few cases, such as electronic aerospace and defence equipment, industrial explosives, hazardous chemicals, distillation and brewing of alcoholic drinks, cigars and cigarettes, items reserved for small-scale sector, industries/sectors reserved for the public sector, etc.
India has amongst the most liberal and transparent policies on Foreign Direct Investment (FDI) among the emerging economies. The FDI policy has been rationalised on an ongoing basis to avoid multiple layers of regulatory approvals to facilitate foreign investment.
India VAT rates
The implementation guidelines and rules of Value Added Tax vary from state to state as the tax is collected by state governments. VAT in India is categorised under 4 heads which are as follows:
- Nil: Goods and services that fall under this category are exempt from VAT. These are mainly items that are basic in nature and sold in the unorganised sector. Examples of such items include khadi, salt, etc.
- 1%: VAT is charged at 1% for the items under this category. 1% VAT is usually charged on items that are relatively expensive in nature. The reason why VAT is charged at 1% on expensive goods is because increasing the rate of VAT will considerably increase the prices of the items that fall under this category. Some of the examples of products that fall under this category include gold, silver, precious stones, etc.
- 4-5%: VAT is charged at 4% to 5% on certain items that are used on a daily basis. Examples of items that attract VAT at 4-5% include cooking oil, tea, medicines, etc.
- General: Items that fall under the general category attract VAT at 12% to 15. The items that fall under this category are mainly luxury items such as cigarettes, alcohol, etc.
VAT Registration – The turnover limit for compulsory registration for businesses is INR 500,000, although this may vary by state. State VAT laws also specify monetary amounts of sales and/or purchases required for registration.
Filing and payment – VAT returns must be filed and payments made either monthly or quarterly, based on the tax liability.