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If you are posted abroad, tax filing is complex

May 16, 2016 15:46 IST

In case a person leaves the country for the purpose of employment abroad and his stay in India is less than 182 days between April 1 and March 31, he won't need to file returns in India. 

Software developer Mandar Gokhle went to the US in October last year for a project.

His company transferred him to its subsidiary there and he was therefore paid a salary there.

With incomes in two countries, he is not sure how his overall taxation will work out.

If you were deputed abroad, filing income tax can be tricky.

It will depend on the number of days you were outside the country, structure of payments made in India and abroad and whether the foreign government deducted tax.

Find the resident status: India follows a physical presence test as the criteria for determining the tax residential status.

In case a person leaves the country for the purpose of employment abroad and his stay in India is less than 182 days between April 1 and March 31, he won't need to file returns in India.

Mandar left in mid-October, which means he stayed in India for more than 182 days. He will need to file tax returns here.

For those who work out of multiple locations, there are other conditions to determine residency.

It depends on the number of days the person has spent in India over the long term.

"If a person has shifted abroad for employment but receives salary in India, revenue authorities may not agree to treat him as a non-resident. It needs to be substantiated with suitable paperwork," says Amarpal Chadha - partner and India mobility leader, EY.

Salary structure and tax: If the person receives full salary in India but only daily allowances or as per diem, abroad, the latter is exempted from tax in India under Section 10(14)(i) to the extent of the actual expenditure provided, which is incurred wholly in the performance of official duties, says Suresh Surana, founder, RSM Astute Consulting Group.

Some companies deposit a small portion of salary in the Indian bank account but a major chunk is paid abroad, on which the respective government of that country may deduct tax.

"Those treated as residents are liable to pay tax in India on worldwide salary income irrespective of its place of payment," says Kuldip Kumar, partner and leader - personal tax, PwC India.

But he points out that India has a Double Tax Avoidance Agreement (DTAA) with more than 80 countries and an individual has the option to choose the provisions of the treaty or domestic tax laws of India, whichever are more beneficial to him.

"If under the treaty provisions, a person's residency shifts to a foreign location, he may not be liable to tax in India in respect of salary for the period of services rendered abroad. But the person will need to obtain the tax residency certificate from US tax authorities," says Kumar.

If a person's residency under the treaty provisions continues in India, he will be taxable in India on his global salary.

India will, however, consider the taxes paid abroad as prescribed in the treaty.

When filing tax in India, individuals need to use the tax paid certificates and the return of income filed in the foreign country.

The hiccups: Only federal tax paid in many countries, like the US, is eligible for foreign tax credit in India.

The claim for relief for the state taxes paid is not admissible, says Chadha.

Problems also occur when filing returns as different countries have different financial years.

The US, for example, has it from January to December. "Difficulties are often encountered by taxpayers in claiming tax credits paid in the US between January and March, as those taxes are accounted for in a different financial year," says Surana.

Some countries also follow a joint filing concept, where an individual and spouse's returns are filed jointly, says Chadha.

 This can conflict when filing taxes in India, which follows a single filing concept.

New ITR forms: While filing returns, the person will also be required to report his foreign assets and income in the 'Foreign Assets' schedule of the India tax return form.

The Government of India has introduced The Black Money Taxation Act with effect from the tax year 2015-16 under which assessees are mandatorily required to report their overseas assets and income details.

Those earning over Rs 50 lakh a year also need to give details of assets and liabilities while filing returns.

For NRIs: If an individual is a non-resident, he is taxable in India only for income sourced or received in the country. So, before going abroad in a financial year, if a person has received salary in India or has rental income from a property, he will need to pay tax in India on these.

While such individuals don't need to pay tax on any income received outside India or disclose foreign assets, they will need to give details of Indian assets and liabilities if the taxable income exceeds Rs 50 lakh a year.

Tinesh Bhasin