Expatriate Executive: India

Summary of local taxation situation

A foreign national working in India or based there will be taxed in India as resident, non-resident, or not ordinarily resident.

Residence applies to individuals who:

• spend more than 182 days in the country in the tax year; or
• spend more than 60 days in India during a tax year plus more than 365 days in the country in the previous four tax years.

Other individuals are non-resident.

A not ordinarily resident person is one who has been non-resident in nine out of the previous ten years and has not spent more than 729 days in the country during the previous seven tax years.

To lose tax residence it is simply necessary to stop fulfilling any of the above criteria in a given tax year.

Resident individuals are taxed on their worldwide income; non-resident and not ordinarily resident individuals are taxed only on their local-source income.

In 2010, the first INR160,000 of income is free of tax; between that level and INR500,000 the rate is 10%; then 20% up to INR800,000; then 30% on income above that level. A 10% surcharge was due on income over INR1m until was removed from 2009/10. However, income is subject to a further 3% education 'cess'.

If a foreigner works in India for a foreign company for less than 90 days in a tax year, the income is generally exempt from tax.

Capital gains from most types of listed securities are taxed at 15% (short-term gains); longer-term gains are exempt. Short-term gains on other types of securities are taxed as regular income; longer-term gains are taxed at 20%, and the same rate applies to capital gains on other types of asset. An amended Direct Tax Code presented in June 2010 proposes reforms to the capital gains tax system so that the distinction between short- and long-term gains is largely removed. This would bring some previously exempted transactions into the tax net.

Dividends from Indian companies are normally exempt from taxation in the hands of an individual recipient, but are subject to Dividend Distribution Tax at 15%, plus a 3% education surcharge. An additional 7.5% surcharge is due if total tax due is more than INR10m.

There is a wealth tax, charged annually at 1% of assets held in India in excess of INR3m. There is no alternative minimum tax and no inheritance tax.

Expatriates used to be exempt from paying social security contributions in India, but as of November, 2008, both they and their employers must pay 12%.

NB: The Indian tax rules are considerably more complicated than the above simplified summary, and professional advice on the situation of any particular individual is a necessity.

Offshore Investment Opportunities

Although some revenue protection measures apply to countries having "preferential" tax regimes, these apply mostly to the corporate sector, and general anti-avoidance legislation has not progressed far in India for individuals; offshore trusts or other corporate forms are therefore generally speaking quite effective at sheltering many types of asset.

It follows that before taking on Indian residence, there is a case for placing income- or growth-generating assets into trust.

Needless to say, it is essential to take professional advice.

Once Indian residence has been terminated, and if non-residence is expected to be permanent, then an ex-Indian resident is free to invest offshore in order to obtain the best possible returns.

www.lowtax.net contains extensive information on the investment, tax and legal regimes in 50 of the main offshore jurisdictions. Further information is available in our Investment Information Providers Section, and the four main types of offshore investment are described in the Guide to Offshore Investment on this site.

NB: The suggestions given above do not constitute investment advice. They are intended only to assist individuals in finding appropriate professional advice, which is essential for anyone planning offshore investment.