Taxing income from stints abroad

Such assignments require compliance with tax laws in both countries

Is your employer sending you abroad on work temporarily?

Since such assignments are typically short-term in nature, the employee is compensated in addition to his normal salary. Usually, an allowance (normally called subsistence allowance) is given to him to meet additional cost incurred in leaving his home base.

The assignment can be for over a period of six months or linked to project completion, which can get extended. In such cases, the employee could be sent on secondment to the overseas company. Such stints require compliance not only with the local tax regulations in the foreign country, but also with tax laws of the home country, which is India.

Thus, it is good to know the nature of your earnings and the tax implications of the same during an overseas stint.

Taxability of allowance

As the law recognises, any allowance is tax-exempt if spent in full and there is no saving out of the same. No proof of spending is needed by the employer; a declaration by the executive that he has spent the allowance is enough. Hence, if the executive saves out of the allowance and deposits it in his bank account, the onus is on him to pay tax on the savings when he files his return. The same is expected to be added to his regular income from other heads such as salary, interest income, etc.

Tax for outside posting

In many cases, the executive is posted outside India and is paid wages/salary in India or overseas or at both places. In such cases, the most important factor is to ascertain the tax resident status of the executive. Normally, most countries sign a double-tax treaty with India and, as per a general acceptance, if the executive has been posted overseas for more than 183 days in a year, he will be not be considered a tax resident in India for that year. This will relieve him of the liability to pay taxes in India on his overseas salary. What he needs to file in India will be the tax return, comprising salary earned in India as non-tax resident.

In case the executive stays outside India on employment for less than 183 days, he would need to first file his tax return overseas and pay taxes on income earned overseas. Then he has to file a return in India for his Indian income plus overseas income, where he would be given relief for tax paid overseas. In the second year (FY) of his overseas stint, he would be considered a non-resident in India. It’s therefore important that when such posting happens, the executive should tell his employer to give him tax equalisation allowance, which will compensate him as the extra tax burden would be taken over by the employer. Also, for tax planning, the posting can be planned before September 30 of a financial year while leaving the country and, after September 30, when he returns. Once the secondment is over and the executive returns to the parent company in India and continues his employment stint, the overseas stint is counted as continuation of employment, which allows the employee to get gratuity and other retirement benefits, without a break in service. Normally, employers provide tax-related services to such executives to iron things out.

If this is not done, the employee should consult the auditor or ask the employer to clarify the tax liabilities that may arise with respect to the foreign stint.

The writer is Managing Partner, Anil K Goyal and Associates

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