With its global dominance of the IT industry along with a rich culture and gorgeous landscape, India has become a popular location for American expats looking for alternative career opportunities. Our firm is asked many questions by expats and soon to be expats about the Indian tax system, social security benefits, and ways in which US expat taxes can be reduced. US expats moving to India or living in India also enquire if our US expat tax services will be available to them. Below we address these questions and many others with concise answers from our expert US expat tax service providers.
Guide to Filing – 12 Top Expat Tax Tips for Americans Living in India
Does Your Firm Provide US Expat Tax Services to Americans Living in India?
Our firm is well versed in the Indian tax laws and is able to provide a full range of expat tax services to Americans living in India.
Are American Expats Living in India Required to File US Expatriate Tax Returns?
US expats living in India still have an obligation to report their income to the Internal Revenue Service (IRS) every year. When filing their taxes they must include all income earned for the tax year, including that which was earned through their foreign employment. The US expat should be advised that even income that has been taxed by the Indian government will still need to be reported to the IRS. The US expat may be able to reduce their taxes using qualifying tax credits and deductions from the income that was earned through their Indian employment.
How Can Americans Working in India Minimize US Expat Taxes and Avoid Double Taxation?
US expats have various methods to explore when trying to avoid being double taxed on income earned while working in India. They may include:
- Foreign Earned Income Exclusion for American Expats in India: A US expat may be able to decrease the taxable income earned in India by the first $101,300 using this exclusion for the 2016 tax year. The amount was $100,800 for 2015.
- Foreign Tax Credit: An American expat might be able to apply this credit to income earned that is taxable in both India and the United States.
- Foreign Housing Exclusion or Deduction for Americans living in India: An expats housing expenses in India may be used to offset their income earned in India if they meet a certain threshold. The allowance will be added to the FEIE.
In order to claim the foreign income exclusion and foreign housing exclusion, Americans must meet either the physical presence test or bona fide residence test while living in India.
For the Purpose of Taxation, Who is Considered a Resident of India?
An expats residency status in India is determined each fiscal year. When an individual is deemed to be a resident of India, they are required to pay taxes on their income for that fiscal year. In India, there are three different types of residency statuses:
- Resident and Ordinarily Resident (ROR): This is defined as an individual who has spent more than 181 days in India during the fiscal year and has over 729 days in India during the course of the prior 7 years.
- Resident but not Ordinarily Resident (RNOR): An RNOR is defined as being an individual who has spent more than 181 days in India during the fiscal year, but less than 730 over the course of the previous 7 years.
- Non-Resident: An individual who has spent less then 181 days in India during the fiscal year, but was earning an income from Indian employment during that time.
The tax residency in India is also dependent on the scope of the income tax liability.
Is Foreign Income Subject to Taxation in India?
US expats who are deemed residents or ROR will be taxed on income earned worldwide. Non-residents and NROR American expats will only be taxed on the income that was earned in India. Any income that is accrued or received outside of India is not deemed taxable, unless the same is received directly inside of the nation. Salary that is given for services performed in India was earned there and therefore considered taxable income. Regardless of where that salary is paid, salaried income will be tax subject to benefits available in accordance with Indian domestic tax law or any double taxation avoidance agreement India may have entered with other nations. The leave period that takes place before or after the job was performed in India and which is part of the contract with the employer is considered to be income earned in India.
What are Personal Income Tax Rates in India?
In India, income tax rates are applied progressively and will be based on the residency status of the US expat.
- ROR: The expat will be taxed on income earned from all over the world.
- RNOR: US expats will be taxed on any income earned or received in India.
- Non-resident: Expats who are deemed to be non-residents will be taxed only on income earned or received in India.
For 2014-2014, the Indian Ministry of Finance reports the tax rates as follows:
|Earnings in Indian Rupee (INR)||Percentage Applied as Income Tax|
|500,001-800,000||30,000 INR + 20%|
|800,001 and Above||30,000 INR + 30%|
*Female residents are allowed to exclude the initial 190,000 of their income.
When the total income exceeds 1 crore a 10% surcharge is applied. If applicable, education cess at a rate of 3% is payable on the amount of tax and surcharge. This brings the maximum marginal rate to 33.99%. An additional surcharge is introduced at 10% if the taxable income goes above INR 10,000,000.
*250,000 INR when the individual resident is between the ages of 60 and 79.
*500,000 INR where the individual resident is 80 years old or above.
There is a tax rebate of up to INR 2,000 per year for individual residents whose income falls below INR 500,000 a year.
In India, no provisions are made for filing jointly with a spouse. There is also no distinction made between married and unmarried individuals or those who support children. The same tax rates are applicable to everyone.
When are Tax Returns Due in India?
Tax returns must be submitted to the Indian Ministry of Finance no later than July 31st.
What is the Tax Year End for Taxpayers Living in India?
The tax year in India runs from April 1st until March 31st of the following calendar year. Since the tax year is different in the United States compared with India as are the deadlines for filing US expat tax returns an American earning an income in India will have to pro-rate their earnings and the taxes paid when filling out their IRS tax forms.
For US taxpayers the income earned during a calendar year is relevant for that tax year. For tax purposes, the previous or tax year is the calendar year in which the income was earned, while the current, or subsequent year, is known as the assessment year.
What Income is Considered Taxable Income in India?
An expat residing in India is required to file taxes in India if their income is in excess of INR 200,000 after any exclusions or deductions. They are also obligated to file a return if they plan to exclude any taxes paid to the US or other tax authorities. An expat who receives a request from the Ministry of Finance to submit a tax return must do so for the tax year being requested.
Are Investment Income and Capital Gains Taxed in India? If so, How?
An ROR will be taxed on their worldwide capital gains. On the other hand, an NROR will only be required to pay tax on capital gains that were derived in India.
Any income that is received for services that were rendered in India is considered taxable under Indian tax laws. This includes monies that were received outside of India for those services performed. Earned income and transference of assets that originate in India are also taxable, regardless of the location listed on any receipt.
India does allow for some deductions from income that include retirement annuities, mortgage interest, loans for education and medical expenses.
What is the Social Security System in India?
All expats working in India and any Indians who are working abroad are required to pay into the mandatory statutory provident fund. Employers are also required to make contributions. The employee contribution is 12% of their salary plus any applicable cash allowance.
Is There a Social Security Agreement and Tax Treaty Between the USA and India?
There is a tax treaty in place between India and the United States that works at avoiding dual taxation of workers. It outlines which country should be paid certain taxes and at what point in the year. The US – India Tax Treaty serves as an expats guide to ensuring that their taxes are being paid at the right time to the right country. For an expat who is having difficulty in understanding the language of the treaty should consult with a qualified expat tax advisor.
Are There Other Taxes in India?
In India, there is a 13.5% value added tax (VAT) applied to consumer goods. Certain goods are sold with a lower VAT rate. The VAT can also vary from state to state. Tax must also be paid on capital gains earned by any ROR. This includes real estate and gifts that are considered assets.
What are the FBAR and FATCA Requirements for American Expats in India?
The Foreign Bank Accounts Report (FBAR) requires that any US citizen holding a foreign financial account must report the balance regardless of where they live. Citizens are obligated to file FinCEN form 114 if that balance is in excess of $10,000 US dollars (USD). If the form is not filed by the June 30th deadline, the taxpayer will be subject to monetary fines.
The Foreign Account Tax Compliance Act (FACTA) was legislated as an attempt to uncover those US expats who avoid paying income taxes. The law requires American expats and foreign financial institutions to report any balance that is above $200,000 USD at the end of the year, or one that is in excess of $300,000 USD at any point during the year. A married couple is given a higher threshold to meet. Qualifying expats must file a Form 8938 with their US tax return.
Do You Need Expatriate Tax Help While Living in Afghanistan?
An American who is making the move to India must first ensure that they understand the key tax issues that will affect their income. If you are in need of additional help, the expert US expat tax advisors are available for further assistance.