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for the first nine years of residence in India.
Special provisions for foreigners
Foreigners are entitled to certain special
concessions as follows.
1. Remuneration received by a foreigner as an
employee of a foreign enterprise for services rendered in India is not
subject to Indian income tax, provided :
a. The foreign enterprise is not engaged in any trade or business in
India;
b. The foreigner is not present in India for more than 90 days in that
year; and
c. The remuneration is not liable to be deducted in computing the
employer's taxable income in India.
In a treaty situation, the 183-day rule applies.
2. A foreigner (including a nonresident Indian)
who was not resident in India in any of the four financial years
immediately preceding the year of arrival in India is entitled to a
special tax concession, if :
a. The foreigner has specialized knowledge and experience in
construction or manufacturing operations, mining, generation of
electricity or any other form of power, agriculture, animal husbandry,
dairy farming, deep-sea fishing, shipbuilding, grading and evaluation
of diamonds for diamond export or import trade, cookery, information
technology (including computer architecture systems, platforms and
associated technology), a software development process and tools, or
such other fields as the central government may specify; and
b. The individual is employed in any business in India in a capacity in
which specialized knowledge and experience are used.
During the first 48 months commencing from the date of arrival in
India, the remuneration will not be subject to any further tax in such
a foreigner's hands if the employer bears the tax on the remuneration.
3. A visiting foreign professor who teaches in any
university or educational institution in India land whose contact of
service is approved by the central government is exempt from tax on
remuneration received during the first 36 months from the date of
arrival in India, provided the teacher was not resident in India in any
of the four financial years immediately preceding the year of arrival
in India. If the foreigner continues in employment in India thereafter,
the remuneration of the following 24 months is taxable; however, if the
tax is paid by the university or education institution, there is no
further tax liability.
4. Salary received by a nonresident foreigner in
connection with employment on a foreign ship is exempt from tax if the
employee's stay in India during a year does not exceed 90 days.
5. Special exemptions under specified
circumstances are available for the following :
a. Amounts receivable from a foreign government or a foreign body by a
foreigner for undertaking research in India under an approved scheme;
b. Remuneration received by employees of a foreign government during
training with the Indian government or in an Indian government
undertaking (applicable to individuals assigned to India under
cooperative technical assistance programs in accordance with agreements
between the Indian government and a foreign government); and
c. Remuneration received by nonresident expatriates in connection with
the filming of motion pictures by nonresident producers.
All types of remuneration received or receivable
by an employee from the employer for services rendered, including the
value of benefits-in-kind (i.e., perquisites), are subject to tax.
Car, housing and servants are concessionally taxed (see
"Valuation of perquisites" below). Reimbursement of medical
expenses and leave passages paid by the employer are exempt from tax
up to specified amounts. Allowances granted to meet expenses on tour,
in a transfer in connection with employment or for conveyance in
performance of office duties are deductible to the extent spent for
the purpose. Allowances granted for Children's education and for
meeting children's hostel expenditure are exempt up to Rs 50 per month
and Rs 150 per month per child, respectively, up to a maximum of two
children. Payments toward children's education in excess of these
amounts are taxable.
The cost to the employer for providing retirement
benefits under schemes approved by the Tax authorities are exempt,
except for the employer's contribution to recognized provident funds
in excess of 10 percent of the salary. Cashing of accumulated leave at
the time of retirement is exempt up to specified limits.
Compensation for termination of service or for
modification of the service terms is taxable. Gratuities paid upon
retirement, death or termination of service are exempt to the extent
of a half month's salary for each completed year of service or Rs
250,000, whichever is less. Pensions for past services rendered in
India are taxable, although payments in commutation of pension are
exempt up to prescribed limits.
Where an employer bears the tax liability, the
employee's taxable income is determined by grossing it up with the tax
paid by the employer so that the tax on the grossed-up income is equal
to the tax paid by the employer. In such cases, the amount of tax may
be significant. However, such grossing up is not required in the case
of approved foreign technicians, as indicated in item (2) under
"Special provisions for foreigners."
Residents are taxed on their worldwide income
irrespective of where the services are rendered, but are entitled to
claim credit for foreign taxes paid, as explained below under
"Double taxation relief".
Perquisites are values as follows.
1. The value of rent-free accommodation provided
by the employer is deemed to be 10 percent of the salary (including
allowances) due to the employee during the period of occupation of
the accommodation. If the fair rental value of the accommodation
exceeds 50 percent of the salary (60 percent in Mumbai (Bombay),
Calcutta, Delhi and Madras), the excess is added to the base value of
10 percent.
Where furniture is also provided, the value of
furniture (including television sets, radios, refrigerators,
household appliances, and air conditioners) is deemed to be 10
percent of the original cost of the furniture is hired, the actual
rental charges. If, instead of providing accommodation, the employer
gives a house rent allowance to the employee, a portion of the
allowance is exempt from tax.
2. The value of a car provided by the employer
that is used for both personal and business purposes is as follows :
|
Kind of use
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cars with limited capacity *
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other cars
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Running and maintenance Expenses met by
employer
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600
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800
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Expenses for personal Use met by employee
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200
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300
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· Cars not exceeding 16 horsepower or engines
not exceeding cubic capacity of 1.88 liters
If a chauffeur is also provided, the perquisite
value mentioned above is increased by Rs 300 per month. If the
employee owns the cat but all expenses are met by the employer, the
perquisite value is the sum spent by the employer reasonably
attributable to the use of the car for personal purposes.
3. Services of a sweeper and a watchman directly
employed by the employer and placed at the disposal of the employee
are concesionally valued at Rs 120 per month for each such person.
4. Other perquisites, in most cases, are valued
at the cost incurred by the employer for providing them.
Gains on the transfer of capital assets are
subject to tax in the individual's hands. Nonresidents are subject
to tax only on gains from the transfer of capital assets situated in
India (or from the transfer abroad of foreign assets if sales
proceeds are received directly in India). Capital gains are computed
in the same manner as in the case of companies. Gains on the
transfer of residential house are exempt if they are reinvested in
acquiring or constructing another residential house within a
specified period.
For residents, in addition to income from
employment and capital gains, all other types of income (e.g.,
income from property, profits and gains from a business or
profession, royalties, dividends, interest, and miscellaneous other
income), wherever earned or received, are includable in the taxable
income.
For nonresidents, such income is subject to
tax only if its received in India or it arises or is deemed to
arise in India. Therefore, foreign-source income of nonresidents
(e.g., income from foreign-source dividends and interest) is not
taxable in India unless received directly in India.
Rents from residential property are taxed
after allowing specified deductions for repairs, municipal taxes,
insurance premiums, interest on loans, etc. Profits from a business
or profession are computed in the same manner as for companies.
A deduction is allowed for interest on
government securities, debentures of specified cooperative
societies and institutions, deposits with banks, and mutual funds
and on dividends from Indian companies, unit trust and cooperative
societies, up to an aggregate of Rs 13,000 pr year. It is proposed
to increase this amount to Rs 15,000, out of which Rs 3,000 will be
allowed only for the dividends and the mutual funds interest.
In the case of a nonresident, interest on
money on deposit in a nonresident (external) account in any bank in
India and, in the case of nonresident Indians, interest on
specified national savings certificates purchased in foreign
exchange is entirely exempt from tax, subject to specified
conditions.
Closely held companies are discussed under
"Intercompany transactions". Advances or loans given by
a closely held company to a shareholder with 10 percent or more of
the voting power or to a concern in which the shareholder at any
point of time during the year, is entitled to 20 percent of the
income of the concern, as well as payments made for the benefit of
such shareholder, are in certain circumstances taxed as dividends
in the hands of the shareholder. However, the advances or loans
will not be so taxed where they are made in the ordinary course of
business if lending money is a substantial part of the company's
business.
Business
AS noted above, allowances granted by the
employer to meet the cost of travel on tour, transfer or
conveyance in performance of office duties are deductible to the
extent actually spent for that purpose. A standard deduction is
allowed to all employees equal to one-third of salary or Rs.
15,000 (Rs 18,000 for women with an income not exceeding Rs
75,000), whichever is less. Deductions are also allowed for
allowances granted to meet expenditures for engaging a helper in
performance of the duties of an office, for academic research and
other professional pursuits. or for purchase or maintenance of
uniforms, to the extent actually spent for the purposes. No other
business deductions are available.
Nonbusiness
No deductions are available from salaries
for interest or taxes (other than for state employment tax, which
is minimal). Deduction up to certain limits are allowed for
donations to approved charities and medical insurance premiums.
Personal allowances
Currently, there are no personal allowances,
other than a deduction for certain high altitude and border area
allowances generally applicable to defense personnel. However,
tax credits are available for certain investments out of taxable
income.
Nonresidents
All the deductiions mentioned above are
applicable to nonresidents.
Residents are allowed double taxation
relief for foreign taxes withheld or paid on foreign-source
income, either under treaties or unilaterally under the credit
method. The credit against the Indian tax liability on the
worldwide income of the resident is limited to the lower of the
foreign tax withheld or paid and the Indian tax on the doubly
taxed income.
Nonresidents are entitled to claim double
taxation relief under the treaties in their country of
residence.
Taxable income
Income from all sources (other than
long-term capital gains) less all deductions available is
aggregated to determine the total taxable income (see Appendix
VIII for a sample tax calculation). Long-term gains are
separately taxed at lower rates.
Tax rates
Income tax is calculated at graduated
rates (see Appendix VI). On income of Rs 120,000, the tax is Rs
22,000 (it would be Rs 21,000 under the Finance Bill 1996
proposal), and income in excess of Rs 120,000 is taxed at 40
percent. Long-term capital gains are taxed at 20 percent.
Tax credits
A rebate is allowed against the gross tax
liability equal to 20 percent of the amount invested or
deposited in life insurance policies, recognized provident
funds, approved superannuation funds, etc. The total rebate is
limited to Rs 12,000.
All income taxes withheld or paid are
credited in full against the tax liability. Credit for foreign
taxes paid are allowed as explained under "Double taxation
relief" above.
Local tax on income
Some states levy nominal taxes on
employment, trade and the professions. These taxes are
deductible in computing taxable income from salaries and
profits from a business or profession.
Wealth tax
An individual is liable to pay wealth tax
at 1 percent on net taxable wealth that is in excess of Rs
1,500,000 as of the last day of the year. Net wealth means
value of specified assets (e.g. residential houses, urban
land, jewelry, bullion, motorcars, yachts, boats, aircraft,
cash-in-hand in excess of Rs 50,000) in excess of debts
secured by or incurred in relation to those assets. However,
the value of one residential house is exempt from wealth tax.
Foreigners, nonresidents and those not
ordinarily resident are exempt from wealth tax on assets
located outside India. Correspondingly, no deduction is
allowed for foreign debts.
Gift tax
Gift tax is levied on the donor at 30
percent on the aggregate value of taxable fits in excess of Rs
30,000.
Gifts exempt from tax include fits by a
nonresident Indian to any relative in India in convertible
foreign exchange and fits of specified government bonds.
Inheritance tax
There is no inheritance tax. However,
stamp duty is payable on the transfer of property by
inheritance.
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General Section
