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For tax purposes, an individual is resident in India if he/she spends at least 182 days in the country in a given year, or 60 days if he/she has spent at least 365 days in India in the preceding four years. Indian citizens leaving India for employment or as members of the crew of an Indian ship and for an Indian citizen/person of Indian origin working abroad who visits India while on vacation, the threshold for the five-year test is 182 days in the given year instead of 60 days.

A "not ordinarily resident" individual is one who has either not been a resident in nine out of the 10 preceding years or who has been in India for less than two years during the preceding seven years. As a result, expatriate managers who have lived in India continuously for two years may be liable to tax on their foreign income.

Taxable income and rates
Personal income tax is levied on only about 3.5% of India's more than 1 billion citizens.

The personal tax rate is imposed progressively at rates of up to 30%. Those with an income of less than INR 150,000 are exempt from tax and need not file a tax return. The vast majority of citizens are not liable for personal income tax.

A 10% surcharge applies to individuals with income exceeding INR 1 million and the cess of 3% is levied on all direct and indirect taxes. 

Tax on long-term capital gains earned by individuals is generally 20% (plus the applicable surcharge and cess of 3%), except for long-term gains on listed securities, which are now tax-exempt.

Determination of taxable income
Residents of India are normally taxed on worldwide income. Persons not ordinarily resident generally do not pay tax on income earned outside India unless it is derived from a business controlled in India, or the income is accrued or first received in India or is deemed to have accrued in India. For example, a pension for years of service in India-even if received abroad¬is deemed to have accrued in India and is taxable.

Nonresidents are liable to tax on Indian-source income, including: (1) interest, royalties and fees for technical services paid by an Indian resident; (2) salaries paid for services rendered in India; and (3) income that arises from a business connection or property in India.

Standard deductions are not allowed. Deductions are allowed for contributions to life insurance, recognised provident funds, national savings certificates, the national savings scheme, income from certain mutual funds and dividends, deposits made under Senior Citizen Savings Scheme Rules (2004), five-year time deposits under the Post Office Time Deposit Rules (1981) and certain educational expenses up to INR 100,000. In addition, the following items may be deducted in calculating taxable income:

•           Mortgage interest on home loans obtained on or after 1 April 1999, where the borrower resides in the residence of up to INR 150,000 annually.

•           INR 15,000 (INR 20,000 for senior citizens) for medical insurance premiums. Medical expenses actually incurred for specified ailments are deductible up to INR 40,000 annually.

•           Interest on loans for higher education (including interest paid for higher education of spouse and children) without limit.

•           INR 50,000-75,000 for physically handicapped taxpayers or taxpayers with physically handicapped dependents.

•           Royalties received by authors of literary, artistic and scientific books and for income from the exploitation of patents of up to INR 300,000. 

The tax treatment of perquisites (such as accommodation, furniture and interest-free loans) provided by the employer is as follows:

•           Free or concessional accommodation will be valued at a specified percentage of the employee's salary depending on the city where the accommodation is located.

•           The use of movable assets (e.g. furniture) of the employer will be valued at 10% per annum of the actual cost of the assets or the amount of rent paid by the employer if the assets are leased. The provision of computers and laptops is not treated as a perquisite.

•           Interest-free or concessional loans exceeding INR 20,000 are presumed to carry interest calculated at the annual rate charged by the State Bank of India depending on the purpose of the loan.

•           Health-insurance premiums paid by the employer and reimbursement for medical expenses of up to INR 15,000 annually are tax-exempt. A leave-travel allowance, subject to certain conditions, is tax-free for two journeys in a block of four years.

•           Up to INR 500,000 received from voluntary-retirement schemes that conform to prescribed guidelines may be excluded from taxable income. 

Special expatriate tax regime
Remuneration received by foreign expatriates working in India generally is assessable under the "salaries" category and is deemed to be earned in India. Income payable for a leave period that is preceded and succeeded by services rendered in India and that forms part of the service contract is also regarded as income earned in India. Thus, irrespective of the residence status of an expatriate employee, the salary paid for services rendered in India is liable to tax in India.

There are no special exemptions or deductions available to foreign nationals working in India, except for local living allowances, which are exempt to the extent the expense is actually incurred. However, a foreign national can make use of a short-stay exemption following the 90¬day threshold limit as prescribed under the Income Tax Act and the 183-day threshold limit under relevant tax treaties provided all applicable conditions are satisfied.

Where salary is payable in a foreign currency, the salary income must be converted to Indian rupees. For this purpose, the rate of conversion to be applied is the telegraphic transfer-buying rate as adopted by the State Bank of India on the last day of the month immediately preceding the month in which the salary is due or paid. However, if tax is to be withheld on such an amount, the amount of tax to be withheld is calculated after converting the salary payable into Indian currency at the rate of the date on which tax was required to be withheld.

Capital taxes
All individuals and other specified persons must pay a 1% wealth tax on the aggregate value exceeding INR 1.5 million of non-productive assets such as land; buildings not used as factories; commercial property not used for business or profession; residential accommodation for employees earning over INR 500,000 per annum; gold, silver, platinum and other precious metals, gems and ornaments; and cars, aircraft and yachts.

Municipalities levy property taxes (based on assessed value), and states levy land-revenue taxes.

Taxes must be withheld at source among others on rental payments at the rate of 15% (plus applicable surcharge and cess of 3%) for individuals and 20% (plus applicable surcharge and cess of 3%) for others for use of land or building, exceeding INR 120,000 during anyone financial year. The withholding tax rate in respect of rental payments for use of any plant or machinery is 10% (plus applicable surcharge and cess of 3%). 

The profession tax is a local tax levied on salaried employees and persons carrying on a profession or trade; rates vary from state to state.

Source: Deloitte

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