Expatriate tax ebook - India

What taxes?

Capital gains tax
Inheritance, estate and gift taxes
Investment income
Local taxes
Real estate taxes
Social security taxes
Stock options
Wealth taxes
Other specific taxes

Capital gains tax
Capital gains means any profits or gains arising from the transfer of a capital asset. Capital assets are divided into long term or short term assets, with reference to the period of holding of the asset.

Shares in a company or any other security listed on a recognised stock exchange in India or a unit of a mutual fund held for more than 12 months, and all other assets held for more than 36 months, are classified as long term capital assets; otherwise they are considered short term capital assets.

The long term capital gain is subjected to a flat rate of income tax at 20%. However, exemptions are available for certain assets. Short term capital gains will be included in the total income of the assessee and charged at the regular rates of income tax. However, short term capital gains arising from the sale of securities on a recognised stock exchange are taxable at a flat rate of 15%.

The income tax calculated will then be further increased by the applicable surcharge and education cess @ 3% of the income tax so computed.

Investment income
Interest income and other investment income arising to individuals in India are taxable in India. Dividends paid by Indian companies on which Dividend Distribution tax has been paid are exempt from tax in the hands of the recipient.

Local taxes
Depending on the State, the employer may be required to deduct the profession tax from the remuneration paid to employee and pay this to the profession tax authority.

Real estate tax
Property tax is levied on property by the local authority.

Social security taxes
There are no social security taxes in India per se. However, employer and employees are mandatorily required to contribute to Provident Fund and Pension Schemes as per the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (‘PF Act’). Such regulations shall apply only to those entities which qualify as an eligible establishment under the PF Act.

The above regulations now apply to ‘International Workers (‘IW’s)’ as well. However, International workers do not include employees who are contributing to a social security programme of his/her country of origin, either as a citizen or resident, with whom India has entered into a Social Security Agreement (SSAs).

As on 1 April 2011, three SSAs in respect of Belgium, Germany and Switzerland have been made effective from 1 September 2009, 1 October 2009 and 29 January 2011 respectively. Apart from the above, SSAs have already been signed with France, the Netherlands, Czech Republic, Denmark, Hungary, Norway, Luxembourg, and Republic of Korea, but not yet made effective.

As per the latest provisions of the PF Act, the IW’s are permitted to withdraw the balances standing to the credit of their respective social security accounts either on retirement i.e. after attaining the age of 58 years or in certain specified situations.

Stock options
Specified securities and sweat equity shares allotted or transferred, directly or indirectly, by employers to employees will be taxed in the hands of the employees upon exercise of the options. The value of the perquisite will be linked to the fair market value of the securities on the date of exercise and the amount actually paid / recovered from the employee.

The fair market value so considered for valuation will be taken as cost of acquisition in computing capital gains when the employee disposes off the security. Employees will be liable to capital gains tax at the time of sale of shares received upon exercise of options.

Wealth tax
Wealth tax is chargeable in respect of Net Wealth comprising of certain specified non-productive assets @ 1% of the amount by which the Net Wealth exceeds INR 3 million as on the last day of the FY.

Other specific taxes
.
Education cess
An education cess of 3% is payable in addition to the tax and surcharge mentioned above.

Information about India:

• introduction
• facts and figures
• basis of taxation
• what taxes?
• tax planning opportunities