Indian labour law does not apply to Indian nationals who are employed by foreign entities abroad.
As a general principle, the global income of an individual who is “ordinarily resident” in India is chargeable to tax in India, including all incomes which accrue or arise outside India during the relevant tax year.
However, if this person’s stay in India is for less than 182 days in aggregate during the relevant tax year, such person would be considered a non-resident in India for that year. In this case, the person would be liable for tax in India only for income derived from a source in India or received in India during the relevant tax year, including income deemed to be received or deemed to accrue or arise in India (subject to any exceptions under an applicable double taxation treaty).
Income Tax
As per normal understanding, income earned in India is considered as Indian income and income earned outside India is considered as foreign income. However, understanding the classification of income as per Income Tax Act i.e. Indian income or foreign Income is important. For the purpose of taxation, income may be earned from salary, house property, business, capital gain or any other source. Classification of such sources of income into Indian or foreign income will be decided on the basis of place of earning/accrual of income and place of receipt of income. Following table will help us to understand when an income is considered to have been earned in India.
| Condition 1 | Condition 2 | Status of Income |
| Received In India | Earn/accrued In India | Indian Income |
| Received outside India | Earn/accrued In India | Indian Income |
| Earn/accrued in India | Received Outside India | Indian Income |
| Received outside India | Earn/accrued outside India | Foreign Income |
Except for income which is earned/accrued and received outside India all other income will be considered as Indian income. Also, remittance of foreign income in India will not be taxable if it was first received outside India.
NRI and Resident Indian
You are a resident Indian as per Indian tax laws if:
- You are in India for more than 182 days in a financial year OR
- You are in India for more than 60 days in a particular financial year and more than 365 days in the 4 years preceding that financial year
If you do not satisfy either of these 2 conditions, you are a non resident Indian – NRI.
Example: On 1st June 2018, Ram was sent to the US on a project through his Indian company. He returned to India on 31st December 2018. For the financial year 2018-19, Ram was in India for 151 days. He does not qualify as a Resident Indian under point (i) of the above definition. We now need to check point (ii). Ram was in India for more than 60 days and since this was his first foreign posting, he has been in India for more than 365 in the last 4 financial years. Therefore, for 2018-19,, Ram will be treated as a Resident Indian.
Salary and allowance: During his stint abroad, Ram continued to receive his salary in his Indian bank account. He also received an allowance for expenses in his bank account in the US.
Taxability: There are two instance of taxation: One in India and one in the foreign country, in this case USA.
Tax in India: For resident Indians, all your income, whether local or global will be liable to be taxed in India. Tax will be deducted as source (TDS) on his Indian income. As for the foreign allowance, if it is in the nature of ‘allowance’ and the amount is used by you for fulfilling all your work related obligations, it would be considered as tax-free under section 10(14) of the Indian Income Tax Act.
Tax in foreign country: You will have to check on the tax laws prevailing in the country of your residence. Currently, according to the tax laws in the USA, you are considered a resident of USA if you have been present in the USA for 31 days or more in a particular calendar year and more than 183 days during a 3-year period that includes the current year and two preceding years. You are also a resident if you are a green card holder. If you satisfy this residency test, you will have to pay tax in USA. (Note: Financial year in the USA is on calendar year basis)
Ram has been in the USA for 214 days during the calendar year 2017. Therefore, he qualifies as a resident of the USA. Now according to US tax laws, a resident of USA will have to pay tax in the USA on his global income. Ram is in an awkward position as he qualifies as a resident of both countries for the same year. Therefore, next, we need to take help from the Double Taxation Avoidance Agreement (DTAA) between India and the US.
According to this DTAA, if a person is a resident of both countries as per residency definitions, he shall be deemed a resident of the country where he has a permanent home. Therefore, in Ram’s case, he will be deemed a resident of India and not a resident of USA.
According to US laws, compensation paid by a foreign employer to a person who is non-resident of USA for the period that he is temporarily in USA is exempt from US income tax. However, the compensation paid must be reasonable and in the nature of living expenses.
Ram will therefore not be liable to pay any tax in the USA, on either his foreign income or his Indian salary.
Example 2: If posted abroad and acquire NRI status
Let us suppose that instead of June 1st, Ram was posted abroad from April 1st 2018 to March 10th 2019. Therefore, by the residency definitions of both countries, he is an NRI for the year 2018-2019 and a resident of USA for the calendar year 2018.
If you are a non-resident Indian, you must pay tax in India only on your income earned in India. All foreign incomes will be taxed in the foreign country.
According to US tax laws, a person who is resident of USA will have to pay tax in USA on his global income. Therefore, Ram will have to pay tax in the USA on his Indian income.
However, since his Indian employer will also deduct tax at source on his Indian salary, Ram can claim a credit for the same when he files his returns in the USA. That is, he can deduct that tax paid in India from his overall tax liability in the USA.
As for foreign allowance, the US laws state that per diem allowance is tax free if within certain prescribed limits and if they are accounted for by the employee through expense reports. If per diem is in the nature of flat amount without the employee submitted any expense reports, then they would be taxable. Each metropolitan has a different prescribed limit. So if the per diem exceeds that limit you would have to pay tax on the excess. Also, the rule of thumb for the duration of the per-diem is less than one year. If the IRS believes that compensation is being masked as per-diem in order to evade taxes, it may raise questions on the company paying the per-diem.
A similar provision exists in the UK where is the amount of per diem is within reasonable limits and not for a period longer than 2 years, it is tax exempt.
Social Security
An Indian employee sent on posting to a country with which India has an SSA becomes an „International Worker‟ and is required to contribute on full salary. He can, however, seek exemption from the social security legislation of the country in which he is posted on the basis of a detachment certificate issued in terms of the SSA. If an Indian employee is directly employed by a local employer abroad, such an employee shall be covered by the foreign country legislation.
If an Indian employee prior to his posting abroad qualifies/happens to be a contributing member of the EPF, he will continue to be a member of the EPF during his posting to a country with which India does not have an SSA. International Workers drawing salary in any currency and in any manner are to be covered.
Further, SSA details have been listed in previous section.
