Tax Advisory for Remote Workers in India: Optimizing Savings

We discuss key tax considerations, compliance requirements, and strategies to optimize savings for remote workers in India while ensuring adherence to domestic and global taxation regulations.

The rise of remote work, accelerated by the COVID-19 pandemic, has transformed India’s employment landscape, offering flexibility for employees and access to broader talent pools for employers. However, this shift brings tax complexities for both salaried workers and Non-Resident Indians (NRIs) working remotely from India.

Taxability of salary income

General taxability

Under the Income Tax Act, 1961, salary income is taxable if services are rendered in India, regardless of the employer’s location or payment currency.

Income is taxable even if it is:

• paid in a foreign currency; or
• deposited in a foreign bank account.

Tax liability is determined based on residential status:

• Resident (RES): Taxable on global income.
• Resident but Not Ordinarily Resident (RNOR): Taxable on Indian-sourced income or income from businesses controlled in India.
• Non-Resident Indian (NRI): Taxable only on Indian-sourced income.

Foreign salary conversion

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Foreign salaries must be converted to INR for paying taxes like advance tax or self-assessment tax at the time of income tax return filing using the telegraphic transfer buying rate of the State Bank of India (SBI) on the last day of the preceding month.

2. Choosing between old and new tax regimes

Remote workers can opt for either the old or new tax regime.

Old regime: Offers deductions such as:

• INR 50,000 standard deduction.
• House Rent Allowance (HRA) exemption (if eligible).
• Section 80C to 80U Deductions for investments like PPF, ELSS, and health insurance premiums.

New regime: Features a simplified tax structure with lower tax rates but offering limited exemptions and deductions, while retaining the INR 75,000 standard deduction.

Workers should compare both regimes to determine which maximizes savings based on income and eligible deductions.

There is no distinction in the taxation framework for workers employed by a foreign employer versus a domestic employer under the work-from-home model. Both are subject to the same tax rules under the Indian Income Tax Act, 1961.

Here’s a comparison of the old tax regime rates and new tax regime rates under the Indian Income Tax Act for FY 2024-25:

*Surcharge and education cess will be applicable in addition to the slab rates.

Advance tax compliance

Who needs to pay advance tax?

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Advance tax is applicable to individuals whose total tax liability exceeds INR 10,000 in a financial year. This is particularly relevant for Indian workers employed by foreign companies, as such employers typically do not deduct Tax Deducted at Source (TDS) under Indian tax regulations.

Steps for compliance

Estimate taxable income: Include salary income, other earnings, and deductions under applicable sections (e.g., 80C, 80D).

Calculate tax liability: Use applicable rates under the chosen old/new tax regime.

Determine advance tax installments:

Pay advance tax in four installments:

• 15 percent by June 15.
• 45 percent by September 15.
• 75 percent by December 15.
• 100 percent by March 15.

Pay online: Use the income tax e-filing portal or authorized banks to pay advance tax. Retain receipts for proof.

Penalties for non-compliance: Interest under Sections 234B and 234C is charged for failure to pay advance tax or incorrect estimation of liability.

Updating bank account to receive foreign salary

Personal savings account: Ensure the personal savings bank account supports foreign inward remittances via SWIFT or wire transfer. Provide employment documentation to the bank.

Currency conversion: Banks convert foreign salary to INR upon receipt. Track exchange rates for accurate tax reporting.

Maintain records: Retain transaction receipts, bank statements, and salary slips.

Alternative account options: Consider a Resident Foreign Currency (RFC) Account for holding funds in foreign currency, especially if planning to move abroad.

Foreign Exchange Management Act (FEMA) compliance

Under FEMA regulations, Indian residents receiving foreign salaries must ensure the following:

• Disclose foreign income and assets in Schedule FA of their Income Tax Return (ITR).
• Clearly defined payment terms and remittance methods in employment contracts.
• Adherence to monetary limits under the Liberalized Remittance Scheme (LRS) for outbound transfers under FEMA.

Double Tax Avoidance Agreements (DTAAs)

India’s DTAAs with various countries help prevent double taxation. Key provisions include:

• Tax credit: Indian tax liability can be reduced by the amount of tax paid abroad.
• Eligibility: Workers must obtain a Tax Residency Certificate (TRC) and file Form 67 with proof of taxes paid in the foreign country.

Social security benefits

Avoiding double social security contributions (SSA Agreement with India):
Workers contributing to India’s Employees’ Provident Fund (EPF) are exempt from contributing to foreign social security schemes if a Social Security Agreement (SSA) exists between India and the foreign country.

Transferability of benefits under SSA:
Contributions made to foreign social security schemes may be transferable to India or refunded after the worker’s employment ends, depending on the terms of the SSA.

India currently has SSA agreements in place with 20 countries. For details on the respective SSA agreements, see the Ministry of Labor website here.

Source: Ministry of Labor & Employment

Tax obligations in the employer’s country

Key considerations:

• Tax withholding:
  Many foreign employers withhold taxes on employee salaries. Workers may need to file tax returns in the employer’s country to claim refunds or exemptions.
• Social security contributions:
  Workers should verify whether social security contributions made abroad are refundable or transferable under the provisions of the SSA.
• Local compliance:
  Employment contracts should comply with the labor and tax laws of the foreign employer’s country.

Filing Indian income tax returns

Essential steps:

• Accurate disclosure: Report all foreign income and assets in Schedule FA of the income tax return (ITR).
• Claim foreign tax credit (FTC): File Form 67 and attach proof of taxes paid abroad to claim credit.
• Maintain supporting documents: Retain salary slips, bank statements, and tax payment receipts for accurate filing and verification.

Practical tips for workers and employers

For workers:

• Choose the appropriate tax regime to optimize savings.
• Monitor residency status to determine appropriate tax treatment (RES, RNOR, or NRI).
• Plan investments under Sections 80C and 80D to minimize tax liability.
• Maintain records of internet, electricity, and other work-from-home (WFH) expenses for potential future deductions.
• Ensure timely advance tax payments to avoid penalties.

For employers:

• Establish clear reimbursement policies for WFH expenses, including documentation requirements.
• Deduct and remit taxes accurately to ensure TDS compliance.
• Mitigate risks of creating a Permanent Establishment (PE) in India by limiting activities that may create a taxable presence.

Conclusion

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Indian workers employed by foreign companies must navigate a complex web of tax rules, FEMA compliance, advance tax obligations, and DTAA provisions. By proactively managing tax payments, updating bank accounts, and leveraging social security agreements, they can ensure compliance while optimizing financial benefits. Employers, too, must adopt clear policies to mitigate risks and foster seamless cross-border collaborations. Strategic planning and professional guidance remain key to successfully navigating these challenges.

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