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Sep 25, 2006, 05.50 PM IST | Source: Moneycontrol.com

You may have to pay tax on foreign allowance

If you're getting a salary from two different sources, then you need to manage your bank accounts properly. Here's a handy guide.

Vinit Deo

Chairman & MD, Posiview Consulting

Expertise : Property

More about the Expert...

Queries you asked:

I am working for TCS and on India payroll only. Right now am in London. When I ask TCS about the status of tax paid on UK allowances they say that they do deposit tax on our behalf but what we get is a constant amount and that too as allowances not a salary. I have got queries regarding the allowances I am getting here in UK.

  1. Are the allowances paid here in UK taxable in India?
  2. How the situation will change depending on the tenure of my stay i.e. if my status is NRI or not as per income tax authorities.
  3. Whats the best way to send my earnings back to my country as there are number of methods available.

Sharad Rathi


I have recently moved from India to Singapore on an assignment. I am still working on the company's payroll in India and would continue to earn my salary and pay taxes in India. In Singapore I would get the living allowances etc. Since I have lived more than six months now - do I be considered as NRI?
Sanjay Saini

I'm an employee of an Indian company and currently working in Dubai for 3 months, on deputation. I'll be here till May 2007. But I visit India every 3 months. So my question is do I get NRI status in spite of my visits to India once in every 3 months. As far as my knowledge goes a person would get the NRI status if he is residing out of India continuously for 181 days.
Srinivas Akula

I am a software eng and I am onsite to UK since last 3 months. Initially the contract was of 3 months only but now it seems that I might have to stay for 1 and half year. Will I be treated as NRI since I will be staying for continuous 182 days outside India. I have bank accounts in India. Do I need to change the status for all of them also?
Mrigendra Kishore


I have just got posting in USA for longer term. I have few bank accounts in India, including my salary bank account. Is there any legality involve if I continue to hold these account? Please advice if yes then what I need to do ?
Sushil Tiwari


Our expert Vinit Deo replies:
These cases are common what should one do when he is sent abroad on short trips and is paid an allowance or salary in foreign currency and continues to his earn his salary in foreign currency. Does one need to open a foreign currency account or can that money be deposited in the good old salary account back in India? In this article I will attempt to deal with all the possible combinations that are possible when person is posted abroad by his employer.

First, let's look at who is an NRI under the Income Tax Act.

A person is said to be a non-resident for a particular year under the Income Tax Act when he satisfied both the following conditions:


1)       He is in India for less than 182 days in that particular year, AND
2)       If he was in India for more than 365 days or more in the four years

preceding that year, then he is India for less than 60 days in that year.

 

Example 1: If Mr. Shah, who has not been in India for more than 4 years comes to India on 1st January 2006 and returns to his home country on 31st May 2006. He will still be called a non-resident in India as he has satisfied both the conditions i.e. I) He has stayed for less than 182 days during the financial year 2005-06 and ii) Since he has not come to India during the last 4 years, the second condition will not apply at all

 

Example 2: Assume in the example above that Mr. Shah has been coming to India regularly and his total stay during the last 4 years has exceeded 365 days. In this case, he will become a resident in India in the year 2005-06 as he will not satisfy the second conditions which says that if your stay in India has exceeded 365 during the last 4 years then your stay in India should be less than 60 days in the current year in order to qualify for non resident status. As Mr Shah is in India from 1st January 2006, he has stayed for more than 60 days in financial year 2005-06.

 

What are the types of remunerations an employee would receive? 

Let us first understand the various ways in which an employee will receive his remuneration when he goes abroad:

 

Type

Compensation in India in Rupees

Compensation in Foreign Country in foreign currency

Case 1

(Short Term visit)

Salary

Allowance (Daily allowance, hotel charges, food, local conveyance etc.)

Case 2

(Medium to long term visit)

Salary

Salary

Case 3

(Long term visit)

Nothing

Salary

 














One important rule of thumb we will have to keep in mind is that we have to check out the residential status under each of the above cases. The eligibility to open certain type of Bank Accounts depends on your residential status. (For details please refer the article, 5 Thumb Rules for Opening Bank Accounts )

 

We need to understand the implications of each of the above types of travel.

 

Case 1: Salary in India and Allowance in foreign currency

Usually when an employee goes on a short-term tour ranging from a few days to few months, he continues to be on the payroll of the Indian company and is merely deputed abroad on a temporary assignment at the clients location. In such a case, he does not become a Non Resident Indian (NRI) at all as one of the criteria for becoming an NRI is that the visit abroad should be for the purpose of taking up employment in that country or your visit is of an indefinite period.

In this case, you continue to be the employee of the Indian company and it is definite that once your assignment is over or the visa expires, whichever is earlier, you will return to India. Thus you are a Resident Indian, no matter how long you stay in that country. The implication of this residential status is that you are not eligible to open any foreign currency accounts in India. You have three options to deal with the foreign currency you have saved and brought back to India:

 

  • Retain the foreign currency up to an amount of USD 2,000 or equivalent. Any currency over and above that has to be converted into India Rupees.
  • Convert the entire foreign currency in Indian Rupees
  • Open a Resident Foreign Currency (Domestic) RFC (Domestic) Account and deposit the foreign currency in that Account. This is a special type of account, which has permitted by the Reserve bank of India. The key feature of this account is that although you are a Resident India, you are allowed to maintain this account in foreign currency.

The Tax controversy

One area of controversy in dealing with the foreign currency brought into India is the taxation aspect. The Indian taxation law i.e. the Income Tax Act, 1961 prescribes that any kind of allowance paid by or on behalf of the employer becomes taxable in the hands of the employee. Thus the foreign travel allowance is also taxable in India and your employer should ideally have paid you the allowance after deducting tax thereon. If not, there is a chance that either you are the employer may be questioned by the Income Tax Department as to why the tax has not been paid on the allowance.

 

Case 2: Salary in India and also in foreign currency

If you are being paid a salary in India as also in foreign currency, we have to check the nature of your visit viz:

  • If you have been sent abroad as an employee of the foreign company, then you become an NRI. You can open an NRE / NRO / FCNR Accounts in India and freely remit any amounts to these accounts
  • If you continue to be the employee of the Indian company and have only been seconded to the foreign company, then we have to check the duration of your stay:
    • If the stay is for an indefinite period e.g. if you are the onsite coordinator for your company and the company has not specifically fixed up a date for your return, then you get the status of NRI. You can open an NRE / NRO / FCNR Accounts in India and freely remit any amounts to these accounts
    • If the stay abroad is for a definite period, then despite the fact that you are getting salary in foreign currency you will be considered an Indian and all the issues that we have mentioned in Case 1 above apply to you. Thus you should actually open a RFC (Domestic) Account and remit the salary received in foreign currency to that account.

Case 3: Salary in foreign currency only

This is the simplest case. If you are getting a salary in foreign currency, it means you are an NRI and eligible to open the Accounts available to NRIs (NRE / NRO / FCNR (B)) etc. In addition to these accounts which will be opened in India, you will probably have to open an Account in the Bank of the foreign country as your salary will firstly be deposited to that Account as also you may have to make local payments in that country like lease rentals, purchase of car etc.

 

The Practical Dimension

In practice you will notice that it is difficult to determine whether you have gone for an indefinite period or its a visit for a fixed duration. Hence you will find that, the moment you go to the Bank and tell that you are being shifted abroad for a project, they will immediately ask you to open an NRE / NRO Account. This is because of the peculiar nature of our foreign exchange law, which prescribes that the moment you are going outside India for employment, or to start a business or for any other purpose for which it is not possible to determine the period of stay, you become a NRI. And the moment you become a NRI you are eligible to open all types of NRI Accounts.

(The expert, Vinit Deo is a Chartered Accountant and CEO of ITLogy FPO Services Pvt. Ltd.)

If you have a query on investing, taxation, property or other legal matters, mail us at
nri@moneycontrol.com .

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