India’s 2020 Budget, presented Feb. 1, includes several tax proposals that could impact both American employees working in India as well as employers with internationally mobile employees. While the proposals still to be approved into legislation, employers with offices and/or employees in India should review the Budget to understand its impact and plan ahead to identify how best to respond.
New personal tax regime
A new optional tax regime allows taxpayers to benefit from lower tax rates by forgoing certain deductions and/or exemptions – these include house rent allowance, investment-linked specified deductions, and premiums paid for health insurance and medical insurance. For employees on assignment to India, these exemptions may be less common, and accordingly the new tax regime may provide a limited tax-cost reduction for employees and businesses if employee compensation is tax-equalized.
For employees coming from India to work in the United States on a tax-equalized assignment, consideration should be given as to which regime will be applied for hypothetical tax-withholding purposes. Employers should review and update their tax policy to accommodate changes and how this impacts an assignee’s tax-equalization position.
Provident Fund and other retirement provisions
The Budget proposes an overall cap of 750,000 rupees (about $10,000 in U.S. dollars) on deductions for employer contributions to India’s retirement programs such as the Provident Fund (PF) the National Pension Scheme and the Superannuation Fund. Where an employer's contribution exceeds this threshold, the excess will be regarded as taxable income to the employee. Additionally, annual interest and dividends that accrue in the PF relating to contributions in excess of 750,000 rupees will also be taxed.
For U.S employees working in India on assignment, this has a potentially significant tax impact. Currently there is no bilateral totalization agreement between the U.S. and India allowing employees and employers to contribute social tax contributions in only one country. Accordingly, “international workers” in India who are subject to uncapped contributions at 12% for both employee and employer contributions may have additional taxable income, potentially at high tax rates.
Change in residency conditions
Residency rules for Indians living and working in the United States, and elsewhere, have been tightened. The Budget proposes to reduce the amount of time an Indian employee can return to India before they will be regarded as tax resident, as follows:
- 120 days or more (formerly 182 days or more) during the financial year
- 365 days or more total during the preceding four financial years
The Budget proposals also outline that Indian citizens who are not liable for tax in any other country while working overseas will be deemed to be tax residents of India. The government has clarified, however, that income earned outside India for a non-Indian employer shall not be taxed in India.
For employees who have moved to the United States and may undertake trips back for personal and business purposes, this change may result in additional India tax implications.
Deferred tax on share of eligible start-ups
Start-up companies may provide their employees with stock options as part of their long-term incentive compensation. Existing law taxes these shares in the year the option is exercised and then as a capital gain when the shares are sold. In order to ease the cash-flow burden for employees of eligible start-ups, the Budget has proposed to defer the deduction and payment of taxes such that taxes are payable at the earlier of within 14 days from either the completion of five years from the end of the relevant financial year, the date of sale of the shares, or the date on which an individual ceases to be an employee.
For U.S. companies that are undertaking acquisitions in India, this may be a valuable incentive if the benefit can be structured into the deal. For internationally mobile employees of such start-ups, mobility professionals should be engaged in the due diligence process to identify future tax liabilities and potentially effective deal structuring.
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