Foreign Employees in India: Key Risks to Manage

Tax generally follows the place of work. As a general rule in international taxation, the income earned through employment is taxed in the location where the activity takes place – typically the country where the individual doing the job is located.

Accordingly, salary relating to work performed in India is generally taxable in India, even if the employee remains on a foreign payroll, signed the employment contract abroad and receives salary in a foreign bank account. A treaty short-stay exemption may, however, apply.

Short-stay exemptions may apply

Short-stay exemptions are generally provided in Indian treaties. In general terms, salary will be subject to tax in the country of residence only when the following conditions are satisfied:

• the employee’s stay in India does not exceed the limit provided in the treaty, commonly 183 days;
• the remuneration is paid by, or on behalf of, an employer outside India; and
• the remuneration is not borne by a permanent establishment or fixed base of that employer in India.

All these conditions generally need to be met, and the exact wording may differ from one treaty to another.

Payroll requires a wider view

Taxable salary may include allowances, housing, bonuses, stock options and tax paid by the employer. Overseas and Indian payroll data should therefore be reviewed together.

If Indian tax applies, a shadow payroll may be required even where the Indian company does not pay the salary.

Provident fund can be particularly onerous

Where the provident-fund provisions apply to an international worker, they can be considerably more onerous than those applicable to a typical Indian employee.

The ₹15,000 wage ceiling does not apply. Contributions are generally calculated on the employee’s full pay, as defined under the provident-fund rules, irrespective of where the salary is paid.

Withdrawal may also be highly restrictive. For an international worker whose country has no social security agreement with India, completion of the project and leaving India does not mean full withdrawal.

In general, the full provident-fund balance can be withdrawn only after the employee reaches 58 years of age and has ceased employment with an establishment covered by the provident-fund law. This can apply even if the employee left India many years earlier.

An employee covered by an applicable social security agreement may qualify for exemption through a valid Certificate of Coverage or for other relief under that agreement.

Visa and business presence

The visa should reflect the work actually being performed. The employee’s activities may also create a taxable presence or other tax exposure for the foreign company, particularly where the employee negotiates contracts, manages the Indian business or regularly represents the company.

For that reason, the assignment should be reviewed before arrival from the perspectives of tax, payroll, provident fund, immigration and the employee’s actual business role.