The Indian Union Budget 2023 is around the corner and the expectations of individual taxpayers are soaring. Especially the salaried taxpayers who are expecting higher tax savings to combat the growing costs of living. This has not left foreign nationals behind as well.
Foreign Nationals (FNs) moving to India for employment purposes have started picking pace over the last few months after a drop during the COVID-induced lockdowns. Highlighted below are few aspects from an FN perspective, where clarity is expected from the upcoming Budget.
Contribution to Social Security funds
In India, social security is governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act).
FNs working in India for an employer to whom the PF Act applies, need to contribute to the PF. for FNs coming from countries with whom India has signed a Social Security Agreement (SSA) may apply for detachment. However, if applicable, FNs are required to contribute to the PF at 12% of their salary with a matching contribution by the employer.
1. Employee’s contribution to PF
Currently, an employee’s contribution to PF is eligible for deduction under the combined maximum limit of INR 150,000 under section 80C of the Income-tax Act, 1961 (IT Act).
While FNs can avail this deduction, the contribution is generally on the higher side since skilled FNs from overseas countries come at a higher compensation leading to higher PF costs. Hence, the deduction limit needs an uplift.
2. Employer’s contribution to PF
Until recently, PF enjoyed an E-E-E tax regime i.e., tax-exempt at contribution, accrual and withdrawal. However, Budget 2020 provided that the employer’s contribution to recognised PF, Superannuation Fund and National Pension System exceeding INR 750,000 in aggregate will be a taxable perquisite for an employee in the year of contribution.
This could lead to lower net take-home compensation for FNs as contributions made by FNs and the employer would be substantial and consequentially higher tax cost on perquisites.
Interest on employer’s and employee’s contributions
The below are taxable in the hands of the employee:
a) Interest earned on an employee’s contribution in excess of INR 250,000 (introduced in Budget 2021) as ‘Income from Other Sources’
b) Annual accretion on employer contribution in excess of INR 750,000 as a prerequisite.
4. PF withdrawal
FNs from non-SSA countries are eligible to withdraw accumulated funds from a PF account only upon attainment of 58 years of age. This becomes a major challenge as this could be a long wait for FNs and needs tracking.
Further, PF withdrawal made before completing 5 years of continuous service with the employer is taxable for FNs. This would also lead to a situation of double taxation considering the contribution/interest accretion was subject to tax (as explained in the above scenarios) and also taxed at withdrawal.
5. Contribution to overseas social security funds
Based on a few judicial precedents, deduction could be claimed for contributions made to mandatory social security schemes in overseas countries. However, clarity is needed from the upcoming Budget regarding such a claim.
FNs will have more comfort if the clarity is provided on the above issues. Hence, some relaxation is expected from the upcoming Budget and consequential changes/clarification by the PF authorities.
Deduction of interest on housing loans
The Foreign Exchange Management Act, 1999 (FEMA) regulates the purchase of properties by FNs. Acquisition/transfer of immovable property in India by FNs is permissible subject to fulfilment of specified conditions and also prior permissions of the Reserve Bank of India in certain cases.
Further, additional compliances and/or paperwork may be required from a banking and regulatory perspective for the remittance of funds or funding of the property acquired through a loan.
Below are a few aspects under the IT Act:
1. Deduction under section 24 of the IT Act for repayment of interest component of a housing loan could be taken by FNs in case of a property based in India.
2. For FNs qualifying as Resident and Ordinary Resident (ROR) in India, the interest repayment in case of income from house property outside India could be claimed on a jurisprudent basis. However, clarity is required from the Budget to avoid any ambiguity.
3. Deduction under section 80C of the IT Act for repayment of the principal component on a housing loan is available under the combined limit of INR 150,000 and a separate deduction limit is expected for home loan repayments.
Moreover, the above deductions are not available under the concessional/new tax regime. Hence, it is expected from the Budget that these deductions could be available under both tax regimes for FNs to have better tax savings.