Grossing Up & Computation of Income Tax Liability of Expats in India

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This article has been authored by CA Tarun Sharma who can be contacted at tarunsh11@gmail.com. You can also get your articles published by mailing them to us at admin@charteredclub.com

In the previous article I explained about the concept of taxation of expatriates. (Refer article – Taxation of Expats in India) Now I with explain with an example how to compute the tax liability for an expatriate.

Taxation of expatriate is the same like normal computation of Income and Tax liability but with an additional requirement of grossing-up of tax.

I will explain to procedures to compute tax which are: -

  1. Computation with grossing-up (where Income Tax is borne by the company) and
  2. Computation without grossing-up (where tax is paid to the expatriate in addition to the salary as a perquisite to bare the burden of tax himself).

Let me explain this with the help of an example.

For eg –If the Indian Salary of the Individual is Rs. 3,00,000, Foreign Salary is  Rs. 50,00,000 and the value of other perquisite is taken as Rs. 40,000 following would be the Taxes payable

Computation of tax with grossing-up

For computation of any income and tax liability you need a form 16 (form given by the employer as a proof of deduction of tax on salary, containing the amount of salary and its components along with the amount of TDS deducted).

For an expatriate separate form 16 can be issued for Indian salary and foreign salary, separately or even combined form 16 can be issued.

The Computation of Tax has been shown below

Particulars Amount
Indian Salary 300000
Add: Value of Rent Free furnished Accommodation
15% of the Indian & Foreign Salary(As per Rule 3 (a)(iii) of the Income Tax Rules)
795000
Add: Other Perquisites 40000
TOTAL INCOME 11,35,000
Tax on Above Income as per Normal Income Tax Slab Rates 192500
Add: Education Cess @2% 3850
Secondary and Higher Education Cess 1925
TOTAL TAX 198275
Grossing Up Tax – 144.71/100 286924

 

Foreign Income 50,00,000
Tax on above @44.71% 22,35,500
BALANCE TAX PAYABLE/ REFUNDABLE 22,35,500
POSITION OF TAX LIABILITY
Tax Payable (Indian Salary) 286924
Tax Payable (Foreign Salary) 2235500
Total Tax Liability 2522424

There are many other aspects to the computation, including many perquisites, allowances, TDS, advance tax, interest u/s 234 A, B & C, etc. But only basic example is taken for explanation.

Computation of Tax without grossing-up

If the tax liability is not borne by the company but by the expatriate employee himself, in this agreement the company agrees to pay to the expatriate the tax amount in addition to the salary paid to him. In this case the tax amount will be paid as perquisite to the expat, it may be called salary tax perquisite.

This amount will not be taken into account for calculation of rent free accommodation as perquisites are not taken into account for calculation of RFA. Thus the burden of tax will be on the expatriate in this case and not the company directly.

Following is the example for this type of computation: -

Particulars

Amount

Salary: Indian Salary3,00,000

Foreign Salary50,00,000

53,00,000

(Add) Value of Perquisite

40,000

(Add) Value of Rent Free furnished Accommodation

15% of the Indian & Foreign Salary

(As per Rule 3 (a)(iii) of the Income Tax Rules)

7,95,000

GROSS TOTAL

61,35,000

Tax on Above

16,92,500

(Add) Education Cess @2%

33,850

(Add) Secondary and Higher Education Cess @1%

16,925

Total Tax Payable

17,43,275

This is the normal tax liability, but now as the company has to pay tax as a perquisite to the expatriate this amount will be grossed-up and that amount will be paid as salary tax perquisite.

The amount of salary tax perquisite is 1743275 *144.71/100 = 25,22,693

Considering this amount as a part of payment to employee the computation will be as follows: -

Indian Salary

3,00,000

Salary Tax Perquisite

25,22,693

Add: Value of Rent Free furnished accommodation

(15% of Indian and Foreign Salary)

[As per Rule 3(a)(iii) of I.Tax Rules]

7,95,000

(Add) Perquisite

40,000

Total

36,57,693

Tax on above at Normal Rates

949308

(Add) Education Cess @2%

18986

(Add) Secondary and Higher Education Cess @1%

9493

Total Tax

977787

No Grossing up of tax would be done in this case does the tax is 977787

Foreign Salary

50,00,000

Tax on above @30.9%

15,45,000

Position of Tax Liability

Tax Payable – Indian Salary

9,77,787

Tax Payable – Foreign Salary

15,45,000

Total Tax Payable

25,22,787

Conclusion

The thing to notice is that the amount of total tax liability in both the cases is almost the same just with the minor difference due to approximation and rounding off. And also in second case the salary tax perquisite and the amount of total tax liability is also almost the same with minor differences.

The second case is the computation which is same as in our case by applying normal tax rates without any need to gross-up the tax in computation. But in this case tax liability is borne by the company indirectly and not directly through salary tax perquisite.

In above examples Indian Salary and foreign salary is shown separately for simplification and understanding, you can also combine the incomes and then compute tax liability on the total income together. I hope through this article you get the idea of how grossing-up is done.

Particulars

Amount

Salary: Indian Salary3,00,000

Foreign Salary50,00,000

53,00,000

(Add) Value of Perquisite

40,000

(Add) Value of Rent Free furnished Accommodation

15% of the Indian & Foreign Salary

(As per Rule 3 (a)(iii) of the Income Tax Rules)

7,95,000

GROSS TOTAL

61,35,000

Tax on Above

16,92,500

(Add) Education Cess @2%

33,850

(Add) Secondary and Higher Education Cess @1%

16,925

Total Tax Payable

17,43,275

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