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

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