Daily allowance on short-term assignment is exempt from tax

Q. I work for an Indian company that has deputed me on a project abroad. I get per diem in that country and salary which is credited to an Indian bank account. I have been out of India for over a year now. I am expected to be out for another six months.

Is the per diem taxable at the hands of the employee? I currently withdraw with an Indian ATM card and my company settles the credit card company's due via expense reimbursement.

Am I a non-resident Indian (NRI)? What kind of bank account should I need to hold in India? — Arvind

A. Subject to expenditure, per diem allowance paid for short-term assignment can be claimed as exempt from tax but this exemption cannot be claimed in case of long-term assignment. There is no threshold to what qualifies as short-term or long-term assignment.

The category has to be determined on the basis of facts and circumstances.

For short duration assignments per diem could be claimed as exempt, subject to other conditions. Also the per diem allowance needs to be spent on daily living and subsistence expenditure.

Further, holding of bank account in India would depend on FEMA regulations. Assuming you left India for employment, you should re-designate your saving accounts to Non-Resident Ordinary (NRO) Rupee Account. Under FEMA, you can open a Foreign Currency (Non-Resident) Account - (FCNR) which is a foreign currency designated account or a Non Resident External Rupee (NRE) account. Inward remittances can be received in the NRE account and the funds therein are allowed to be fully repatriated.

However, check with your bank on the modalities of opening the accounts.

Q. I was born in India but work abroad. I plan to return to India this year after retirement and live in the country on a year-long basis. That is, I will not be going back-and-forth to avoid taxes in either the US or India, if that is possible.

I might transfer $12,000 a year from my US bank to my NRE account in a local bank for my living expenses.

Let us assume my pension is about $30,000 a year in the US. What would be the tax implication in India and how much income-tax would I pay on this $12,000 I transfer.

If I pay taxes in the US on my income, do I still have to pay taxes in India for the $12,000 I would transfer; and how much income-tax would I have to pay? — K. Kashyap

A. Taxability of income in India depends on your tax residential status during the financial year (FY). Residential status is determined by the physical presence of the individual in India during the FY and immediately preceding seven FYs.

It is important to determine your residential status in India for each FY to be able to comment on the taxability of income in India. As long as your aggregate stay in India in the immediately seven FYs preceding a particular FY does not exceed 729 days, you would qualify as non-resident (NR) or not ordinarily resident (NOR) in India and only your India sourced income should be taxable in India. In other words, pension income which you have earned and directly received in the US would not be taxable in India.

Subsequent mere remittance of pension from the US to India would not attract tax implications in India.

Once your aggregate stay in India in the immediately seven FYs preceding a particular FY exceeds 729 days, you would qualify as Ordinarily Resident (OR); and accordingly your global income would be taxable in India subject to benefit under the Double Tax Avoidance Agreement. The pension income, say $30,000 per annum, would be taxable in India. However, to comment on the benefit available under the treaty, further examination will be required regarding your residential status in the US.

Further, once you come back to India with an intention to stay for an uncertain period the NRE interest will become taxable in India. Also, you may wish to evaluate the status of the NRE account from a Foreign Exchange Management Act-1999 (FEMA) perspective with your bankers.

Q. My father transferred shares of a company that were allocated through IPO in 1991 to me in June 2009 and I sold those shares after 2 months. I want to know if profit gained from such a deal is considered as long-term or short-term gains. I want to know what is the tax I have to pay? — V.V.P. Narasimham

A. The gains from sale of shares are taxed as capital gains. Assuming the shares have been gifted to you by your father, the period of holding for you will be counted from the date of acquisition of shares by your father. As the said period of holding the shares is more than 12 months (i.e. from the date of acquisition through IPO by your father), the resultant capital gains on sale of the shares are long-term capital gains (LTCGs). If the shares are sold by you on a recognised stock exchange in India and Securities Transaction Tax (STT) was paid at the time of sale of shares, such LTCGs are fully exempt from tax in your hands.

If STT was not paid , capital gains should be computed as difference between the net sales proceeds and the ‘indexed cost of acquisition'. While computing the LTCGs, the cost of acquisition needs to be appropriately indexed, based on cost inflation indexes published by the Income-Tax Department.

The cost of acquisition shall be the cost at which your father had acquired the shares. Such LTCGs are taxed at the applicable rate of 20.6 per cent (including education cess). Where benefit of indexation is not availed, the rate of tax would be 10.3 per cent (including education cess).

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