Why residential status is the first question, not an afterthought
An individual's tax liability in India — what income is taxable, and at what scope — depends heavily on their residential status for the relevant year, determined primarily by the number of days physically present in India, with specific rules for different categories of individuals.
The general categories
- Resident and Ordinarily Resident — generally taxed on worldwide income
- Resident but Not Ordinarily Resident — a transitional status with narrower scope of taxable income, often relevant for individuals returning to India after a long period abroad
- Non-Resident — generally taxed only on income sourced in India
Why this matters so much for expatriates specifically
An expatriate on a multi-year assignment in India can move between these categories as their cumulative days in India accumulate — meaning their tax exposure can change significantly from one year to the next, even without any change in their actual role or compensation. Planning around the timing of assignment start/end dates can materially affect this.
Common issues expatriates and their employers face
- Employers not correctly tracking days in India across the assignment, leading to incorrect residency assumptions
- Compensation structured without factoring in how residency status affects taxability of foreign-source income or equity compensation
- Not claiming applicable DTAA relief where the individual remains tax resident in their home country as well
- Social security and equalisation arrangements not being properly documented for tax purposes
A practical approach for employers sending staff to India
Track days in India carefully from the start of the assignment, model the residency status implications before the assignment begins (not partway through), and structure compensation and tax equalisation policies with Indian residency rules specifically in mind, rather than applying a generic global mobility template.
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