Taxable Allowances for International Employees in India and the United States

Taxable Allowances for International Employees in India and the United States

International employees work differently from local ones in many ways. Many companies give special allowances when they send expatriates overseas. International employees follow the various laws of the countries in which they live.

Taxable Allowances in India

India’s income tax system is complicated. Among the more confusing aspects is the complex taxable allowances system. The law allows employers to split up a salary into several different allowances which may be taxed at different rates.

Most kinds of the wages that an employer pays are fully taxable:

  • Wages, salary, bonuses, and other cash compensation
  • Income tax paid by the employer
  • Special perquisites such as rent-free housing, memberships, etc.

These kinds of taxable forms of compensation are the same in most countries. There are, however, some allowances specific to India that are generally tax exempt:

  • Certain travel allowances
  • Medical expenses up to NR 15,000 per tax year. The cost of hospitalization is fully exempt.
  • Medical expenses of an employee or any member of his/her family incurred outside India
  • Leave travel concession
  • Allowance granted to meet payment of rent towards accommodation
  • Tax borne by the employer on non-monetary perquisites
  • Reimbursement of telephone expenses including cost of the telephone
  • Gratuity
  • Leave encashment
  • Gift from employer up to specified limit
  • Superannuation Employer contribution
  • Employer Provident Fund contribution

Some allowances are partially taxable depending on the circumstances. The Housing Rental Allowance, which provides for housing costs, is limited to the amount that is least of these items:

  • 40% of salary (50% in the case the house is situated in Mumbai, Delhi, Kolkata or Chennai)
  • The actual allowance paid
  • Excess of actual rent paid over 10% of salary

India also makes concessions for foreign workers in the country. These additional allowances are tax exempt:

  • Cost of services rendered by a foreign national if the stay is less than 90 days, the corporation does not conduct business in India, and the costs are not charged to an entity that is taxable in India
  • Remuneration for working on a foreign ship where the total stay does not exceed 90 days
  • Remuneration for working for a foreign government if it is part of a training activity in a place owned by that government

Indeed, the taxable allowances system is incredibly complex. It takes dedicated professionals to stay compliant and ensure that employees have as low a tax burden as possible.

United States Expatriate Taxable Allowances

India isn’t the only country with a complicated tax code, of course. The United States has a multitude of exemptions, making compliance sometimes challenging. Because the U.S. taxes use a worldwide system as opposed to a territorial system, expatriate employees may have to pay taxes in the country in which they work as well as in the United States. The IRS allows for several tax-exempt allowances for expatriates, including:

  • Certain repairs to a leased home
  • Education of dependents in special situations
  • Motor vehicle shipment
  • Separate maintenance for dependents
  • Temporary quarters
  • Transportation for medical treatment
  • Travel, moving, and storage

Like India’s tax system, it can be difficult to understand the best way to pay employees, so they can have the lowest tax burden.

International Payroll Support

Working with international employees can be difficult, even without the headaches that come from trying to understand international tax laws. Our international payroll solutions take the responsibility of payroll management, tax reporting and withholding, and payroll compliance out of your hands. Velocity Global’s international payroll solutions provide simple way to manage your payroll with a centralized service for all your supported employees. Contact us today to learn more.

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