UK salary and per diem: When can Indians claim tax relief in India? | Personal Finance

Indians working in the United Kingdom may be able to avoid paying income tax back home on per diem allowances received through their Indian employer’s payroll. However, the relief depends on their residential status, where they perform their employment and whether they qualify for benefits under the India-UK Double Taxation Avoidance Agreement (DTAA).

 

A Delhi bench of the Income Tax Appellate Tribunal (ITAT), in Sachin Saxena v. DCIT/ACIT (International Taxation), in May ruled in favour of an employee who received Rs 16.17 lakh as a per diem allowance during his UK assignment. The tribunal held that the allowance was not taxable in India under the applicable treaty provisions, given the facts of the case.

  

The ruling is relevant for professionals working overseas while continuing to receive salary and allowances from an Indian employer. However, it does not establish a blanket exemption for all overseas allowances.

 

Why did the tribunal rule in the employee’s favour?

The employee, who worked for EY India, was deputed to the UK during the financial year 2016-17. He received remuneration in India, including a per diem allowance of Rs 16,17,724, while working in the UK.

 

He qualified as a non-resident under Indian tax law, having stayed in India for fewer than 60 days during the relevant period, and submitted a Tax Residency Certificate issued by the UK authorities.

 

The tax department sought to tax the allowance because the payment was received in India through the Indian payroll. The dispute centred on whether the place of receipt was sufficient to make the amount taxable in India despite the employee’s overseas employment and eligibility for treaty relief.

 

The tribunal applied Article 16(1) of the India-UK DTAA, read with Section 90 of the Income-tax Act, to hold that the allowance was not taxable in India in the circumstances of the case.

 

“The mere fact that an allowance or remuneration is disbursed by an Indian employer, or processed through its domestic payroll, cannot by itself constitute a sufficient basis for asserting tax liability in India,” said Tushar Kumar, advocate, Supreme Court of India.

 

When can a UK assignment allowance escape Indian tax?

The tax treatment depends on the employee’s circumstances and the applicable treaty provisions. Three factors are particularly important.

 

Residential status: The employee’s status under Indian tax law must be established. Eligibility for treaty benefits also depends on meeting the applicable conditions for residence under the DTAA.

 

Place of employment: The employee must establish that the remuneration relates to employment exercised in the UK.

 

Treaty documentation: A valid UK Tax Residency Certificate and supporting evidence of the overseas assignment help establish eligibility for relief.

 

Kunal Savani, partner at Cyril Amarchand Mangaldas, said the ruling provides clarity for employees in similar arrangements but is not a blanket exemption for overseas per diem allowances. Taxpayers must assess their residential status and eligibility under the applicable treaty on the facts of their individual cases.

 

The nature of the payment also matters. A genuine reimbursement of official expenses may need to be distinguished from an allowance that effectively forms part of salary.

 

“Merely because the payment is made by an Indian employer or routed through an Indian payroll does not automatically make it taxable in India,” said Shashank Agarwal, founder of Legum Solis.

 

Employees should retain assignment letters, travel records, employment documents and evidence showing the purpose of the payment. These records can help establish where the employment was exercised and what the allowance represented.

 

What does the India-UK tax treaty say?

Article 16 of the India-UK DTAA deals with salaries, wages and other similar remuneration from employment. Its provisions determine which country can tax such income, depending on the employee’s tax residence and where the employment is exercised.

 

The treaty also contains an exception for certain short-term assignments. Under Article 16(2), remuneration for employment exercised in the other country may remain taxable only in the employee’s country of residence if three conditions are met: the employee’s presence in the other country does not exceed 183 days in the relevant fiscal year; the employer is not resident in that other country; and the remuneration is not deductible against the profits of an enterprise taxable there.

 

The exception must not be confused with the circumstances of the Saxena case. An employee’s eligibility for relief depends on the relevant treaty provisions and facts, rather than simply on the duration of the overseas stay.

 

Rohit Jain, managing partner at Singhania & Co, said the India-UK Free Trade Agreement (FTA) and the proposed social security arrangements should not be confused with income-tax relief. The contemplated Double Contributions Convention addresses overlapping social security contributions, but does not change the allocation of income-taxing rights under the DTAA.

 

What should employees and employers do?

 

Employees should take the following steps before claiming treaty relief.

 

Confirm tax residency: Determine residential status under Indian tax law and establish eligibility for treaty benefits in the UK.

 

Keep supporting records: Preserve the overseas assignment letter, travel records, employment documents and details of how the per diem was calculated.

 

Obtain tax residency documents: Secure a valid UK Tax Residency Certificate and meet applicable documentation and filing requirements.

 

Check UK compliance separately: Relief from Indian tax does not automatically exempt the payment from UK tax or reporting obligations.

 

Anadi Mishra, advocate at the Delhi High Court, said the ruling underlines the importance of examining residential status, the place where employment is exercised and the applicable treaty together. The decision also makes clear that the place where remuneration is received cannot be considered in isolation.

 

B. Shravanth Shanker, managing partner at B. Shanker Advocates LLP, said that relying solely on receipt in India to invoke Section 5(2) is legally untenable where the applicable treaty assigns taxing rights to the host country. He emphasised the importance of a valid Tax Residency Certificate and evidence that the services were actually performed abroad.

 

Savani of Cyril Amarchand Mangaldas noted that treaty documentation remains essential. Employees must comply with applicable requirements, including obtaining a valid Tax Residency Certificate and electronically furnishing Form 41, previously Form 10F, where required.