One of the downsides of planning to retire to another country is that you need to be familiar with the tax systems of two different countries. This is especially challenging in the case of US and India, since tax regulations of the two countries are substantially different.
Since I never worked in India, I have never paid income taxes there, so I have no first-hand experience in this. I am planning a series of posts based on information that I gathered from different sources. This post explains some of the basic details regarding taxation of Indian residents.
- A basic difference in the Indian tax system compared to the US system is that income taxes are filed on an individual basis. In other words, there is no filing status such as "married filing jointly" etc. As a result of this, one of the basic rules of tax planning in India is that you should spread your income among different members of your family.
- Income tax is assessed based on the Financial Year (FY) which starts on April 1 and ends on March 31 of the following year. So you normally talk about the income taxes for FY 2005-06 and so on. However, since taxes are filed after the financial year is over, FY 2005-06 is also referred to as Assessment Year (AY) 2006-07.
- You are required to file income taxes only if your taxable income for the financial year exceeds the Basic Exemption Limit. For FY 2007-08 (AY 2008-09), the Basic Exemption Limit is Rs. 110,000 (about $2750).
- One of the interesting things about Indian income tax laws is that women and senior citizens (over 65) get some special tax breaks. For example, the Basic Exemption Limit above is increased to Rs. 145,000 (about $3625) for women and Rs. 195,000 (about $4875) for senior citizens.
- Another striking aspect of Indian tax law is that there are special provisions that apply based on which religion you belong to! For example, the notion of Hindu Undivided Family (HUF) is a special family entity that applies only to Hindus, Jains and Sikhs. This is an exception to item #1 in that it allows a HUF to be treated as a single unit for tax purposes.
- Every person who files income taxes is required to get a Permanent Account Number (PAN) from the Income tax department. This is the equivalent of the social security number in the US.
- Tax deadline is normally July 31. For example, tax returns for FY 2006-07 must be filed by July 31, 2007.
- Much like in the US, a number of deductions are available that may be excluded from your income for tax purposes. Your taxable income is computed by subtracting these deductions from your gross income.
- Tax rates are progressive as they are in the US. The tax rates for FY 2007-08 are as follows:
- For taxable income from Rs. 110,001 to 150,000, the tax is 10% of the amount greater than Rs. 110,000. (Lower limit is Rs. 145,001 for women).
- For incomes in the range Rs. 150,001-250,000, the tax rate goes up to 20% (Lower limit is Rs. 195,001 for senior citizens).
- The highest tax bracket of 30% applies to taxable incomes above Rs. 250,000 (about $6250).
- There are two additional "surcharges" that apply in addition to the above. These add to your tax bill as an additional percentage of your already computed tax amount. First, a 10% surcharge applies if your income is above Rs. 1,000,000 (about $25,000). An additional education surcharge of 3% also applies to all taxpayers. After including the surcharges, the highest tax bracket is almost 34%.
One thing to keep in mind is that tax evasion is widespread in India. According to some reports, there are only 30 million taxpayers in India, which is remarkable for a country of over 1 billion people. The majority of taxpayers in India are salaried employees whose taxes are withheld from their paychecks. Many rich farmers and business owners pay little or no income taxes. The tax collection and enforcement system is long overdue an overhaul.