India: Tax system

Tax Rate For Foreign Companies

A resident company is taxed on its worldwide income. A non-resident company is taxed only on its Indian-sourced income.
Non-resident companies and branches of foreign companies are taxed at a rate of 40% instead of 30%, plus a health and education cess and a surcharge depending on the turnover value (consult the corporate income rates section for further details).

An equalization levy of 6% on the amount of consideration in excess of INR 100,000 for specified services received by a non-resident without a permanent establishment in India must be withheld by a resident payer or a non-resident payer with a PE in India.

Capital Gains Taxation

The tax treatment of capital gains varies based on the duration the asset is held. Gains are considered long-term if the asset is held for more than three years, one year for listed shares and specified securities, and two years for unlisted shares and immovable property (land, buildings, or both).

For listed shares and specified securities not subject to the Securities Transactions Tax (STT), gains are taxed at the lower of 10% (plus surcharge and cess, if applicable) without inflation adjustment, or 20% (plus surcharge and cess) with inflation adjustment. Long-term gains on listed securities subject to STT are taxed at 10% (plus surcharge and cess). Long-term gains on other capital assets, excluding listed shares and securities, are taxed at 20% (plus surcharge and cess) with the benefit of inflation adjustment. For nonresidents, the tax rate on long-term gains from unlisted securities is 10% (plus surcharge and cess) without foreign currency conversion or inflation adjustment.

Short-term gains on listed shares and specified securities subject to STT are taxed at 15% (plus surcharge and cess), while gains from other short-term assets are taxed at normal rates (plus surcharge and cess). Domestic companies must pay an additional 20% tax (plus surcharge and cess) on income distributed to shareholders from a share buyback.

Gains on the disposal of units in specified mutual funds acquired on or after April 1, 2023, and on market-linked debentures, are considered short-term capital gains from April 1, 2023, and are taxed at the applicable rate(s) (plus surcharge and cess) without indexation.

Main Allowable Deductions and Tax Credits

In general, expenses are deductible if they are incurred wholly and exclusively for business or professional purposes, not in the nature of a personal expense, and if they are not capital in nature.
Allowable deductions include wages and salaries, bonuses and commissions, rent, repairs, insurance, royalty payments, certain taxes (sales, municipal, road, property and expenditure taxes, customs duties), interest, lease payments, depreciation, expenditure for materials and scientific research, etc. One-fifth of start-up expenditure is allowed as a yearly deduction, over a period of five years. Bad debts can be allowed as a tax-deductible write-off if they have been written off as irrecoverable.
Certain expenses, including employees’ provident fund dues, employee bonuses, interest payable to financial institutions and banks, and payments to micro, small, and medium enterprises, are tax-deductible only upon actual payment. Tax disallowances apply if these payments are delayed beyond their respective legal due dates.
Any interest paid by a taxpayer on capital borrowed for business or professional purposes is fully tax-deductible. However, if the interest is paid to certain related non-resident associated enterprises, the deduction is limited to 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA). Any disallowed excess interest expenditure can be carried forward for eight years for future set-off. If the capital is borrowed to acquire a capital asset, the interest liability until the asset is put to use cannot be deducted as an expense and must be added to the asset's cost.
Only donations made in cash or by cheque are eligible for a tax deduction under Section 80G, but cash donations exceeding INR 10,000 do not qualify for a deduction. Additionally, cash donations over INR 2,000 are not eligible for a deduction, so contributions exceeding this amount must be made by other modes to qualify. Donations in kind are not eligible for any tax deduction.
Losses can be carried forward and set off against income from the subsequent year (business and capital losses for 8 years), while carrybacks are not allowed.

A 100% deduction is available for capital and revenue expenditures (excluding land or buildings) on in-house scientific research conducted by companies in specified industries, such as biotechnology or manufacturing eligible goods, and for payments made to specified organizations for scientific research. This includes amounts paid to companies registered in India conducting scientific research, research associations, universities, colleges, or other institutions engaged in social science or statistical research.
An investment-linked incentive allows a 100% deduction for capital expenditures, excluding land, goodwill, or financial instruments, for specified activities. This incentive also applies to the development, maintenance, and operation of infrastructure facilities like roads, highway projects, water-supply projects, or ports, subject to certain conditions.
A 100% deduction is available for capital and revenue expenditures on "notified" agricultural extension or skill development projects. For the right to use spectrum for telecommunication services, certain capital expenditures can be deducted over the period of the right.
Units in the IFSC in GIFT City can claim a 100% deduction of income for 10 out of 15 assessment years and are subject to a concessional MAT rate of 9%. Eligible start-ups can elect a 100% deduction of profits from an eligible business for any three consecutive assessment years out of the 10 years starting from the year of incorporation (for companies/LLPs established on or after 1 April 2016 and before 1 April 2024).
A concessionary tax rate of 10% (plus surcharge and cess) on income by way of royalty in respect of a patent developed and registered in India by a resident in India ("Patent Box regime").

Other Corporate Taxes

A securities transaction tax is applicable to transactions involving the purchase/sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or the purchase/sale of a unit of an equity-oriented fund to any mutual fund. The rates vary from 0.001% to 0.125%, depending upon the type of securities.

A property tax is levied by the governing authority of the jurisdiction in which the property is located, with rates varying from city to city. Stamp duties apply to all legal property transactions, with different rates being set by each state.

Social contributions paid by the employer amount to 12% of the employee's salary (8.33% are allocated to the Employees’ Pension Fund, capped at INR 15,000/month for Indian employees). A reduced tax rate can apply to individual and Hindu Undivided Family (HUF) taxpayers.

An equalization levy of 6% must be withheld by a resident payer or a nonresident payer with a PE in India on consideration exceeding INR 100,000 for specified services received by a nonresident without a PE in India, such as online advertising or digital advertising space. Additionally, a 2% equalization levy applies to e-commerce supply and services provided by an e-commerce operator without a PE in India, if their annual sales, turnover, or gross receipts are at least INR 20 million. Income subject to the 6% levy is not taxed in the recipient's hands, and income from e-commerce supply or services subject to the 2% levy is exempt from income tax. A 1% withholding tax applies to the sale of goods or provision of services by an e-commerce operator to an e-commerce participant resident in India.

The Finance Act, 2022 taxes gains from VDAs, including cryptocurrencies and NFTs, at 30% without allowing expense deductions other than the cost of acquisition. Losses from VDA transfers cannot be set off against other income. From July 1, 2022, a 1% TDS applies to payments to residents on VDA transfers.

Partnership firms and LLPs are taxed separately, with partners' income shares being tax-exempt. They face a tax rate of 31.2% (inclusive of surcharge and health and education cess) for income below INR 10 million and 34.944% for income exceeding INR 10 million, along with an alternate minimum tax of 18.5%. Interest payments to partners on capital or current accounts are tax-deductible, capped at 12% per annum. Working partners can receive salary, bonus, commission, or remuneration, with deductions based on the firm's book profit at different profit levels.

Indian companies must pay an additional tax on share buybacks from shareholders at 20% (plus a 12% surcharge and 4% health and education cess) on the difference between the buyback consideration and the issue price of the shares. The CBDT has outlined the methodology for determining the issue price under 12 different situations. The buyback consideration received by shareholders is tax-exempt, and no tax credit is allowed for these taxes to either the company or the shareholders.

Other Domestic Resources

Income Tax Department

Country Comparison For Corporate Taxation

Source: The World Bank - Doing Business, Latest data available.

Accounting System

Accounting Standards

Accounting standards issued by the Institute of Chartered Accountants of India (ICAI), which largely are based substantially and converged with IFRS standards, apply. Financial statements must be prepared annually, in accordance with the accounting standards prescribed under the Companies Act. There are differences between these accounting standards and IFRS.  
India has committed to converge its accounting standards with IFRS (subject to a few carve-outs); these standards are called the Indian Accounting Standards or the Ind AS. For accounting periods commencing on or after 1 April 2016, these standards are mandatory for listed and unlisted companies meeting certain net worth thresholds.

Accounting Regulation Bodies

Institute of Chartered Accounts of India

Accounting Law

- Income Tax Act;
- Indian Companies Act;
- Regulations from Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI).

Difference Between National and International Standards (IAS/IFRS)

India originally intended to converge with IFRSs in a phased approach beginning in 2011, but transition to Ind AS was postponed. In January 2015, the Indian Ministry of Corporate Affairs (MCA) released a revised roadmap that reflects that, in essence, companies with a net worth of Rs. 500 crore or more have to mandatorily follow Indian Accounting Standards (Ind AS), which are largely converged with International Financial Reporting Standards (IFRSs), from 1 April 2016. Corporates having a net worth of less than Rs. 500 crore but are listed, or in the process of getting listed, and companies with a net worth of Rs. 250 crore or more have to follow the new norms from 1 April 2017. For banking, insurance and non-banking finance companies, which were exempt from the general roadmap, a separate one has was drawn up in January 2016 that will see a phased approach with Ind AS adoption beginning from 1 April 2018.

Accounting Practices

Tax Year

The fiscal year begins on 1 April and ends on the 31 March of the following year.

Accounting Reports

'Balance Sheet' and 'Profit & Loss' report.
Companies are required to prepare their financial statements each year, as per the provisions of the Companies Act, and to have them audited by a practicing chartered accountant or a firm of chartered accountants registered with the ICAI. The audited financial statements must be approved by the members in an annual general meeting. All companies are required to file their audited financial statements with the ROC after they have been approved by the members.

Publication Requirements

The "balance sheet" and ‘profit and loss account' need to be published every fiscal year.

Accountancy Profession

Accountants

In order to become a certified accountant, one needs to become member of ‘The Institute of Chartered Accountants of India (ICAI)' by passing a 3-tier examination conducted by ICAI. The qualified accountant is then named "Chartered Accountant (CA)".

Professional Accountancy Bodies

ICAI, Institute of Chartered Accounts of India

Member of the International Federation of Accountants (IFAC)

Yes

Member of Other Federation of Accountants

Member of the Confederation of Asian and Pacific Accountants (CAPA)

Audit Bodies

Companies have to seek a statutory auditor to conduct an annual audit of the financial health of their organization. For more information, consult the Institute of Internal Auditors-India and The Institute of Chartered Accountants of India (ICAI)

Allowable Deductions and Tax Credits

When calculating the taxable salary income, a deduction of INR 50,000 is provided.

Interest or taxes paid to tax authorities are not deductible. However, deductions up to certain limits are permitted for contributions to approved charities and, to a limited extent, for children's education or hostel expenses received from the employer. Additionally, a deduction of up to INR 150,000 is available for investments made in eligible schemes in India during the tax year, including life insurance premiums, contributions to recognized provident funds, public provident funds, or National Pension System, tuition fees, and repayment of housing loans. An extra deduction of INR 50,000 is granted for contributions to a government-notified pension scheme. Employers' contributions to the NPS are eligible for an additional deduction of up to 10% of salary (14% for contributions made by the Central Government). Upon retirement, individuals can withdraw up to 60% of the corpus fund tax-free, with the remaining 40% required to be invested in an annuity plan. Withdrawals up to 60% of the corpus fund are tax-exempt for all subscribers, and if received by a nominee due to death, they remain tax-free. Partial withdrawals from the NPS by employees see 25% of their contribution exempt from tax in the year of withdrawal.

On donation of a certain amount to specifically approved funds, charitable institutions, etc., an individual can claim a deduction of 50% to 100% of the amount donated, subject to certain legal restrictions. Deduction for funds or charitable institutions in excess of INR 2,000 can to be allowed only when the donation is not made in cash.

• A deduction is available for health insurance premiums or contributions made to an approved insurance scheme by an individual for insuring the health of oneself, spouse, and dependent children. The deduction available is up to INR 25,000 (INR 50,000 where any of the insured persons is a senior citizen). Further, an additional deduction of INR 25,000 is available for insuring one’s parents (INR 50,000 where either of the parents is a senior citizen).
• An amount of up to INR 5,000 spent on preventive health check-up of oneself, spouse, dependent children, and parents is also eligible for deduction within the overall limit provided above.

The medical expenditure incurred for senior citizens (60 years and above) will be deductible up to INR 50,000 if no payment has been made towards any existing health insurance policy for such individuals.

Expenses relating to business income are deductible.

Following the introduction of the new optional personal tax regime, individuals who opt for such regime renounce to certain deductions or exemptions, including house rent allowance; leave travel allowance; allowance under section 10(14) of the Income-tax Act (with some exceptions); standard deduction of INR 50,000 and deduction for professional tax; exemption of free food and beverages through vouchers provided by the employer; deduction of interest payment on housing loans for self-occupied property and restrictions on set-off of loss from let out property; relocation allowance; helper allowance; children education allowance; all Chapter VIA deductions of the Income-tax Act available for expenditure by way of employee’s contribution to provident fund, insurance premium, donations, medical premium, etc., except employer’s contribution to a notified pension scheme, such as National Pension Scheme (NPS). For further information, click here.

Special Expatriate Tax Regime

No special exemptions or deductions, as remuneration for foreign expatriates working in India, is deemed to be earned as salary in Indian territory. However, foreigners who visit India on short-term business trips can claim an exemption under domestic tax law or a relevant tax treaty.

All employees, including international workers but excluding those defined as "excluded employees" under the Provident Fund Act, contribute 12% of eligible wages monthly to the provident fund. However, under a social security agreement (SSA) with a foreign jurisdiction, inbound international workers meeting certain conditions are exempt from contributing to the provident fund in India upon obtaining a certificate of coverage (CoC). An international worker can be either: (i) a foreign employee working for an establishment in India covered by the Provident Fund Act, or (ii) an Indian employee seconded to a jurisdiction with which India has an SSA, who has not obtained a CoC and is or will be eligible for benefits under the social security program of the host jurisdiction.

Dividend income to a non-resident received on or after 1 April 2020 would be subject to tax in the hands of the shareholder at the rate of 20% unless a lower rate applies due to a tax treaty.

Capital Tax Rate

The wealth tax was abolished on 1 Apr 2015. No inheritance tax is levied in India. Real estate tax varies by state. Generally, capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred.

Any sum of money aggregating to INR 50,000 or more received during the relevant tax year without consideration from any person not being a relative is subject to income tax in the hands of the recipient.
Employees (including foreign nationals) working with an establishment in India that employs 20 or more people are liable to contribute towards the provident fund at the fixed rate of 12% of salary. Interest accumulated on employee contributions exceeding INR 250,000 (or INR 500,000 if no contribution is made by the employer) in a tax year to the provident fund is taxed under the category of "income from other sources."

From October 1, 2023, remittances made outside India incur a tax collected at source (TCS) of 20%. However, remittances for education or medical treatment are subject to a 5% TCS rate on amounts exceeding INR 700,000.

When purchasing or selling equity shares, derivatives, or equity-oriented funds through a recognized stock exchange, or buying or selling a unit of an equity-oriented fund to a mutual fund, a securities transaction tax (STT) is imposed. The applicable STT rate differs for each type of instrument, whether it is a delivery-based or non-delivery-based transaction.