Sameer, a software engineer is being deputed to the US for two years. His company has given him certain options for payment of salary during his overseas deputation and Sameer needs help in making the right choice. His employer has offered him the following alternatives which are typical in the case of Indian employees being deputed overseas: Salary net of hypo tax with taxes borne by the employer: This arrangement, where the employee receives salary after reduction of hypo tax is popularly known as Tax Equalisation. The hypo tax would be equal to the Indian taxes that Sameer would have paid had he continued to remain in India. The entire overseas tax liability would be borne by Sameer’s employer. Guaranteed net salary with taxes borne by the employer: Under such an arrangement, the employer agrees to pay a guaranteed net salary and bears the entire overseas tax liability. Any risk of increase or decrease in overseas taxes would be borne by the employer. Gross salary: The employer pays a gross salary and withholds the relevant taxes as applicable to the overseas country. In such cases, the risks and benefits attached to increase or reduction in tax liability would be to the employee’s account. Existing salary plus additional allowances for the overseas deputation: This is a structure usually followed in case of short-term deputations (six months to one year) with the deputed employee continuing to get his Indian salary plus an additional net of tax daily allowance (per diem) during his stay abroad. Sameer’s perspective, the safest option would be to go for a guaranteed net salary with taxes to be borne by the employer (the employer needs to be a foreign entity in such cases). Sameer would be insulated from fluctuations in tax rates and interpretations by the US and Indian tax authorities. The concept of hypo tax is gaining popularity even though under this structure, the employee is not insulated from fluctuations in Indian tax rates. The employee’s decision should also factor in key aspects like employer entity (usually a foreign entity), continuity of retirement benefits, and assurance of continued employment at an appropriate level on eventual return to India. Once the overseas deputation commences, there are various overseas tax compliances that the employee must be aware of. While an employer would typically organise for assistance on the above aspects, these compliances are the personal obligation of the employee. Further, Indian tax filing obligations, Indian taxes, if any, payable on salary received when overseas and availability of tax credit are matters that need consideration. So, if you are all set to go overseas, you know the questions to ask to ensure that your deputation is less taxing!
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