Social security contributions
Indian social security is broadly governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952 (PF Act) and schemes made thereunder, namely the Employees’ Provident Fund Scheme (EPF) and the Employees’ Pension Scheme (EPS). The Employees’ Provident Fund Organisation (EPFO), a statutory body established by the government of India, administers social security regulations in India.
Currently, Indian social security regulations apply mandatorily to an establishment in India employing 20 or more persons or where an establishment voluntarily seeks registration with the authorities. Employees (including foreign nationals) working with an establishment in India to which the PF Act applies are liable to contribute towards the provident fund at the fixed rate of 12% of salary. The employer is required to make the matching contribution and deposit both the employer’s and employee’s contributions (i.e. 24%) to the provident fund of the employee by the 15th day of the following month.
Out of the employer’s contribution of 12%, an amount equal to 8.33% of salary (salary capped at INR 15,000 per month in respect of Indian employees) is allocated to the pension fund of the employee.
The government of India made the social security scheme mandatory for cross-border workers. A foreign national qualifies as an ‘international worker’ if he/she is coming to work for an establishment in India to which the PF Act applies.
Similarly, an Indian national qualifies as an ‘international worker’ if he/she has worked or is going to work in a country with which India has entered into a social security agreement (SSA) and is eligible to avail benefits under the social security program of the host country, according to the terms of the relevant SSA. However, it has been clarified that Indian employees holding a certificate of coverage (COC)/detachment certificate, obtained from Indian social security authorities and contributing to the Indian social security schemes, will not become international workers and will continue to be treated like any other domestic Indian employees. Also, Indian employees qualifying as international workers on account of working/having worked in a country with which India has an SSA will re-acquire the status of Indian employees upon repatriation to India after completion of overseas assignment. Accordingly, such employees will not be subject to the special provisions applicable to international workers after repatriating to India.
An international worker from a country with which India has an SSA in force is exempted from Indian social security where he or she:
- is contributing to his/her home country’s social security, either as a citizen or resident, and
- enjoys the status of ‘detached worker’ for the period, and according to the terms, specified in the relevant SSA.
Similarly, an international worker from a country with which India has entered into a bilateral comprehensive economic agreement prior to 1 October 2008 is exempted from Indian social security where:
- he or she is contributing to his/her home country’s social security, either as a citizen or resident, and
- the agreement specifically exempts natural persons of the other contracting country from contributing to the social security system of India.
To amend and consolidate a majority of Indian labour laws, the following four labour codes have been passed by the Parliament of India, which subsumes and amalgamates 29 different central labour laws legislations,:
- The Code for Social Security, 2020.
- The Code on Wages, 2019.
- The Occupational Safety, Health and Working Conditions Code, 2020.
- The Industrial Relations Code, 2020.
There are several changes, ranging from reclassification of workforce to changes in the definition of salary for employees’ benefit and other matters.
The Ministry of Labour and Employment of India has deferred the implementation of the above four codes.
- In case of Unit Linked Insurance Policies (ULIPs) issued on or after 1 February 2021, tax exemption on proceeds received from such ULIPs is not available if aggregate premium payable for any tax year exceeds INR 250,000. Such proceeds are to be taxed as capital gains from equity-oriented funds and to be subjected to securities transaction tax (STT). Proceeds received upon death will continue to be exempt from tax.
- Effective 1 April 2023, income from insurance policies (other than ULIP, for which provisions already exists) having premium or aggregate of premium above INR 500,000 in a year would be taxed. However, income is proposed to be exempt if received on the death of the insured person. This income will be taxable under the heading 'income from other sources'. A deduction will be allowed for the premium paid if such premium has not been claimed as a deduction earlier.
- Currently, due to mismatch in timing of taxing withdrawals from overseas retirement funds, certain tax residents face hardship from double taxation in situations where such individuals contributed to the retirement benefit fund outside India while they were non-resident in India and resident in that foreign country. Rules for providing relief due to mismatch in timing of taxation of such retirement benefits are yet to be prescribed.
Goods and services tax (GST)
GST is an indirect tax, which is a transaction-based taxation regime, that has been in effect in India since 1 July 2017. The rate of GST varies from 5% to 28% depending upon the category of goods and services, the general rate of tax being 18%. See the Other taxes section in the Corporate tax summary for more information.
There are no wealth taxes in India.
Inheritance, estate, and gift taxes
There is no inheritance tax in India.
There is no gift tax liability on the donor. However, any sum of money aggregating to INR 50,000 or more received during the relevant tax year without consideration or for an inadequate consideration by an individual from any person not being a relative (see below for details) is subject to income tax in the hands of the recipient.
Similarly, the following receipts are also subject to tax:
- Any specified movable property/sum of money received without consideration, the FMV of which exceeds INR 50,000: Total amount is taxable.
- Any specified movable property received for a consideration less than FMV, where the difference between the FMV and consideration is more than INR 50,000: Such difference is taxable.
- Any immovable property received without consideration, the stamp duty value of which exceeds INR 50,000: Total amount of stamp duty value is taxable.
- Any immovable property received for a consideration less than stamp duty value, where the difference between the stamp duty value and consideration is more than the higher of INR 50,000 and 10% of the consideration: Such difference is taxable. Under the Atmanirbhar Bharat 3.0 package, the above limit of 10% has been increased to 20% till 30 June 2021 for the primary sale of residential properties valued up to INR 20 million.
- The above receipts are not considered as taxable if the same is/are received from any relative, i.e.:
- brother or sister of the spouse
- brother or sister of either of the parents of the individual
- any lineal ascendants/descendants of the individual or spouse of the individual, and
- spouse of individual or of any of the above.
Further, the same are not considered as taxable if received at the time of marriage, under a will/inheritance, in contemplation of death of the payer, or through any other criteria specified in the law.
Property tax is levied by the governing authority of the jurisdiction in which the property is located. The rate of tax levied varies from city to city in India and is generally related to the prevailing market prices for property in each locality.
Capital gains taxes
Capital gains from the disposal of capital assets are liable to tax in the tax year in which such assets are sold or transferred. Capital assets include all forms of property, stocks and shares, land and buildings, goodwill, etc. (but exclude personal effects except stock-in-trade, stores, and raw materials held for business purposes). Jewellery also forms part of capital assets.
Categorising capital gains
Capital assets held for more than 36 months (12 months in the case of shares or securities listed on a recognised stock exchange in India/equity oriented mutual funds/zero coupon bonds and 24 months for immovable property or unlisted shares) are termed as ‘long-term capital assets’, and the assets not so held are called ‘short-term capital assets’. Capital gains arising from the transfer/disposal of long-term capital assets are called 'long-term capital gains'. Gains arising from the disposal of short-term capital assets are called 'short-term capital gains'. This distinction is important as long-term capital gains are taxed or treated beneficially and there are also planning opportunities to save taxes provided the consideration or gain is re-invested, subject to fulfilment of certain other conditions.
Long-term capital gains are subject to tax at prescribed beneficial rates (plus applicable surcharge and health and education cess). Short-term capital gains are added to the taxable income of the individual and subject to tax at normal slab rates.
Computation of long-term capital gains
Except in case of debentures and bonds (other than capital indexed bonds issued by Government/Sovereign Gold Bonds issued by the Reserve Bank of India), the cost of acquisition of long-term capital assets is determined after indexing costs by a prescribed inflation factor (known as ‘indexed cost of acquisition’). The base year for computation of indexed cost of acquisition is 2001. Assets acquired before 1 April 2001 can be taken at actual cost or FMV as on 1 April 2001 at the option of the taxpayer. However, effective 1 April 2020, in case of capital asset being land or building or both, the FMV of such asset on 1 April 2001 will not exceed the stamp duty value, wherever applicable, of such asset as on 1 April 2001.
In case of an NR where shares or debentures of an Indian company are purchased by utilising foreign currency, the subsequent capital gains are determined by computing the gains in the same foreign currency in which it was purchased and reconverting the gains into Indian rupees to calculate the tax payable on the same.
However, there are a few exceptions for indexation and rate of tax on long-term capital gains/short-term capital gains:
- Effective 1 April 2018, long-term capital gains arising on transfer of equity shares in a company or a unit of equity oriented mutual fund or a unit of business trust (on which STT has been paid) will be taxable at the rate of 10% (without any indexation benefit). However, there is no tax on capital gains up to INR 100,000. For transaction of sale effective 1 April 2018, in respect of above-mentioned capital assets already held from a date prior to 31 January 2018, the cost of acquisition would be determined as the higher of the following:
- Actual cost of acquisition.
- The lower of the following:
- FMV as of 31 January 2018.
- The full value of consideration arising on transfer.
- Tax on long-term capital gains (arising to any person) on transfer of securities (other than units) listed on a recognised stock exchange in India or a zero-coupon bond is computed at the lower of 10% on gains computed without indexation or 20% of gains computed with indexation (if applicable). In case of an NR, if the securities are not listed on an Indian recognised stock exchange, the tax on corresponding long-term capital gains is computed at 10% (without indexation).
- Short-term capital gains earned on equity shares and equity oriented mutual funds and a unit of business trust that are listed on a recognised stock exchange in India are taxable at 15%, provided STT has been paid on sale.
The surcharge rate of 25%/37% will not apply to capital gains arising on sale of equity share of a listed company or a unit of an equity oriented mutual fund or unit of business trust. The enhanced surcharge rates of 25%/37% will also not apply to the income of foreign institutional investors (FIIs) arising from securities prescribed under the Income-tax Act.
Further, on income arising on account of long-term capital gains on all the capital assets, the rate of surcharge will be 15%.
For NRs, the basic exemption limit of INR 250,000 does not apply against the gains earned on sale of such shares/units.
Tax liability on long-term capital gains can be reduced by taking benefit of exemptions provided in the Income-tax Act when gains/sale proceeds from the sale of the capital assets are reinvested into house property and/or prescribed investments. Effective 1 April 2023, benefit claimed on long-term capital gains arising from transfer of capital asset where gains are re-invested in a residential house has been restricted to INR 100 million.
Short-term capital losses can be offset against any capital gains (long-term or short-term). Long-term capital loss can only be offset against long-term capital gains. Unabsorbed capital losses (short-term or long-term) can be carried forward for a maximum of eight years to be offset only against future capital gains as mentioned above.
To raise funds for the Start-up Action Plan, the government has provided an exemption from long-term capital gains on the sale of any long-term capital asset if the sale consideration is invested in units of a specified fund. The specified fund will be notified by the Central Government in due course, and the maximum deduction available will be INR 5 million. The investments should be held for a minimum period of three years to avail the exemption.
Effective 1 April 2019, a once in a lifetime option has been given to an individual/HUF wherein long-term capital gains (up to INR 20 million) arising from transfer of a residential property can now be reinvested in two house properties in India. Further, an individual/HUF selling a residential property also has the option to reinvest the long-term capital gains by subscribing to shares of a company that qualifies as a small or medium enterprise and in shares of eligible start-ups with no cap on reinvestment of the capital gain. Investments under this provision can be made up to 31 March 2022. In case the eligible start-up is a technology driven start-up, it will be entitled to utilise the proceeds of such equity shares in computers or computer software.
On account of transaction in immovable property, any income earned is either taxed under income from capital gains or income from other sources. The income is taxed on the basis of the sale consideration or stamp duty value, whichever is higher. In case the sale consideration is less than the stamp duty value, the differential is taxed as income from other sources. However, effective 1 April 2020, in case of sale, no such adjustments will be made in cases where the difference between stamp duty value and sale consideration is not more than 10% of such sale consideration. In case of purchase, if the variation between stamp duty value and sale consideration does not exceed INR 50,000 or 10% of sale consideration, no addition is to be made to total income.
The above limit has been enhanced from 10% to 20% in relation to immovable property acquired during the period 12 November 2020 to 30 June 2021 by way of first-time allotment from a real estate developer for a consideration up to INR 20 million.
Securities transaction tax (STT)
STT is applicable to transactions involving purchase/sale of equity shares, derivatives, units of equity-oriented funds through a recognised stock exchange, or purchase/sale of a unit of an equity-oriented fund to any mutual fund. The STT leviable for such transactions varies for each kind of instrument, whether delivery based or non-delivery based.
Buyback of shares
An additional tax is payable on transactions involving buyback of shares by Indian companies from its shareholders. A tax at 20% (plus surcharge at 12% and health and education cess at 4%) is payable by the company on the difference of consideration paid on buyback and the issue price of shares. The Revenue Department has prescribed the methodology for determination of amount received for issue of shares under 12 different situations, being a subject matter of tax on buyback. The buyback consideration received will be tax exempt in the hands of the receiver. No tax credit will be allowed in case of such taxes paid either to the company or to the shareholder.