Income falling under the head salaries – If payable by the Government to a citizen of India for service outside India [Section 9(1)(iii)]

Salary paid to an Indian citizen by the Government of India for rendering services outside India shall deemed to accrue/arise in India, irrespective of residency of the person.

Text of Section 9(1)(iii)

Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :—

       (i)  ………..

      (ii) ………..

      (iii) income chargeable under the head “Salaries” payable by the Government to a citizen of India for service outside India;

Indian citizens, who are employed by the Government abroad, are chargeable to tax in India in respect of their remuneration earned abroad. Though the income is accrued and received outside India, it is, by virtue of the provisions of section 9(1)(iii), deemed to accrue in India, the place of actual accrual of the remuneration being immaterial for this purpose. The residential status of the employee shall not affect the taxability of the remuneration in India. In other words, remuneration for services rendered outside India by an Indian citizen, who is in the employment of Government of India, shall be chargeable to tax in India irrespective of the fact that the employee has attained the status of a non-resident. This is an exception to the general provision that the remuneration received abroad by a non-resident for services rendered out of India is not taxable in India.

Only salary income covered under section 9(1)(iii)

It is pertinent to note that by virtue of section 9(1)(iii) any income received by a Government servant chargeable under the head “Salaries” is deemed to accrue in India. No income other than such income is deemed to accrue in India.

Remuneration received by an Indian citizen, who is ordinarily resident in India or who is a non-resident but is in the employment of Government of India, for services rendered outside India is taxable in India in his hands under the head “Salaries” and the provisions of sections 15, 16 and 17 and other relevant sections of the Act will apply.

Allowances and perquisites of Government servants - Exempt under section 10(7)

Allowances or perquisites paid or allowed as such outside India by the Government to Indian citizens for rendering service outside India are, by virtue of section 10(7), exempt from income of the recipient. The word “allowances” would cover all allowances including dearness allowance. It is pertinent to note that section 10(7) grants exemption to Government servants only. It, therefore, follows that only basic salary will be liable to tax in India and any allowances or perquisites paid or allowed outside India for rendering service outside India will be exempt from tax in India. In other words, any allowance or perquisite paid allowed in India during the period of his service outside India would not fall within the purview of section 10(7) and would not, therefore, be exempt from Indian tax.

For instance, a Government employee serving abroad may retain government residential accommodation in India for the use of his family. The value of perquisite in respect of the residential accommodation occupied by his family in India will be taxable in his hands in India.

Definition of the word “Government” under the General Clauses Act, 1897

It is pertinent to point out that the word “Government” occurring in section 9(1)(iii) is not defined in the Income-tax Act or Rules made thereunder. It is, however, defined in section 3(23) of the General Clauses Act, according to which it includes “both the Central Government and any State Government”. It, therefore, refers to Indian Government and not to the Government of a foreign country.

Thus, if a Government employee, who is an Indian citizen, is sent abroad on deputation to the Government of a foreign country and is paid remuneration by that Government, his remuneration will not be deemed to accrue in India under section 9(1)(iii) since the income chargeable under the head "Salaries" is not paid by the Indian Government. His salary income would, however, be taxable in India, if he remains an ordinarily resident in India by virtue of any clause of section 6.

Similarly, the word “Government” occurring in section 10(7) refers to Indian Government. Any allowances or perquisites paid or allowed as such outside India by the Government of foreign country to a citizen of India for rendering service outside India will not, therefore, qualify for the exemption allowed in that section.

Remuneration due to non-residents directly remitted to India is taxable

If an employee, who is sent abroad by non-Government employer and who renders services outside India, becomes a non-resident, he can be held liable to tax in respect of the remuneration earned by him for services rendered outside India, if the remuneration is paid to him or his family members in India or it is credited to his bank account in India. It is, therefore, advised that any amount, which is earned by such an employee for his services outside India, should be actually received by him outside India so that the amount of such remuneration is not subjected to Indian income-tax. In case such an employee desires to remit the money to his bank account in India, he should first receive the remuneration outside India and then remit the same to India.

Remuneration - Meaning of -

The word “remuneration” is not defined anywhere in the Income-tax Act or in the Rules made thereunder. It has, therefore, to be understood in the general sense. “Remuneration” may cover salary, allowances, bonus and the perquisites as well. It may be allowed in cash or in kind.

Frequently Asked Questions (FAQ)

Q. - I am an Indian citizen working in an Indian consulate in USA and receive salary from the Indian government, is the amount taxable in India?

Ans. : Yes, as per section 9(1)(iii) of the Income Tax Act, salary payable by Indian government to Indian citizen for services rendered outside India are deemed to accrue or arise in India and hence taxable in India.

However, allowances and perquisites provided to such persons by the government of India for rendering services outside India are exempt under section 10(7)

Letter E/275/118A/77-II(B), Dated 07.11.1978

Subject :   Section 9 of the income - tax act, 1961 - income - deemed to accrue or arise in India - Application of section 9(1)(iii) to Sikkim

Though the Indian Income-tax Act, 1961 has not yet been extended to Sikkim by any notification under Article 371F(n) of the Constitution and for the purpose of Indian Income-tax Act, 1961, Sikkim will have to be treated as outside India under section9(1)(iii) of the Indian Income-tax Act, 1961.

CBDT Circular No. 4 [F. No. 73A/2/69-IT(A-II)], dated 20.02.1969

Subject : Pensions received from abroad by pensioners residing in India - Taxability under clause (iii) of sub-section (1)

1. Under section 9(1)(iii), pension accruing abroad is taxable in India only if it is earned in India.  Pensions received in India from abroad by pensioners residing in this country, for past services rendered in the foreign countries, will be income accruing to the pensioners abroad, and will not, therefore, be liable to tax in India on the basis of accrual. These pensions will also not be liable to tax in India on receipt basis, if they are drawn and received abroad in the first instance, and thereafter remitted or brought to India.

2. It is only in cases where in pursuance of a definite agreement with the employer or former employer, the pension is received directly by the pensioner in India that the pension would become taxable in India on receipt basis.

3. While the pension earned and received abroad will not be chargeable to tax in India if the residential status of the pensioner is either “non-resident” or “resident but not ordinarily resident”, it will be so chargeable if the residential status is “resident and ordinarily resident”. The aforesaid status of "ordinarily resident" cannot, however, be acquired by a person unless he has been resident in India in at least nine out of the preceding ten years.

A resident of Sikkim is non-resident for purpose of Act. Where petitioner was Advocate General of Sikkim and was ‘non resident’ in India for income tax purposes during relevant assessment year, retainer and fees received by him from Government of Sikkim could not be assessed under section 9(1)(iii)

The petitioner was a senior advocate of Calcutta High Court. He was appointed as Advocate-General of Sikkim and joined the post in March 1980. Soon thereafter, he shifted his residence to Gangtok, Sikkim. In the Income-tax returns filed for the assessment years 1981-82 and 1982-83, the petitioner claimed exemption from tax in respect of his income earned in Sikkim and the Income-tax authorities allowed the claim. The petitioner resigned from the post of Advocate-General of Sikkim with effect from 01.04.1983 and came back to Calcutta. For the assessment year 1983-84 also he described his status as ‘resident of Sikkim’ and claimed exemption of tax in respect of income earned by him in Sikkim during the period from 01.04.1982 to 31.03.1983. The ITO disallowed the petitioner’s claim. On writ:

The petitioner's retainer could not be taxed under section 9(1)(iii) for the following reasons.:

(a) The Income-tax Act, 1961, having not been extended to Sikkim, the Government of Sikkim is not governed by the provisions of the said Act and the word ‘Government’ in section 9(1)(iii) cannot include the Government of Sikkim.

(b) Tax was deducted by the Sikkim Government at source from the retainer of the petitioner under the provisions of the Sikkim Income-tax Manual which is a law in force in Sikkim under article 371F(k) of the Constitution and as such is an Indian law on taxation on income. To tax his retainer again under section 9(1)(iii), by another Indian law will result in double taxation of the same income by two Indian laws on taxation on income.

(c) All residents of Sikkim including Government servants pay income-tax under the Sikkim Income-tax Manual and not under the Income-tax Act, 1961. The Sikkim Government servants suffer deduction from their salaries at source at Sikkim Government income-tax rates and they do not pay further tax in addition at Central rates on the same income. That being the position, to tax the petitioner again under section 9(1)(iii) would be discriminatory and violative of article 14 of the Constitution. All Government servants of Sikkim are citizens of India and the position of the petitioner was in no way different.

The result of the above discussion was :

(a)  the finding of respondent No. 1, that the petitioner was a resident during the financial year 01.04.1982, to 31.03.1983, was perverse,

(b)  the petitioner was a non-resident during the said financial year,

(c)   Retainer and fees arose and was earned in Sikkim and the finding that part of the same arose outside Sikkim was perverse,

(d)   the petitioner was entitled to exemption of Rs. 1,00,000 as claimed by him and

(e)   charging of interest under section 217 was illegal.

Therefore, the respondent had no jurisdiction to assess or demand tax on Rs. 1,00,000 earned by the petitioner in Sikkim as he was a resident of Sikkim, i.e., a non-resident, during the relevant period 01.04.1982, to 31.03.1983.

In the result, the instant application succeeded. The impugned order of assessment and notice of demand passed by the ITO, were quashed/set aside. The case was decided in favour of the assessee. [In favour of assessee] (Related Assessment year : 1983-84) – [D.P. Choudhury v. Union of India (1990) 186 ITR 329 (Cal.)]

Assessee a citizen of india was a judge of Sikkim High Court - within four years preceding relevant year, he did not stay outside Sikkim for any period or periods amounting in all to 90 days or more-during relevant year, assessee received salary as a judge of Sikkim High Court - assessee, though a citizen of India, should be taken as non-resident for purposes of act - On facts under head ‘residence’ salary drawn by assessee was chargeable to tax as income deemed to accrue in India within meaning of section 9(1)(iii)

The assessee was the Judge of the Sikkim High Court during the previous year relevant to the assessment year 1980-81. He did not stay outside Sikkim for any period or periods amounting in all to 90 days or more in any year since April 1977. In his return he claimed his status as ‘non resident’ and contended that his income from salary as a Judge of the Sikkim High Court was not taxable. His objection concurrently failed before the ITO and in appeal before the AAC. On second appeal:

Held : Sikkim, no doubt, was admitted into the Indian Union as the 22nd State in the First Schedule of the Constitution but thereby all the laws applicable to the Indian territory were not automatically extended to Sikkim. The word ‘India’ used in the Act cannot be construed to comprise the State of Sikkim therein as there was no such extension of the Act to the State of Sikkim. The inclusion of the whole of the State of Sikkim as backward area in the Eighth Schedule of the Act does not make the Act applicable thereto, since any part of land to which the Act is not applicable can be included as a backward area for the obvious purpose of development of that area. Therefore, the assessee, though a citizen of India, had to be taken to be a non-resident for the purpose of the Act, since he did not stay outside Sikkim for any period or periods amounting in all to 90 days or more in any year since April, 1977.

It cannot be said that the word ‘salary’ appearing in article 221 and in the Second Schedule of the Constitution is used in the popular sense and that the remuneration paid to the Judge of the High Court is not salary. The general tests to be applied for finding out if there is an employer and employee relationship hold good in the case of employment of a Judge of the High Court also. The Constitution mentions qualifications of a person to be appointed as Judge of the High Court and the power to appoint has been invested with the President. The terms and conditions of service, namely, his tenure of appointment, salary, pension and other benefits have also been defined. The Constitution has laid down rules for discharge of his duties and so also a procedure has been laid down for removal from his office. Thus, he is obviously an employee of the State and in no sense of the term he can claim to be self-employed without exercise of any control over his work. Because of the nature of his work he has been made independent and supreme within the sphere of his duties inasmuch as that he is paid out of the consolidated fund without any voting but at the same time he has to take an oath that he shall uphold the Constitution and the laws. A Judge of the High Court is a high dignitary and a constitutional functionary and, therefore, the word ‘servant’ is seldom used for him but thereby the reality cannot be denied.

Thus, the impugned salary drawn by the assessee, in the instant case, was income chargeable under the head ‘Salaries’ payable by the Government to the citizen of India for service outside India and, as such, the said income was deemed to accrue to him in India within the meaning of section9. Therefore, the AAC was justified in taxing the impugned salary. – [Justice Anandamoy Bhattacharjee v. ITO (1986) 18 ITD 181 (Cal.)]