Executive SummaryIndian tax residents employed in the UK face complex questions about claiming foreign tax credit and relief on UK salaries and per diem allowances. Understanding eligibility criteria under India's tax law and bilateral treaty provisions is critical for proper compliance and avoiding double taxation.
What Happened
Indian tax residents working in the United Kingdom—whether on assignment, deputation, or direct employment—frequently encounter ambiguity regarding their tax residency status in India and entitlement to foreign tax credit or relief mechanisms. The issue centres on whether individuals can claim relief in India for UK income tax paid on salaries and allowances (including per diem), and under what circumstances such relief is available.
For Indian tax purposes, the determination hinges primarily on residential status under Section 6 of the Income Tax Act, 1961. An individual is classified as a resident of India in a given financial year if they satisfy either the 'physical presence' test (182 days in India during the year) or the 'ordinary residence' test (stayed in India for 365 days during the preceding four financial years, or 60 days in the current year and 365 days cumulatively in the preceding four years). Non-residents and those not ordinarily resident fall under different taxation regimes with materially different relief provisions.
The India–UK Double Taxation Avoidance Agreement (DTAA) provides the framework for relief. Article 24 (Elimination of Double Taxation) permits relief by way of foreign tax credit or exemption, depending on the category of income and the treaty article applicable. Employment income derived in the UK is generally taxable in the UK under Article 15 of the treaty. However, relief in India depends on the taxpayer's residential classification and whether they have actually paid UK tax.
Why It Matters
The distinction between tax residents and non-residents creates vastly different compliance obligations and reliefs available. A resident individual claiming foreign tax credit under Section 91 of the Income Tax Act must furnish proof of foreign tax paid (typically a UK tax certificate) and file their Indian tax return disclosing worldwide income. The relief operates by reducing Indian tax liability by the lower of: (a) foreign tax actually paid, or (b) Indian tax on that foreign income.
Per diem and allowances complicate matters further. In the UK, per diem allowances may be exempt from UK taxation under statutory exemption rules if they do not exceed prescribed limits. However, Indian tax law treats allowances as part of taxable income unless they specifically qualify as reimbursement of expenses under Section 10(14) or fall within exempted categories. Where UK per diem is not taxed in the UK but is taxable in India, the foreign tax credit mechanism offers no relief because no foreign tax was paid—creating potential double taxation at the Indian end.
Non-residents and persons not ordinarily resident face even greater complexity. Under Section 5(1)(c), non-residents are taxed in India only on income accruing or arising in India; foreign-source income (including UK employment income) ordinarily escapes Indian taxation. However, if a non-resident has Indian-source income or receives remittances in India from foreign employment, different rules apply, and relief provisions vary significantly.
Practical Impact
Indians on UK assignment must conduct a prior assessment of their residential status for the relevant financial year before structuring their tax planning. Those likely to remain in the UK for extended periods and lose Indian residency should document their physical presence meticulously, as the burden of proving non-residency falls on the taxpayer.
For those maintaining resident status, claiming foreign tax credit requires assembling foreign tax paid certificates (UK P60 or tax computation), converting amounts to INR at the prescribed exchange rate, and filing Form ITR-2 with detailed annexures disclosing foreign income and relief claimed. Inaccurate disclosure or missing documentation invites scrutiny from the Income Tax Department.
Per diem allowances must be separately itemised and classified. Where not taxed in the UK, Indian tax cannot be avoided, and no foreign tax credit is available. Employers should structure such allowances transparently and ensure employees understand the Indian tax implications.
Professionals should also review whether their UK employment contract documents expense reimbursements as genuine reimbursement (not taxable per Section 10(14)) rather than allowances. This distinction is material for Indian tax treatment.
Conversely, non-residents with UK employment income generally face no Indian tax on that income, provided they do not have Indian-source income and remittances remain abroad. However, any receipt of funds in India or Indian-source income triggers partial or full taxation, and relief mechanisms become restricted and fact-dependent.
Competent tax planning requires individual assessment of residential status, anticipated stay duration in the UK, presence of Indian-source income, and remittance patterns before the financial year commences. Retroactive correction after tax filing is costly and often unsuccessful.
Key Takeaways
- →Residential status determination under Section 6 of the Income Tax Act is the foundation—assess the 182-day physical presence test and four-year ordinary residence test before the financial year begins
- →Foreign tax credit under Section 91 is available only to residents; non-residents are taxed in India only on Indian-source income, making UK employment income generally non-taxable if remittances stay abroad
- →Per diem allowances not taxed in the UK remain taxable in India with no corresponding foreign tax credit—structure reimbursements explicitly as expense reimbursements under Section 10(14) wherever possible
- →Furnish UK tax certificates (P60, tax computation) and disclose worldwide income in Indian tax returns; lack of documentation invites adjustment and penalties
- →Engage chartered accountants early to review contract terms, anticipated stay duration, and remittance plans; retroactive tax planning is ineffective and expensive
Disclaimer: This update is for general information only and does not constitute legal, tax or professional advice. Regulatory positions may change. Please consult APRA & Associates LLP for advice specific to your business. Contact us.