Financial Planning Germany financial products Post

Guide to Income tax in Germany

I have been asked to write about personal income taxes in Germany and the German tax system a few times. Things get complicated with taxes when you are an immigrant, like an NRI from India with income in India and work in Germany. How do you then pay taxes in Germany and file tax returns? Do you hire a German tax consultant or do it yourself? Lets try to break it down to the basics.

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Tax Rates in Germany (2020)

Germany has a concept of progressive taxation, simply put the tax rates go upwards the higher your income is.

Income (Single)Income (Couples)Tax Rate
Less than 9,408 eurosLess than 18,816 euros0%
9,409 – 57,051 euros18,817 – 114,102 euros14%
570,52 – 270,500 euros114,103 – 541,000 euros42%
More than 270,000 eurosMore than 541,000 euros45%
Income tax rates Germany 2020

As a couple, the tax limits are doubled because taxes are calculated as a household. This tax rate is not complete it inself, apart from this your payslips will also have entries of Kirche Tax(Church Tax 8-9%) and Soli(Solidarity Surcharge at 5.5%).

Other Essential Charges which aren’t Tax

Apart from the tax payments each month, you also pay for Health Insurance (Krankenversicherung), Pension Insurance (Rentenversicherung), Disability and Unemployment Insurance (Pflegeversicherung & Arbeitlosenversicherung). The impact of all these payments is on your take home pay (nettolohn) which dwarfs when compared to your gross pay(bruttolohn).

So, how do you optimize your tax payments such that your take home pay isn’t tiny?

Tax Classes in Germany

Enter Tax Classes. If there is a concept which I have seen people confused with, it is the selection of tax classes. So here are two key principles to understand:

Principle #1: A tax class does not change your overall tax due to Finanzamt for a given year, that number is calculated based on your income level and applicable tax rate.

Principle #2: A tax class only changes your tax prepaid each monthto Finanzamt. So if you pick aggressive tax class, you get lower payslip now and a higher tax return at the end of the year. If you choose to pay too little tax now, the payslip is higher but at the end of the year you might have to pay back to Finanzamt.

  • Class I = single/separated
  • Class II = single parent
  • Class III = married and spouse has no income or lower income
  • Class IV = married and similar income to spouse
  • Class V = opposite of class III, i.e. this is the class your lower earning spouse has if you have III
  • Class VI= Employees who receive income from other employment

Most of the time classes are allocated by default, it is usually the Class III/V combination or Class IV where there is some choice to be made.

International Income and Double Taxation

If you have invested in your home country, then what is the impact on taxes? The answer to this is to first check if there is a Double Taxation Agreement between Germany and your country (you can see this here). The goal of such an agreement is to reduce taxes to be paid on the income earned, so that you do not end up paying taxes in both countries.

DTAA means you do declare your income from all sources in Germany and will get reductions in taxes in either Germany or your country. The actual rules will be as per the agreement and might need more digging into.

Now I can speak a little more for Indians living in Germany who have investments in India, you need to read this link.

Filing tax returns

You are supposed to file tax returns for the current year in the next year July 31. For example; for 2020 you should file returns by July 31, 2021

Tax returns are allowed retroactively, for the very first time, for upto 4 years. Finally, returns are made to a tool called as ELSTER.

You can choose to use software tools like wundertax, steuergo or have a tax consultant help you.

It takes a few weeks to get confirmation from Finanzamt, and the amount is usually transferred by the time you get your confirmation. In case of discrepancies, Finanzamt can ask you to submit more proofs.

Who needs to file tax returns?

If your income was more than minimum levels (above) in the year and if

  • There is income in another country during the financial year for you
  • You are married and one spouse has opted for tax class (Steuerklasse) III or V
  • The tax office (Finanzamt) has granted you an allowance (Freibetrag) on the employment tax statement.
  • There is income or benefits like parental or maternity leave payments.
  • You have received extraordinary income, such as severance payments for which your employer retained employment tax.
  • You have more than one employer at the same time (excluding mini-jobs).

Do you have more questions on Income tax in Germany? If yes, please leave a comment.

Financial Planning Real Estate

Buying/Selling Property in India as an NRI from Germany

Property in India for NRIs

This post is a little different theme from the usual ones, more focused on Indians who moved to Germany and need to figure out property/real estate matters in India. This is because I see these questions being asked in various forums about property in India as an NRI from Germany.

….am I an NRI?

NRI or Non Resident Indian, from a tax perspective, has

  • Stayed in Indian for the current tax year for 182 or more days, or
  • In the last 4 years has stayed in India for 365 days or more, of which at-least 60 days in current year.

As a Non Resident Indian, can I buy property in India while living in Germany?

Yes, you need not visit India to buy a property. As an NRI you can only buy residential or commercial property in India. The mechanism to do this is buy giving a special power of attorney to someone in India.

Any payments should be made from your NRO account only.

Can I sell Property in India as an NRI from Germany, without visiting India?

The Power of Attorney(POA) is again the instrument to help you here. However, few very important things to understand. By Law, Power of Attorney does not allow the power holder to sell a property, the transaction is only valid when a clear sale deed is executed. So, the person holding this POA has to enact the sale deed which might need your document signatures and so on.

How to get a Power of Attorney in Germany?

The Embassy of India does this for you, you should reach out to CGI Frankfurt or Berlin. The steps are:

  • Get a power of attorney(called Vollmacht) made by local Notary in the local Landgericht (Court).
  • Take the original and a copy to Embassy, sign this document in the presence of Consular Officer
  • The Embassy then attests your signature.

Of course this is just the first step, in India you will need No Objection Certificate, Occupation Certification, Sanction Certificate and maybe more to finally get it done.

Important: Local Landgericht notarization may not be accepted in India, the attestation from Indian Embassy/Consulate is essential for Power of Attorney.

Additional FAQ Link at CGI Munich: here

What about taxation after selling property as an NRI from Germany?

After you make the sale of Property in India as an NRI from Germany, the next step usually is to send this money from India to Germany. The below might changed based on tax laws for the year.

  • If the property is sold <2 years of ownership, then 30% capital gains tax will be applied in India
  • If the sale is after >2 years of ownership the tax claim is 20%
  • You might get exemptions under Section 54, if you are reinvesting the proceeds in other property (within a prescribed time limit).

The money should be deposited to your NRO account if you want to remit it to Germany. For sums <US$ 1 million you only need a certificate from a CA proving the source, this is also referred as Form 15CA


Is debt bad for Financial Independence?

Here’s a confession, I do like to watch Dave Ramsey on Youtube, his take no prisoners approach is quite entertaining. Yet, he often is condescending, which seems unnecessary at times. After-all, people are calling him for his support and reaching out is always a good positive step.

Debt is Bad, without explaining why

Dave Ramsey is also often considered as a strong proponent of debt bad movement. This is not bad advice at all, yet, is debt really bad for your goal of financial independence? However, instead of simply listening to the gospel, can we really assess this?

The purpose of taking loans

The first step is to understand, why is there a need to take debt? It is simply to finance a good or service which you otherwise cannot afford through your regular income and savings. You are borrowing against the promise of your future income.

Digging into my debt collection experience in finance industry

Around a decade ago, I was working in the finance industry in India. I had a few takeaways:

  • We had customers owning Ferraris on loan, with ridiculus payments, which they failed to pay off. In the eyes of their social circle, they were considered very rich.
  • Many customers financed their commercial vehicles to earn money by transporting goods, without learning the costs of the business.

Both of the above examples are the real issue here.

#1 : Debt is bad when you take too much of it

While banks might only look at your credit score or income statements, they cannot predict if you will be able to sustain your debt. Can your choice to buy a ferrari cripple rest of your finances?

If your debt repayment will make it impossible to save anymore each month, then you are buying more than you should. Pare down on your wants, and evaluate if you can opt for a more cost effective solution.

Great loan offers give us an illusion that our spending capacity is more than what it actually is. This often means, we are willing to consider buying things which we should ideally be out of our consideration.

#2 : Don’t call debt bad when your math is bad

The whole idea of debt as a financial product is to earn money through interest rates. This is the return the banks will get after you are done repaying your loans. Thus a simple comparison between two debt offers is comparing their interest rates (and reading the small print).

Comparison of interest rates may not be the whole picture, you should consider the total cost of ownership as well.

For example; if you are buying a car, you will end up having monthly car payments, fuel, parking, maintenance, winter tyres and insurance costs. Add it all up, and split into monthly payments. This number should be affordable, else you need a cheaper car or delay the purchase.

The same applies to buying houses, or rental properties and even buying a TV on loan (monthly payments + electricity + cable costs).

What is the downside of too much debt?

Lets stick to the math of taking debt, and avoid a discussion on mental stress. Let me share a real life example of a friend, he bought an apartment in India with a 25 year mortgage. His monthly payments translate to around 1000 EURs (converting from Indian rupees) at an interest rate of 10%.

As a single income household, he finds it really hard to save after his monthly expenses. His only means of saving are the mandatory rentenversicherung payments. His mistake was borrowing against future earnings of two adults instead of one.

In hindsight, a smaller cheaper apartment would have made sense.

What is an acceptable debt?

Acceptable debt is a combination of sufficient equity (downpayment), manageable interest rate and viable payments.

Household debt in Germany

In the current context of Germany, I would rank the below debts and my preference:

Type of DebtGetFI RatingWhy
Personal CreditAvoid Avoid due to high interest rates, unless you use it to pay off a loan of even higher rate.
Mortgage (Baufinanzierung)OkHistorically low interest rates (<2.5%), try to start with atleast 20% downpayment (more the better)
Credit CardAvoidUnless you can stick to paying off the whole credit each month, just avoid.
Currently interest rates range 13%-19% per year!
Payday loans (minikredit)RunIf you need to consider this, you are in trouble
Auto LoansOkI suggest a high downpayment, dont buy a car you cannot afford.
Make sure interest rates<4% and contract upto 48 months.

The debt principles

Lets summarize our tips for acceptable debt (I won’t call it good debt):

  • When financing a property, use a broker like to get best rates from banks specially when you are not comfortable with German. (I have not used their services, they are an example)
  • When buying a property, go 20% or higher in downpayment, else reconsider your decision.
  • Avoid new cars for loss of value, buy in cash.
  • If you still need a car loan then limit runtime to 4 years and interest<4%. Try not to finance more than 50% of the value of the car.
  • Do your math, for apartments add costs of commission, registration, maintenance. For cars, running costs, parking and maintenance. These will give you an idea of your monthly expenses.
  • Always check loan prepayments options before signing on. The goal should be to have the opportunity to prepay loans without a penalty fees.
  • In case of prepaying debts, hit the one with highest interest rate first.

In short, be responsible with your choices, do not take undue risk. Too much risk can make you poor.