The core rule: Income that accrues or arises in India, or is deemed to accrue or arise in India, is taxable in India regardless of the recipient's residential status. Salary is deemed to accrue in India if it is for services rendered in India, irrespective of where the salary is actually paid or in which country the employment contract is based. So an expatriate physically working in an India office, even if paid entirely into a foreign bank account by a foreign group entity, generally has Indian-source salary income for the days worked in India.
Residential Status Determines the Scope
For a foreign national who is a non-resident for Indian tax purposes (which depends on the number of days spent in India during the relevant year and preceding years, following the same residency tests applicable to anyone), only Indian-source income is taxable in India, meaning the salary attributable to services rendered in India is taxed, but any income from outside India (such as investment income in the home country) generally is not. If the individual's stay in India is long enough to make them a resident (and potentially resident and ordinarily resident), the scope expands to global income, following the same rules that would apply to any other resident.
Apportioning Salary for Days Worked in India
Where an expatriate works partly in India and partly outside during a tax year (common for short-term assignments or frequent travel), the salary needs to be apportioned between the Indian-source portion (attributable to days of service rendered in India) and the portion attributable to services rendered outside India, with only the former generally taxable in India for a non-resident.
Worked Example
A two-year assignment to an India subsidiaryMr Andersson, a foreign national, is seconded by his employer's head office to work at its India subsidiary for a two-year assignment, continuing to receive his salary in his home country's currency into his home bank account, with the India subsidiary reimbursing the head office for the cost. For the period of his assignment, he is physically present and working in India, making his salary for that period Indian-source income (services rendered in India), taxable in India regardless of where it is paid. Depending on the total number of days he spends in India during each tax year, he may be a non-resident (taxable only on this India-sourced salary) or may cross the threshold to become a resident (potentially bringing his global income into scope, subject to any DTAA relief for income also taxed in his home country).
DTAA Relief: The Short-Stay Exemption
Many DTAAs include a provision (often called the 'dependent personal services' or short-stay article) under which an employee's salary may be exempt from tax in the host country (India, in this case) if certain conditions are met, broadly: the employee is present in India for fewer than a specified number of days in the relevant period, the salary is paid by or on behalf of an employer who is not a resident of India, and the cost is not borne by a permanent establishment of the employer in India. Where all conditions of the applicable DTAA's short-stay provision are satisfied, the expatriate's salary may be exempt from Indian tax despite the services being rendered in India.
Registration and Compliance Obligations
Foreign nationals working in India typically need a PAN for tax compliance, and employers operating in India are generally required to withhold tax on salary paid to such employees in respect of their India-sourced income, following the normal TDS-on-salary provisions, with the expatriate then filing an Indian tax return to report this income and claim any applicable DTAA relief or foreign tax credit.
Frequently Asked Questions
If my home country also taxes the same salary I earn while working in India, can I avoid being taxed twice? ▼
This is precisely what DTAAs are designed to address, either through an exemption in one of the two countries (such as the short-stay exemption discussed above, if conditions are met) or through a foreign tax credit mechanism, where tax paid in one country is credited against the tax liability in the other on the same income, subject to the specific DTAA's provisions and the domestic procedures for claiming such relief.
Does an expatriate need to file an Indian tax return even if all their Indian tax has already been deducted at source by the employer? ▼
Generally, individuals (including foreign nationals) with income taxable in India above the basic exemption threshold, or who meet other conditions requiring a return to be filed, need to file an Indian tax return regardless of TDS already deducted. Filing a return also allows the individual to claim any refund if excess tax was withheld, or to claim DTAA benefits and foreign tax credits as applicable.
How are allowances like housing, schooling for children, and home leave provided to an expatriate taxed in India? ▼
Allowances and benefits-in-kind provided by an employer as part of an expatriate's compensation package, such as accommodation, education allowances for children, or home leave travel, are generally evaluated under the same perquisite taxation rules that apply to any employee, with specific provisions determining the taxable value of accommodation, education benefits and similar items, following the general perquisite valuation framework.