Separate individual tax, employer withholding and intercompany obligations
An expatriate assignment can raise several different questions. Test the employee’s tax residence and source of pay, the employer’s payroll obligations, whether the foreign enterprise has an Indian permanent establishment (PE), whether an intercompany service is supplied, and which social security system covers the worker. The contract matters, but actual conduct and payments matter too.
Residence, source and shadow payroll
| Tax status | General test and scope |
|---|---|
| Non-resident | An individual generally fails both the 182-day test and the alternative test of at least 60 days in the year plus at least 365 days in the preceding four years. Special rules apply to specified Indian citizens and persons of Indian origin. Indian receipts and Indian accruals, including deemed accruals, can be taxable. |
| Resident but not ordinarily resident (RNOR) | One ordinary route is being non-resident in nine of the preceding ten years or being in India for no more than 729 days in the preceding seven years. Other statutory categories exist. Foreign accruals are generally outside scope unless derived from a business controlled or profession set up in India; apply the separate receipt and source tests. |
| Resident and ordinarily resident | Worldwide income generally enters Indian scope, subject to exclusions, treaty relief and credit rules. Check applicable foreign income and asset disclosures. |
Under legacy sections 5, 6 and 9, where services are rendered in India, salary may be taxable in India even when paid abroad. Reconcile the home and host payrolls, convert foreign currency using the prescribed tax and withholding rules, and value perquisites under the applicable rules. Withholding generally uses legacy section 192 or, under the 2025 Act, section 392. A shadow payroll is an administrative reconciliation. It does not itself establish who is the employer or which income is taxable.
Secondment, GST and permanent establishment
A genuine employee’s services to the employer in the course of employment fall within Schedule III of the CGST Act. A separate service by the foreign enterprise to the Indian entity can still be taxable. In Northern Operating Systems, the Supreme Court decided a service-tax case on the actual employment and secondment arrangement. Continued foreign employment, pay, rights of return and reimbursement were relevant facts; the judgment did not automatically make every secondment subject to GST.
CBIC Instruction 05/2023 requires fact-specific review and cautions against using the fraud or suppression provisions mechanically. If the arrangement is an import of taxable services, test reverse charge and valuation separately. CBIC Circular 210/4/2024 explains Rule 28 for qualifying imports from related overseas parties where full ITC is available: the declared invoice value is deemed open market value; if no invoice is issued by the domestic recipient for the service in that scenario, the circular addresses deemed nil value. This is valuation guidance, not a blanket finding that a supply exists or an exemption from reporting and cash payment for a positive liability.
| Treaty partner | Service PE checkpoints |
|---|---|
| United States | Article 5(2)(l): covered services in India for more than 90 days in any twelve months, or the related-enterprise limb without that minimum in its text. Check covered services, the treaty protocol and the actual enterprise furnishing them. |
| United Kingdom | Article 5(2)(k): generally more than 90 days within a twelve-month period, or more than 30 days where services are performed for an associated enterprise, with the treaty’s exclusions. |
| Singapore | Article 5(6): generally more than 90 days in a fiscal year, or more than 30 days for a related enterprise, subject to the treaty’s wording and exclusions. |
| Germany and Japan | Read the particular treaty and relevant project, fixed place and agency provisions. Do not borrow a service threshold from another treaty. |
A foreign enterprise’s PE analysis asks who furnishes the services and which treaty tests are met. Review premises, authority, work direction, risk, duration and related-party arrangements. Domestic payroll withholding, a cost-only recharge or a tripartite agreement does not decide the issue alone. If there is a PE, determine attributable profits under the applicable treaty rather than taxing global turnover.
Seven worked illustrations
1. Japanese technical director on dual payroll
Assume FY 2025–26, AY 2026–27, and a full year of India services within a two-year assignment. Local salary is ₹4 lakh a month and home salary is JPY 1.2 million a month. Use ₹8 lakh per month as the assumed correctly converted foreign salary. The company leases the apartment for ₹1.50 lakh per month and provides employer-owned furniture with assumed original cost ₹6 lakh. Assume salary as defined for the legacy Rule 3 calculation is ₹1.44 crore and the car is employer provided with mixed use, engine above 1.6 litres, running expenses paid by the employer and a chauffeur.
| Component | Annual amount |
|---|---|
| Local and home cash salary | ₹48 lakh + ₹96 lakh = ₹1.44 crore |
| Accommodation and furniture | Lower of ₹18 lakh annual lease rent and 10% of ₹1.44 crore (₹14.40 lakh), plus ₹60,000 for furniture = ₹15 lakh. |
| Motor car and driver under legacy Rule 3 | (₹2,400 + ₹900) × 12 = ₹39,600. |
| Gross salary | ₹1,59,39,600 |
| Less standard deduction in the applicable new regime | ₹75,000 |
| Taxable income | ₹1,58,64,600 |
| Slab tax | ₹43,39,380 |
| Surcharge at 15% | ₹6,50,907 |
| Cess at 4% | ₹1,99,611.48 |
| Annual tax rounded to nearest ₹10 | ₹51,89,900; approximately ₹4,32,492 per month on a straight-line basis. |
Assume no other income, deductions or treaty relief. Use actual payroll estimates and reconciliation rather than treating the monthly average as a fixed statutory deduction. Check Japan’s relief article and credit conditions separately; a payroll certificate is supporting evidence, not a guarantee of full credit.
2. US parent assigns eight researchers for 14 months
A US group assigns eight researchers to a Hyderabad subsidiary for 14 months. That duration warrants careful review under Article 5(2)(l), but does not establish that the US enterprise furnished covered services. Retain agreements, time and travel records, assignment objectives, authority over work, cost records, performance reviews and details of any warranties. Local direction and no markup are evidence, not dispositive conditions. Compare the treaty tests with the actual arrangement; no tribunal outcome is assumed.
3. German intercompany recharge and GST
A Pune company receives four specialists; the foreign parent’s aggregate recharge is €30,000 per month, or €360,000 a year. At the assumed ₹90 per euro, this is ₹3.24 crore. If the facts support a taxable import at 18% on that value, IGST is ₹58.32 lakh. The base case assumes invoices and a positive liability, so full ITC does not make the tax nil. Pay the RCM liability through cash and use GSTR-3B Table 3.1(d); report eligible import-of-services ITC in Table 4(A)(2). Verify the exchange rate, documentation and ITC eligibility. Credit availability can reduce net tax cost over time, but timing, financing, interest and any penalty are separate.
4. French engineer and the social security agreement
A French engineer is assigned for 18 months, with €8,000 monthly basic salary assumed to be ₹7.20 lakh. In an illustrative non-excluded international-worker case with this full amount as covered wages and 12% on each side, the contributions would be ₹86,400 each per month, or ₹1,72,800 combined and ₹31,10,400 over 18 months. That is not necessarily all pension contribution. Test establishment coverage, components of pay, the applicable scheme and jurisdiction and any controlling court orders. The Delhi High Court upheld the special provisions in its jurisdiction and disagreed with the Karnataka single-judge decision; do not treat one judgment as a national exemption.
A qualifying French detachment may continue home-country coverage under the India–France agreement. The French authority identifies certificate SE 223-01 IN/FR 101 for an approved assignment. Verify the certificate, dates and covered branches before excluding the worker from Indian contributions. A passport or an upload by itself does not confer relief.
5. Grossing up a guaranteed net salary
Assume ₹12.45 lakh monthly net, equivalent to USD 15,000 at the assumed ₹83 per dollar, and no other income or relief. Annual net is ₹1,49,40,000. In the FY 2025–26 new regime, taxable income in the resulting band bears a 30% marginal slab rate, 25% surcharge and 4% cess. With standard deduction of ₹75,000, total tax in this band is approximately 39% of gross cash pay minus ₹5,46,000. Solving gross pay minus tax equals net pay gives about ₹2,35,96,721 gross cash and ₹86,56,721 employer-borne tax before statutory rounding, or a 57.94% uplift over net. Recheck the surcharge band and the final statutory rounding in payroll.
Legacy section 195A covers tax-borne payments where applicable. Legacy sections 192(1A) and 10(10CC) provide a separate treatment where the employer elects to pay tax on eligible non-monetary perquisites. Paying a cash allowance or calling it a benefit does not qualify it; no ₹28 lakh saving can be established without an actual package and tax model.
6. Allocating a UK equity award
Assume 10,000 RSUs with an illustrative service window from 1 March 2020 through 28 February 2024, of which the final 730 of 1,460 days were India service. Assume the plan and applicable treaty support that allocation, the qualifying valuation date gives £200,000 total at ₹105 per pound, and there is no employee payment. Then the India-service allocation is ₹2.10 crore × 730 ÷ 1,460, or ₹1.05 crore. Confirm the plan’s earning period, applicable domestic tax event and fair market value rule; vesting, exercise and settlement can differ. Indian residence may bring more of the award into scope. Apply foreign tax credit and treaty allocation separately rather than assuming the other country taxes the remainder or that there is no overlap.
7. Permanent departure after a three-year assignment
A Canadian executive leaves after three years in Mumbai. Check domicile, reason for coming to India, Indian-source income, exceptions and the applicable law at departure. Under legacy section 230(1), an in-scope non-domiciled person generally provides the prescribed undertaking in Form 30A and obtains the Form 30B no-objection certificate. For the 2025 Act use section 420(1) and Rules 227–228, Forms 154 and 155. The domiciled-person rules are separate. Do not assume a seven-day processing window, a universal requirement for every foreign traveler or that tax residence establishes domicile.
Assignment records
- Keep travel days, residence and treaty documents.
- Reconcile both payrolls and value all perquisites using the right year’s rules.
- Document the facts of employment and any separate service; test PE, withholding and GST separately.
- Verify international-worker coverage, wages and the applicable certificate.
- Keep the return, foreign income disclosures and credit support, and plan departure filings early.
Frequently asked questions
1. Does every expatriate need the same return or withholding rate?
No. Check PAN obligations, applicable filing criteria and form, residence, income and the relevant year’s deadlines. Failure to furnish PAN may change withholding, but the statutory rate test is not universally a flat 20%.
2. Does a stay under 183 days ensure exemption?
No. The employment article’s time window, residence of the employer and whether a local PE bears pay can matter. A recharge is evidence; its recipient and legal effect depend on the treaty and facts.
3. Which bank account should a foreign employee use?
FEMA residence and account eligibility are separate from tax residence. Ask the AD bank about redesignation, permitted foreign accounts and remittance of net salary; do not assume NRE eligibility or use LRS automatically.
4. Are foreign pension contributions always non-taxable?
No. Review the scheme, entitlement and vesting, payment structure and applicable statutory provisions. A finding about a particular mandatory foreign scheme is not a general exemption.
5. Does Northern Operating Systems govern all local staff moves?
No. Test the actual employer and any separate intercompany service. The service-tax judgment does not automatically decide a move within the same entity or a domestic recharge.
6. What should shadow payroll reconcile?
Match home and host cash pay, withholding, perquisites, conversion rates, tax equalization and certificates to the relevant period and supporting evidence.
Sources
- Income-tax Act, 1961 and legacy payroll provisions
- Finance Act, 2026, rates for AY 2026–27
- Income-tax Act, 2025, as amended, including sections 392 and 420
- Income-tax Rules, 2026, including Rules 227–228
- CBDT Notification 65/2023, leased housing valuation
- Legacy Income-tax Rules, Rule 3 perquisites
- Supreme Court, Northern Operating Systems, 19 May 2022
- CBIC Instruction 05/2023-GST
- CBIC Circular 210/4/2024-GST, related-party imports
- GST portal, GSTR-3B reporting for reverse-charge imports
- India–US tax treaty, Article 5 and protocol
- India–UK tax treaty synthesised text
- India–Singapore treaty synthesised text
- Delhi High Court judgment on international-worker provident fund
- French social security authority guidance on detachment to India
- RBI non-resident accounts guidance