Tax on Overseas Assignment Allowance: How Indian Salaried Employees Are Taxed on Foreign Postings
TL;DR
- Overseas assignment allowance, per diem, and foreign salary received during deputation by an Indian employer can be partly or fully exempt depending on your residential status under Section 6.
- If you become a Non-Resident (NR) or Resident but Not Ordinarily Resident (RNOR) for FY 2025-26, only Indian-source income is taxed in India.
- If you remain a Resident and Ordinarily Resident (ROR), your global income including the foreign portion is taxable in India, with credit for foreign tax under Section 90 or Section 91.
- Per diem received against actual expenses incurred during foreign travel is exempt under Section 10(14) read with Rule 2BB.
- Lumpsum overseas living allowance paid in addition to per diem is taxable in India if you are ROR.
- Maintain travel dates, boarding passes, foreign assignment letter, and host country tax filings to defend exemption claims.
What this means in plain terms
Indian companies often send employees abroad for client work, training, or long-term deputation. The employer may pay you a base Indian salary plus an "overseas assignment allowance" (OAA), per diem for daily expenses, and host-country accommodation. The Indian tax law treats different components differently, and your residential status determines the bigger question of whether global salary is taxable in India at all.
For AY 2026-27, the rules in Section 5 and Section 6 still drive the analysis. Spend 182 days or more outside India for employment in FY 2025-26 (with conditions met), and you may qualify as Non-Resident, dramatically reducing Indian tax. Stay short of that, and your foreign earnings come back to the Indian tax net with relief only via the foreign tax credit.
Residential status under Section 6
Basic test for individuals
An individual is a Resident in India for a year if either:
- They are in India for 182 days or more in the financial year, or
- They are in India for 60 days or more in the year and 365 days or more in the four preceding years.
The 60-day threshold extends to 182 days for Indian citizens going abroad for employment, making it easier for deputees to become Non-Resident.
Additional condition for ROR
A Resident is treated as Resident and Ordinarily Resident (ROR) only if they have been Resident in India in at least two of the ten preceding years and physically present for 730 days or more in the preceding seven years. Otherwise, they are RNOR.
Why this matters
ROR pays Indian tax on global income. RNOR and NR pay Indian tax only on Indian-source income (and on income received in India). For overseas assignment, the difference can be lakhs in tax.
How different components are taxed
Base Indian salary continues
Even on overseas posting, your base Indian salary is credited in India and subject to TDS under Section 192 by the Indian employer. This portion is taxable in India regardless of residential status because it accrues in India.
Overseas Assignment Allowance (OAA)
OAA paid by the Indian employer to cover the higher cost of living abroad is taxable as salary. If you are NR or RNOR and OAA is paid outside India for services rendered outside India, it may not be taxable in India. The location of payment, services, and accrual all matter.
Per diem against bills
Daily allowance to cover meals, local transport, and incidentals during foreign assignment is exempt under Section 10(14) read with Rule 2BB to the extent of actual expenditure incurred. Lumpsum per diem without bill backing can be fully taxable.
Accommodation provided by the employer
Hotel or service apartment at the foreign location, paid by the employer, is a perquisite. The valuation rules under Rule 3 apply with reasonable adjustment for the foreign cost of living.
Claiming foreign tax credit
Section 90 — DTAA route
India has Double Taxation Avoidance Agreements (DTAAs) with most major economies — US, UK, Germany, Japan, Singapore, UAE, and many others. If you paid tax in the host country on your assignment income and that income is also taxed in India (because you are ROR), claim credit under Section 90.
Section 91 — non-DTAA route
If the host country has no DTAA with India, Section 91 provides unilateral relief. The credit is the lower of Indian tax rate and host country tax rate on the doubly-taxed income.
Form 67
To claim foreign tax credit, file Form 67 online at incometax.gov.in before filing your ITR for AY 2026-27. Without Form 67, the credit can be disallowed.
A real example
Divya, 33, Rs. 32L CTC, Indian employer, deputed to Germany from May 2025 to March 2026 (11 months).
- Days in India in FY 2025-26: roughly 60 (April 2025 plus short visit). She qualifies as Non-Resident under Section 6 because she went abroad for employment and stayed less than 182 days.
- Base Indian salary received in India during deputation: Rs. 8,00,000. Taxable in India.
- Overseas Assignment Allowance paid in Euros to her German bank account: equivalent of Rs. 18,00,000. Not taxable in India because she is NR and the income accrued and was received outside India for services rendered abroad.
- German tax paid on the Euro salary: approximately Rs. 5,40,000 (rough 30% effective).
- Indian tax on Rs. 8,00,000 minus Rs. 75,000 standard deduction = Rs. 7,25,000. Under new regime, after Section 87A rebate (available up to Rs. 12 lakh), tax may be nil.
- Total Indian tax outflow on FY 2025-26 deputation income: nil (subject to filing ITR-2 as NR and reporting correctly).
Had Divya stayed Resident (visited India for more than 60 days), her global income of Rs. 26 lakh would have been taxable in India with Section 90 credit for German tax, leaving an additional Indian liability of around Rs. 1 to 2 lakh.
What to do this week
- Map your physical days in India for FY 2025-26 using passport stamps, immigration records, and flight tickets.
- Determine your residential status using the Section 6 tests — NR, RNOR, or ROR.
- Collect host country tax filings, payslips in foreign currency, and Form 16 from the Indian employer.
- Run the 6-step assessment at https://myfinancial.in to see your old-vs-new regime delta, unused deductions, and insurance gap in under 10 minutes.
- If you are ROR, file Form 67 online before filing ITR-2 and claim foreign tax credit; track DTAA articles for the specific host country.
FAQ
Am I automatically NR if I am abroad for 182+ days?
Almost. The Indian citizen going abroad for employment exception keeps the 182-day test the only one applicable; the 60-day rule does not catch you. If you cross 182 days outside India, you are NR.
Is my Indian salary taxable in India during deputation?
Yes. Salary credited in India by an Indian employer is taxable in India regardless of where services are rendered, subject to DTAA tie-breakers. NR status only helps with the foreign-paid portion.
Can I claim Section 87A rebate as NR?
Section 87A rebate is available only to Resident individuals, not NRs. If you are NR for FY 2025-26, the Rs. 12 lakh rebate (new regime) and Rs. 5 lakh rebate (old regime) do not apply.
Is the new tax regime applicable to NRs?
Yes. NRs can opt for the new tax regime under Section 115BAC for AY 2026-27. The slab rates and standard deduction apply similarly, but rebate Section 87A is not available.
What is the difference between OAA and per diem?
OAA is a flat allowance to compensate for the higher cost of living abroad, typically a fixed monthly amount. Per diem is a daily allowance for meals, transport, and incidentals during foreign travel, usually for short trips. Per diem is more easily structured as exempt reimbursement.
Do I need to disclose foreign bank account in ITR?
Yes, if you are ROR. ITR-2 has Schedule FA requiring disclosure of foreign assets, including bank accounts, financial interest in entities, and immovable property. Non-disclosure can attract steep penalties under the Black Money Act, 2015.
Can I keep my Indian PPF and NPS during deputation?
PPF account remains active. Contributions can continue if the resident status allows; NRs cannot open new PPF but can continue existing one until maturity. NPS contributions can continue and you remain a subscriber.
Sources
- incometax.gov.in (Income Tax Department, Government of India)
- Section 5, Section 6, Section 9, Section 10(14), Section 90, Section 91 of the Income-tax Act, 1961
- Rule 2BB, Rule 3 of the Income-tax Rules, 1962
- Form 67 — Foreign Tax Credit claim — incometax.gov.in
- finmin.nic.in (Ministry of Finance, Budget 2025 documents) and Black Money (Undisclosed Foreign Income and Assets) Act, 2015
This is general information, not personalised advice. For your situation, consult a Certified Financial Planner.
