Key takeaways
A familiar situation
Priya works for a Bengaluru software company. In June she is sent to Germany for two years. She has stock options that vest over four years, her German employer contributes to the German pension system, and her salary keeps landing in her Indian NRE account. Her questions are the ones every mobile employee faces: which country taxes her salary, what happens to her ESOPs, and how she avoids paying tax twice. Answering them is less about where the payslip comes from and more about where she lives and where she actually works.
Step 1: residence
Under section 6 of the Income-tax Act, 2025, an individual is resident in a tax year if in India for 182 days or more, or for 60 days in that year and 365 days in the four years before. For an Indian citizen or a person of Indian origin visiting India, the 60 days becomes 182 days (120 days if Indian income exceeds ₹15 lakh). A resident is taxed on global income under section 5(1); a non-resident only on income received, or arising, in India under section 5(2).
If both countries treat the person as resident, the treaty's tie-breaker decides. Indian law looks at the whole year as one unit, but in Raman Chopra v. DCIT (2016, Delhi Tribunal) the tie-breaker in Article 4(2) was applied to periods within the year: resident of one country for part of it and of the other for the rest, which keeps foreign income of the non-resident period out of Indian tax. In Binny Bansal v. DCIT (2026, Bangalore Tribunal) the 'centre of vital interests' test was treated as qualitative: someone who has moved abroad but keeps active economic ties in India, such as running a business, large property or substantial loans to Indian entities, may still be a treaty resident of India. Passive investments like bank deposits and mutual funds carry far less weight.
When a non-resident comes back and becomes resident, redesignate NRE and NRO accounts as resident accounts promptly. Interest on an NRE account stops being exempt once the person is resident.
Step 2: where the salary is earned
Section 9(3)(a) of the 2025 Act (section 9(1)(ii) of the 1961 Act) treats salary as arising in India if it is earned for services rendered in India, wherever it is received. The courts read this as needing physical presence: the Bombay High Court in Clifford Chance (2009) required services to be rendered in India; the Kolkata Tribunal in Santanu Sanyal (2024) held that foreign allowances of a non-resident for work outside India are not taxable even if paid by an Indian employer; and the Bangalore Tribunal in Kachana Raghunatha Reddy (August 2026) sent a case back to verify the days worked in Korea, noting that salary for foreign services is not taxable merely because an Indian company paid it and deducted TDS.
Lump-sum living or cost-of-living allowances meant for personal expenses abroad are taxable perquisites, not exempt allowances for official duty (Sun Outsourcing Solutions, 2018; now Schedule III, item 13 of the 2025 Act).
Step 3: ESOPs that vest across countries
An ESOP is a perquisite under section 17(1)(d) of the 2025 Act, valued at exercise at fair market value under Rule 15 of the Income-tax Rules, 2026. But the option builds up value over the vesting period, which may include years worked abroad. The OECD's approach, which Indian tribunals follow, is to allocate the benefit by the number of days worked in each country during the period of employment to which the option relates.
Priya's options were granted on 1 April 2023 and vested on 31 March 2026, a vesting period of 1,096 days. She worked 790 of those days in India and 306 in Germany. She exercises in 2026-27 and the perquisite value is ₹30,00,000. The India share is ₹30,00,000 × 790 ÷ 1,096 = ₹21,62,409; the German share is ₹8,37,591. If she is a non-resident in the year of exercise, India still taxes the ₹21,62,409 (Unnikrishnan V S, Mumbai Tribunal, 2021); if she is resident and Germany taxes its share, she claims credit for the German tax.
In Robert Arthur Keltz (Delhi Tribunal, 2013, affirmed by the Delhi High Court), only the part of the perquisite attributable to service in India was taxed. Where an employee is resident in different countries at grant, vesting, exercise and sale, each may claim to tax, and the treaty's credit article does not resolve every such residence-residence clash; the mutual agreement procedure may be needed.
Step 4: foreign social security and pensions
| Item | Treatment |
|---|---|
| Employer's contribution to a foreign fund | Generally a taxable perquisite under section 17(1)(h); the ₹7.5 lakh limit applies only to Indian funds (RPF, NPS, approved superannuation) |
| Employee's own contribution | Generally no deduction under sections 123 or 124, as foreign schemes are not notified |
| Withdrawal | Taxable as profits in lieu of salary under section 18(1)(c)(ii), to the extent of the employer's contribution and interest |
| Salary credited to an NRE account | Not taxable merely because it reaches India: the first point of receipt is abroad |
| Retirement account in a notified country | Section 158 and Rule 74: tax can be deferred to the year of withdrawal (option in Form No. 40) |
In Anant Jain (Delhi High Court, 2012), retirement benefits from a US employer for US service were not taxable in India for a not-ordinarily-resident person. In Jignesh Naresh Jariwala (Mumbai Tribunal, 2025), the deferral option, once exercised, was held to continue for later years without filing the form again each year.
Step 5: relieving double tax
A resident who pays tax abroad on income also taxed in India claims foreign tax credit under section 160 and Rule 76 of the 2026 Rules by filing Form No. 44 (formerly Form 67). The employment article of the relevant treaty (for example Article 15 of the India-UAE and India-Germany treaties, Article 16 of the India-USA treaty) decides which country may tax. Because credit articles require relief regardless of when the source country levies its tax, a timing difference should not cost the credit. In Jaspal Singh Bindra (Kolkata Tribunal, 2024), credit was allowed for UK tax on a UK pension also offered to tax in India.
What to keep and do
- A day count for every year: days in India and abroad, from passport stamps and travel records.
- Records of where each working day was spent, especially for remote or hybrid work.
- The grant, vesting and exercise dates of each ESOP, with a day-wise allocation.
- Tax residency certificates from both countries and the treaty tie-breaker analysis in a relocation year.
- Foreign tax paid, with proof, and Form No. 44 filed before the return.
- Form No. 40 for a foreign retirement account, if deferral is chosen.
- For employers: check payroll TDS against the employee's place of work, and whether staff abroad could create a permanent establishment there.
My Indian employer pays my salary while I work abroad. Is it taxable in India?
If you are a non-resident, salary for work done outside India is generally not taxable in India, even if paid and deducted at source by an Indian company. If you are resident, your global income is taxable, with credit for foreign tax.
Can I be resident in India for only part of a year?
Not under Indian law, which looks at the whole year. But if you are resident in both countries, a treaty tie-breaker can be applied to parts of the year.
Does India tax ESOPs I exercise after leaving?
Yes, for the share that relates to days worked in India during the vesting period.
Is money sent from abroad to my NRE account taxable?
Not merely because it is received in India, if it was earned and first received abroad while you were non-resident.
Sending staff abroad or coming back to India?
Aypa can work out residence, allocate ESOPs and prepare foreign tax credit claims for employees and their employers.
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