Introduction
In today’s globalized economy, multinational companies frequently transfer employees across borders on temporary assignments, known as secondments. While secondments unlock operational flexibility and talent deployment, they bring complex tax implications for both employers and employees under Indian Income Tax law and international treaties.
Understanding the applicable tax provisions, compliance obligations, and effective tax planning opportunities for both inbound secondments (foreign employees working in India) and outbound secondments (Indian employees working abroad) is essential. This article provides a detailed, legally grounded, and practical overview for FY 2025-26, aligning with recent amendments, CBDT circulars, and international tax principles.
Legal Framework and Interpretation
1. Determination of Residential Status (Section 6, Income Tax Act, 1961)
An individual’s residential status in India governs the extent of tax liability:
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An individual is deemed resident if physically present in India for 182 days or more during the financial year.
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The earlier exemption for Indian citizens and Persons of Indian Origin (PIOs) with presence up to 60 days is replaced by a strict 182-day rule from FY 2025-26, per CBDT Circular No. 14/2023, aligning India with global standards.
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A non-resident (NRI) is taxable only on income that accrues or is received in India.
Accurate monitoring of physical presence is critical, as misclassification can trigger unintended tax liabilities or loss of treaty benefits.
2. Taxation of Salary Income (Sections 5, 9, 192)
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Income from salary is taxable in India if it is received or deemed to accrue or arise in India.
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For residents, worldwide salary income is taxable.
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For non-residents, only salary income for services rendered in India or received in India is taxable (Section 9(1)(ii)).
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Employers must deduct Tax Deducted at Source (TDS) under Section 192 on salary paid or credited to employees.
Income from salary is taxable in India if it is received or deemed to accrue or arise in India.
For residents, worldwide salary income is taxable.
For non-residents, only salary income for services rendered in India or received in India is taxable (Section 9(1)(ii)).
Employers must deduct Tax Deducted at Source (TDS) under Section 192 on salary paid or credited to employees.
3. Double Taxation Avoidance Agreements (DTAA) and OECD Model
India’s DTAA network aims to prevent double taxation and allocate taxing rights between countries:
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Article 15 (Dependent Personal Services): Provides that salary earned by an employee for services rendered in the other contracting state is taxable only in the employee’s resident country if:
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The employee’s presence in the host country does not exceed 183 days in the relevant fiscal year.
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Salary is paid by an employer who is not a resident of the host country.
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The employer does not bear expenses through a Permanent Establishment (PE) or fixed base in the host country.
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Failing any of these conditions subjects salary to tax in the host country.
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Article 5 (Permanent Establishment): Defines when a foreign company has a taxable presence in India due to the activities of seconded employees, exposing the company to corporate tax on attributable profits.
4. Foreign Tax Credit (Sections 90, 91)
Indian residents who pay foreign tax on income that is also taxable in India can claim credit against Indian tax liability:
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Requires submission of a valid Tax Residency Certificate (TRC) from the foreign tax authority.
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Credit is limited to the lower of foreign tax paid or Indian tax payable on the same income.
Key Compliance Obligations
Compliance Aspect Employer Responsibilities Employee Responsibilities Risks of Non-Compliance Residential Status Monitoring Maintain employee travel logs and presence data Keep personal travel records Incorrect residency status, double taxation TDS Deduction and Deposit Deduct TDS timely as per Section 192 Verify Form 16 and TDS certificates Interest and penalties under Sections 201(1A), 271C Application of DTAA Provisions Validate employer residency and salary payment Submit TRC and relevant documents Loss of treaty benefits, double taxation Foreign Tax Credit Filing Assist in documentation and compliance Claim FTC with accurate proofs Missed credits, higher tax burden Permanent Establishment Risk Monitor employee activities to avoid PE creation Disclose assignment details Corporate tax exposure for foreign company
Caution Points to Avoid Defaults and Higher Taxation
| Compliance Aspect | Employer Responsibilities | Employee Responsibilities | Risks of Non-Compliance |
|---|---|---|---|
| Residential Status Monitoring | Maintain employee travel logs and presence data | Keep personal travel records | Incorrect residency status, double taxation |
| TDS Deduction and Deposit | Deduct TDS timely as per Section 192 | Verify Form 16 and TDS certificates | Interest and penalties under Sections 201(1A), 271C |
| Application of DTAA Provisions | Validate employer residency and salary payment | Submit TRC and relevant documents | Loss of treaty benefits, double taxation |
| Foreign Tax Credit Filing | Assist in documentation and compliance | Claim FTC with accurate proofs | Missed credits, higher tax burden |
| Permanent Establishment Risk | Monitor employee activities to avoid PE creation | Disclose assignment details | Corporate tax exposure for foreign company |
Caution Points to Avoid Defaults and Higher Taxation
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Accurate Day Counting: Meticulous tracking of days present in India and abroad avoids misclassification of residential status, which is critical for correct tax exposure.
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Clarity on Salary Payment Source: Salary paid and borne exclusively by the foreign employer preserves treaty benefits under Article 15 of DTAA; reimbursement by Indian entity nullifies this.
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Comprehensive Documentation: Employment contracts, secondment agreements, salary slips, travel itineraries, and TRCs are crucial to substantiate claims and treaty eligibility.
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Strict TDS Compliance: Delayed or non-deduction of TDS attracts penal interest under Sections 201(1A) and 271C of the Act.
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Permanent Establishment Vigilance: The secondment agreement should clearly define the scope of duties to prevent creation of PE, avoiding corporate tax and compliance burdens.
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Tax Indemnity Provisions: Contracts should allocate tax responsibilities and indemnities explicitly between employer and employee to prevent disputes.
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Monitor Changes in Tax Laws and DTAAs: Stay updated on annual amendments, CBDT notifications, and evolving international tax guidelines.
Accurate Day Counting: Meticulous tracking of days present in India and abroad avoids misclassification of residential status, which is critical for correct tax exposure.
Clarity on Salary Payment Source: Salary paid and borne exclusively by the foreign employer preserves treaty benefits under Article 15 of DTAA; reimbursement by Indian entity nullifies this.
Comprehensive Documentation: Employment contracts, secondment agreements, salary slips, travel itineraries, and TRCs are crucial to substantiate claims and treaty eligibility.
Strict TDS Compliance: Delayed or non-deduction of TDS attracts penal interest under Sections 201(1A) and 271C of the Act.
Permanent Establishment Vigilance: The secondment agreement should clearly define the scope of duties to prevent creation of PE, avoiding corporate tax and compliance burdens.
Tax Indemnity Provisions: Contracts should allocate tax responsibilities and indemnities explicitly between employer and employee to prevent disputes.
Monitor Changes in Tax Laws and DTAAs: Stay updated on annual amendments, CBDT notifications, and evolving international tax guidelines.
Tax Saving Tips for Inbound and Outbound Secondments
Inbound Secondment (Foreign Employees in India)
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Structure assignment duration to stay below 183 days in India to leverage DTAA exemption on salary income.
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Ensure salary payment is made solely by the foreign employer and not reimbursed by Indian affiliates.
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Leverage tax equalization agreements to shield employees from excess tax liabilities.
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Utilize Foreign Tax Credit in the home country for taxes paid in India, supported by valid TRCs.
Structure assignment duration to stay below 183 days in India to leverage DTAA exemption on salary income.
Ensure salary payment is made solely by the foreign employer and not reimbursed by Indian affiliates.
Leverage tax equalization agreements to shield employees from excess tax liabilities.
Utilize Foreign Tax Credit in the home country for taxes paid in India, supported by valid TRCs.
Outbound Secondment (Indian Employees Working Abroad)
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Track physical presence abroad accurately to determine residential status and consequent tax obligations.
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Claim Foreign Tax Credit in India for taxes paid abroad, avoiding double taxation.
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Plan allowances and perquisites efficiently under Indian tax law and foreign jurisdictions to optimize net income.
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Use DTAA provisions to avail tax exemptions or reduced tax rates on foreign salary income.
Track physical presence abroad accurately to determine residential status and consequent tax obligations.
Claim Foreign Tax Credit in India for taxes paid abroad, avoiding double taxation.
Plan allowances and perquisites efficiently under Indian tax law and foreign jurisdictions to optimize net income.
Use DTAA provisions to avail tax exemptions or reduced tax rates on foreign salary income.
Illustrative Case Study
Scenario: Mr. Rahul Sharma, an Indian employee, is seconded to Canada for 175 days in FY 2025-26. Salary is paid directly by the Canadian entity, with no reimbursement by the Indian parent company.
Tax Analysis:
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Mr. Sharma’s residential status remains resident in India (less than 182 days outside India, but an Indian citizen).
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Under India-Canada DTAA, as the stay is under 183 days, salary is taxable only in India, not in Canada, provided salary is paid by the Canadian employer and not borne by a PE in Canada.
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Employer deducts TDS under Section 192 on the salary paid in India.
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Mr. Sharma claims Foreign Tax Credit in Canada if taxes are paid in India.
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Compliance with documentation and timely TDS deposit is critical to avoid penalties.
Without proper structuring, exceeding 183 days or reimbursement by Indian entity could expose Mr. Sharma to tax in both countries, increasing the compliance burden and tax cost.
Secondment Agreement: Critical Tax Clauses and Cautions
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Clearly specify the duration and location of assignment to manage residential status implications.
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Define the salary payment source explicitly to preserve DTAA benefits.
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Include indemnity clauses specifying which party bears additional tax costs arising due to unforeseen tax liabilities or treaty denials.
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State responsibilities for compliance, TDS deduction, and documentation maintenance.
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Address permanent establishment risk by limiting the seconded employee’s activities and authority in the host country.
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Include provisions for gross-up or tax equalization to protect employees from additional tax burden.
Clearly specify the duration and location of assignment to manage residential status implications.
Define the salary payment source explicitly to preserve DTAA benefits.
Include indemnity clauses specifying which party bears additional tax costs arising due to unforeseen tax liabilities or treaty denials.
State responsibilities for compliance, TDS deduction, and documentation maintenance.
Address permanent establishment risk by limiting the seconded employee’s activities and authority in the host country.
Include provisions for gross-up or tax equalization to protect employees from additional tax burden.
Conclusion
Managing tax implications of inbound and outbound secondments demands careful alignment of Indian tax laws, international treaties, and practical compliance measures. Proactive planning, accurate documentation, and informed contract drafting help multinational enterprises and their employees optimize tax efficiency while mitigating risks of default and penalties.
