By CA Surekha Ahuja
A Definitive Guide for Non-Residents, Indian Residents, and Migrated Pensioners
As Indian professionals increasingly take up global roles, many eventually receive retirement benefits—gratuity, leave encashment, or pensions—from Indian or international employers. But how are these receipts taxed in India? Do tax treaties (DTAAs) offer relief? What about UN pensions for Indian residents or retired employees who have since moved abroad?
This comprehensive guide answers these questions using law-backed reasoning, section-wise interpretation, and practical insights.
Legal Characterisation under Indian Law
Gratuity and leave encashment are classified as post-employment salary benefits under Indian law:
Section 10(10) of the Income-tax Act, 1961 covers gratuity.
Section 10(10AA) covers leave encashment.
According to Section 9(1)(ii), income earned in respect of services rendered in India is deemed to accrue or arise in India—even if received after becoming a non-resident.
Thus, under domestic law, such payments are taxable in India even when received by non-residents. However, Section 90(2) permits the application of a DTAA, which may override this.
Important Note on Pensioners Becoming Non-Residents:
Many retired individuals who once worked in India have now taken up permanent residency in foreign countries. Even if gratuity or leave encashment is received years after leaving India, it is still deemed to accrue or arise in India under Section 9(1)(ii) if it relates to Indian employment. However, such pensioners, now being non-residents under the Income-tax Act, may claim relief under the relevant DTAA with their new country of residence.
Relief under DTAA: Article 18 Explained
Most Indian DTAAs include a provision similar to Article 18 of the OECD Model Convention:
“Pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.”
Both gratuity and leave encashment fall within the meaning of “other similar remuneration” as held in international tax interpretation and jurisprudence.
A resident of Germany (or the USA, UK, Canada, Australia, Netherlands, Singapore, etc.) receiving gratuity from India for past Indian employment is taxable only in their country of residence, not in India—provided the DTAA contains Article 18 in standard form.
Why Section 90 and 91 Do Not Help Non-Residents
Section 90(1) provides bilateral tax credit to Indian residents under a DTAA.
Section 91 grants unilateral relief when no DTAA exists.
However, both provisions apply only to tax residents of India.
A non-resident cannot claim tax credit under Section 90 or 91. Instead, they must directly invoke the DTAA under Section 90(2), which allows them to apply the treaty if it is more beneficial than domestic law.
Foreign Company Directors Receiving Indian Gratuity
If a person now serving as a director in a foreign company receives gratuity from their former Indian employment, then:
If linked to past employment, it qualifies under Article 18 and is taxable only in the country of residence.
If it represents director’s remuneration or consultancy fee, it may fall under:
Article 16 (Director’s Fees), or
Article 12 (Fees for Technical Services)
In such cases, India may retain taxing rights.
Key Test: Whether the income is for past employment or current managerial/consulting services.
Tax Exemption for UN Pensions
UN pensions are paid by a supranational body, not a tax resident entity.
Under Article XVI of the Convention on the Privileges and Immunities of the United Nations (1946):
“Officials of the United Nations shall be exempt from taxation on the salaries and emoluments paid to them by the United Nations.”
This applies even when received by Indian residents.
Judicial Support:
R. Venkatraman v. ACIT (ITAT Chennai)
R. Narasimhan v. ITO (ITAT Mumbai)
Therefore, UN pensions are exempt from Indian taxation, even if received in India by a resident.
Documents Needed to Claim Exemption
To claim DTAA exemption (and avoid or reclaim TDS), a non-resident must furnish:
Tax Residency Certificate (TRC) – As per Section 90(4), read with Rule 21AB
Form 10F – If TRC is incomplete
Declaration – Invoking Article 18 and claiming DTAA protection
Communication to Indian payer – To avoid tax deduction under Section 192 or 195
If tax is deducted regardless, the non-resident may file an ITR and claim refund with the above documents attached.
Comparative Tax Summary Table
| Income Type | Recipient | Taxable in India (Domestic Law) | Taxable in India (DTAA) | Applicable Article |
|---|---|---|---|---|
| Gratuity | Non-resident (Germany) | Yes – Sec 9(1)(ii) | No | Article 18 |
| Leave Encashment | Non-resident (USA) | Yes | No | Article 18 |
| UN Pension | Indian Resident | Not specifically exempt | No – by UN Convention | Not DTAA governed |
| Director Fees | Foreign Director | Possibly | Possibly | Article 16 or 12 |
Frequently Asked Questions (FAQs)
Q. Is gratuity or leave encashment received by a German resident taxable in India?
No. Article 18 of the India–Germany DTAA provides exclusive taxation rights to Germany.
Q. Is UN pension received by an Indian resident taxable in India?
No. Exempt due to sovereign immunity under the UN Convention.
Q. Can a non-resident claim rebate under Section 90 or 91?
No. Only Indian residents are eligible. Non-residents must directly invoke the DTAA.
Q. What if TDS was deducted despite eligibility for exemption?
File a return in India and claim a refund with supporting DTAA documents.
Q. Can directors use Article 18 to avoid tax?
Only if the payment is linked to past employment. Current director’s fees are governed by Article 16 or 12.
Special Note for Retired Indian Pensioners Who Become Non-Residents
Who Does This Apply To?
Indian citizens who retired in India, received pension or retirement benefits (e.g., gratuity, leave encashment), and later:
Moved to countries like the USA, Canada, UK, Germany, Australia, etc.
Acquired foreign residency or citizenship.
Key Points:
Indian Pensions Remain Taxable in India unless DTAA provides exemption.
Most DTAAs do not exempt ongoing monthly pensions, unlike gratuity or leave encashment.
Gratuity and Leave Encashment—as lump-sum past employment benefits—are usually exempt under Article 18.
UN Pension remains tax-exempt in India, even after change in residency.
To claim DTAA benefit for gratuity or leave encashment:
One must obtain TRC from the new country of residence.
File Form 10F and furnish a declaration invoking Article 18 to avoid or claim refund of TDS in India.
If TDS is already deducted:
File an Income-tax Return (ITR) in India as a non-resident.
Enclose DTAA documents and seek a full refund based on treaty protection.
🧠Real-world Scenario:
Mrs. Meera Sharma, a retired Indian PSU employee, migrated to Germany post-retirement. Upon receiving deferred gratuity from India, her Indian bank deducted TDS at source under Section 195. However, as she is a tax resident of Germany and the India–Germany DTAA contains Article 18 in standard form, the entire amount of gratuity—being a payment for past employment—is taxable only in Germany. Thus, India has no taxing rights in this context. By obtaining a Tax Residency Certificate (TRC) from German authorities, filing Form 10F, and submitting a written declaration invoking Article 18, she can lawfully file an Indian tax return and claim a full refund of TDS. This ensures alignment with international tax principles and treaty override provisions under Section 90(2).
This case illustrates how proper documentation and awareness of treaty relief can protect non-resident taxpayers from unnecessary taxation and allow lawful recovery of TDS.
Conclusion: The Legal Path to Relief
Gratuity and leave encashment received by non-residents for past Indian services are deemed to accrue in India under Section 9(1)(ii). However, DTAAs override this when they contain Article 18, ensuring exclusive taxation in the country of residence.
Reliefs under Section 90(1) and Section 91 are inapplicable to non-residents. Foreign directors can use Article 18 only if the income relates to past employment.
UN pensions, even when received by Indian residents, remain exempt under international law, upheld by Indian tribunals.
To lawfully secure these exemptions, non-residents must maintain full documentation: TRC, Form 10F, and a treaty-based declaration.
