Posted abroad by the Indian government: how your salary and allowances are taxed

For most NRIs the rule is simple: salary for work done abroad is foreign income, and India does not tax it while you are a non-resident. A government servant on a foreign posting is the exception that runs the other way, and that is what catches people out.

The reason is a specific deeming rule. When the payer is the Indian government and the employee is an Indian citizen, the law treats the salary for services abroad as if it arose in India, so India keeps the right to tax it no matter where you live. In exchange, the allowances you are paid to live and work abroad are made exempt. So instead of the ordinary NRI position, where the whole overseas salary escapes Indian tax, a government servant has a split: the core salary is taxed in India, and the foreign allowances are not.

The provision that fixes the salary in India is Section 9(1)(iii). It says that salary payable by the Government to a citizen of India for services rendered outside India is deemed to accrue or arise in India. Because it is deemed to arise here, it is Indian-source income, and India can tax it regardless of your residential status. You could be a non-resident for the year on the day-count and it would make no difference to this salary; the deeming rule reaches it anyway.

This is why a diplomat or an officer on a long foreign posting cannot treat the base salary as tax-free foreign income. It is Indian income by law. Under the Income-tax Act 2025 the same rule sits in Section 9(3)(b), with identical effect. For the financial year 2025-26 return you file in 2026, the old Section 9(1)(iii) number applies.

The balancing provision is Section 10(7), and it is the part people miss when they assume the whole posting is taxed. It exempts any allowances or perquisites paid or allowed outside India by the Government to a citizen of India for rendering service outside India.

The important word is allowances. The exemption covers the foreign-posting allowances and perquisites, the cost-of-living and representational elements paid abroad, not the base salary itself. So the package has to be read in two parts: the base salary, taxable in India under Section 9(1)(iii), and the foreign allowances, exempt under Section 10(7). Officers often either tax the whole package by mistake, losing the allowance exemption, or exempt the whole package by mistake, missing the tax on the base salary. The right answer is to divide the package, and it depends on how each element of your pay is characterised in your posting order. Under the 2025 Act the exemption continues within the exempt-income schedule; the substance does not change.

The tax treaty does not rescue the salary, it confirms India's right to tax it. The government-service article assigns the taxing right on government remuneration to the paying State, which for you is India. It is Article 19 in the India-US treaty, but the number varies by country, for example Article 20 in the India-Canada treaty, so the specific treaty has to be read rather than assumed. There is a carve-out where the individual is a national of, and resident in, the host country, but that rarely fits an Indian officer on posting.

The trap to watch is your exact status. This treatment is for a genuine government servant paid by the Government. Someone merely deputed to a public-sector company, or seconded to a foreign employer that pays them, is not in the same box, and their salary follows ordinary residence rules instead. So the first thing to confirm is whether you are, in law, paid by the Government for government service, because the whole Section 9(1)(iii) and Section 10(7) treatment turns on that.

Take Meera, an Indian Foreign Service officer posted to a mission abroad for the full year, drawing a base salary of about 18 lakh rupees plus foreign allowances of about 30 lakh rupees paid abroad for the posting. On the day-count she is a non-resident.

Her instinct is that none of it is taxed in India because she lived abroad all year. The correct answer divides it in two. Her base salary of 18 lakh is deemed to arise in India under Section 9(1)(iii) and is taxed here despite her non-resident status. Her 30 lakh of foreign allowances, paid outside India by the Government for the foreign service, are exempt under Section 10(7). Her CA files her Indian return with the base salary taxed and the allowances shown as exempt, and confirms the treaty position that India is the right country to tax the salary. She pays Indian tax on the 18 lakh, nothing on the 30 lakh, and there is no surprise later.