Working Remotely From India for a Foreign Employer: How and Where Your Salary Is Taxed

Remote employment has opened doors for professionals in India to work full-time for companies located anywhere in the world, especially in tech and consulting. Yet, one core question keeps surfacing: if you sit in India and work online for a foreign company, which country can tax your salary, and how should you actually pay that tax?

This article unpacks how the Income Tax Act 1961 and tax treaties such as the India–US Double Taxation Avoidance Agreement (DTAA) apply to such arrangements. It explains why India typically has the primary right to tax your salary, what happens when the foreign country also imposes tax, and what compliance steps are essential for remote employees receiving income directly from overseas.

1. Base Rule: Salary Is Taxed Where You Physically Perform the Work

1.1 The “place of work” principle under tax treaties

Most Indian DTAAs follow a similar structure for employment income (commonly under an article titled Dependent Personal Services or Income from Employment). The core idea is:

Salary is taxable in the country where the employment is actually exercised – i.e., where you are physically present while doing the work.

So, if you are sitting in Pune, Kochi, or Bengaluru, logging into your foreign employer’s systems and delivering work from India, you are exercising your employment in India, regardless of:

  • where the employer is incorporated,
  • in which currency you are paid, or
  • where company servers, clients, or managers are located.

As a result, India acquires the right to tax your salary because you are physically performing your services from Indian territory.

1.2 Residents are taxed on global income

Separate from treaty rules, domestic law under the Income Tax Act 1961 provides that:

  • A person who qualifies as Resident and Ordinarily Resident (ROR) in India is taxed on worldwide income.
  • This includes salary from any foreign employer, even if the money never comes into India or is paid into an overseas bank account.

So, for an assessee who is ROR in India:

  1. The treaty principle (place where work is done) already points to India.
  2. The domestic rule (worldwide income) again pulls that foreign salary into the Indian tax net.

In short, if you live and work from India, your remote foreign salary is ordinarily taxable in India, even if no Indian TDS is deducted.

2. Understanding Article 16 of the India–US DTAA

2.1 General rule under Article 16 – Dependent Personal Services

The India–US DTAA addresses employment income in Article 16 – Dependent Personal Services. In simplified terms, Article 16 provides that:

  • Remuneration derived by a resident of India from employment is taxable only in India, unless that employment is actually exercised in the United States.

Applied to a situation where an assessee is living in India and performing all employment duties from India for a US corporation:

  • The employment is exercised in India, not in the US.
  • Therefore, under Article 16, India has the exclusive right to tax that employment income.
  • The fact that the employer is American and pays in USD does not move the taxing right to the US so long as the individual is working from India.

2.2 When does the US get a right to tax salary under Article 16?

Article 16 carves out exceptions where the United States can tax salary when the work is physically done in the US. This typically arises when:

  1. The assessee is present in the US for more than 183 days in the relevant US taxable year; or
  2. The salary is paid by, or borne by, an employer resident in the US or a US permanent establishment of a foreign enterprise.

If you normally sit in India and undertake only short visits to the US, staying within the 183-day threshold and without a structure that shifts the cost to a US PE or similar, then:

  • The US generally will not tax those employment earnings, and
  • India retains exclusive taxing rights under Article 16.

2.3 Special complication for US citizens and green-card holders

For US citizens and US green-card holders, the “saving clause” in Article 1 of the India–US DTAA becomes crucial. Under the saving clause:

The United States can tax its citizens and residents on their worldwide income notwithstanding most treaty provisions.

So, if an assessee is a US citizen or green-card holder living in India and working remotely for a US firm:

  1. India taxes the salary because the work is physically done in India and the person is resident here.