IT dept finds ways to tax you despite treaty ban

[Akash]

An employee from Bengaluru was sent by his Indian employer to work in the UK from April 2016 to March 2017. He became an NRI that year and had a UK tax residency certificate. His passport showed he spent less than 60 days in India.

His Indian employer paid him Rs 16.17 lakh as a per‑diem allowance for his UK stay. He claimed it was not taxable in India under Article 16 of the India‑UK DTAA. The Income Tax Department disagreed and the Assessing Officer added Rs 17.25 lakh back to his taxable income in India.

His argument was that the money came from an Indian payroll, so Section 5(2) applied. The fact that he earned it while physically working in the UK, as a UK tax resident with a UK tax residency certificate, did not change the AO's view.

He appealed. The Commissioner of Appeals upheld the AO. He appealed again. The ITAT in Delhi finally ruled in his favour on 29 May 2026 - nine years after the tax year.

Article 16 of the India‑UK DTAA is clear: if you are a UK tax resident and your employment is exercised in the UK, your salary is taxable in the UK, not India. The source of the payroll does not override the treaty. The ITAT confirmed this.

The practical lesson: if you have ever worked abroad on an Indian payroll, your Form 16 does not decide your tax liability - the treaty does. Most people don't know this and most don't fight.

[Akash]

It took nine long years of harassment and a fight that could have been avoided if the tax department had just looked at the law instead of harassing him.

I hope the courts start fining the officials personally for causing such harassment, because they currently walk away with no consequences.

[Hema]

There should be a rule that if a taxpayer wins in ITAT and gets the demand dropped or a refund, the same amount with interest should be charged to the AO and deducted from his or her salary. The same should apply to the CIT(A). This would stop them from issuing mechanical orders and force them to think, seek legal advice, read treaties and past ITAT judgments before passing any order.

[Ritvik]

So, was that Rs 16 lakh or Rs 17 lakh taxable in the UK, the amount he actually paid tax on?

[Anupama]

This shows how badly trained the tax babus are when it comes to foreign taxation guidelines.

The lazy chaps at the Narayana Murthy team handling the CBDT portal are adding fuel to the fire. My gut feeling is that the tax posted is simply wrong.

[Dayanand]

Frankly, the tax department should pay fines and reimburse the legal costs and mental agony suffered by the citizen if they are found to be wrong.

[Swathi]

I have been both non‑resident and resident for a while. While DTAA avoids double tax, any Indian resident still has to show taxes in India until they become non‑resident, which doesn't happen in the first year.

For anyone wondering, the correct process is to add the money to your income, calculate tax and then reduce it by the tax you have already paid in the UK.

I guess the company tried to label the amount as per‑diem so they wouldn't have to pay UK tax, leaving them without any tax credit to claim.

DTAA works only if you actually pay tax on the other side. For example, income earned in Dubai is fully taxable in India for the year you are resident here.

Before down‑voting me, please copy this to Gemini for fact‑checking.

[Kavitha]

Isn't per‑diem paid in the home country?

Also, did the person have NRI status? You didn't mention it. It is the individual's responsibility to update their status to NRI and switch bank accounts to NRE/NRO.

If he was an NRI, salary earned abroad is not taxed in India under the treaty. But any income that comes into an NRO account is taxable as per the normal slabs.

Because of this, many companies classify assignments as short‑term or long‑term. Short‑term assignments mean Indian salary plus per‑diem. Long‑term assignments usually involve an inter‑company transfer and the employee moves to a foreign payroll.

[Himani]

This has nothing to do with tax treaties. It is all about the fact that the AO didn't get a cut.

One way to fix this is to automatically assess an AO's past assessments with other taxpayers whenever an order like this overrules the AO.

If you look at their previous interactions you will likely see a pattern where the AO slapped a huge fine on someone and then suddenly dropped or reduced it. That pattern would suggest an "offline" transaction between the AO and the assessee.

[Ritu]

I got a per‑diem (much less money) for a 15‑day onsite trip and saved about USD 1,000. It's sitting in my forex card and I won't convert it to INR. I'll use it for the next overseas travel. I don't trust the tax department.

[Arnav]

I'm not well‑versed in financial matters, so could someone explain this to me like I'm five? I'm a student right now and would like to know what to expect when I enter the job market.