Section 10(7)- Tax Exemption for Allowances/Perquisites Paid Abroad by Government

Table of Contents

Understanding Section 10(7)

Section 10(7) provides a complete tax exemption for:

Allowances
Perquisites
paid outside Indiaby the Indian Government to its citizen employees for services rendered outside India.

✔ Applicable to: Indian government employees (including diplomats, military personnel, scientists etc.)

✔ Location Requirement: Services must be rendered outside India

✔ Payment Condition: Allowances/perquisites must be paid outside India

✔ Exemption Scope: 100% exemption on such foreign-paid amounts

✔ Citizenship: Only for Indian citizens (not for NRIs or foreign nationals)

Scenario

Mr. Sharma, an Indian Foreign Service (IFS) officer posted at the Indian Embassy in Tokyo:

Salary Structure:
- Basic salary paid in India: ₹1,20,000/month (taxable)
- Foreign allowancepaid in Japan: ¥200,000/month (≈ ₹1,25,000) for cost of living adjustments
- Housing perk: Govt.-leased apartment in Tokyo (value: ¥300,000/month)
Tax Treatment:
- Taxable in India: Basic salary (₹1.2L/month)
- Exempt under Sec 10(7):
  - Foreign allowance (¥200,000)
  - Housing benefit (¥300,000)
- Result: Only ₹1.2L/month is taxable; all Japan-paid benefits are tax-free

ASPECT	SECTION 10(7)	SECTION 10(14)	SECTION 10(13A)
Applicable to	Govt. employees abroad	All employees (specific allowances)	House Rent Allowance
Nature	Foreign allowances/perks	Special duty/hardship allowances	Rent-related exemption
Payment Location	Must be paid overseas	Can be paid anywhere	Domestic payments

Avoid Double Taxation: Prevents taxation both in India and host country
Cost Neutrality: Ensures overseas postings don’t financially disadvantage officers
Diplomatic Norms: Aligns with global practices for foreign-service personnel

✅ Must be an Indian government employee

✅ Services must be rendered outside India

✅ Payments must be made outside India (if paid in India → taxable)

✅ Only for Indian citizens