Quick answer: Shadow payroll is an Indian payroll run only for tax and reporting, for an expat or secondee whose salary is still paid from abroad. No second salary is paid. The home pay is converted into rupees and taxed under section 392 of the Income-tax Act, 2025, then reported in Form 138 and Form 130.
- Salary for services rendered in India is taxable in India, wherever it is paid.
- An individual is resident after 182 days in India in a tax year, under section 6.
- Treaty relief under section 159 needs a Tax Residency Certificate and Form 41.
- Foreign nationals on Indian payroll pay EPF on full salary unless they hold a Certificate of Coverage.
Why does India need a shadow payroll for expats?
Because Indian tax follows the work, not the bank account. PwC’s summary of Indian income determination puts it plainly: salary for services rendered in India is taxable here.
The Supreme Court made the employer side clear in CIT v Eli Lilly (2009), decided under the 1961 Act. The Indian company had to deduct TDS on home salary paid abroad to its expatriates. It wasn’t the payer. It still owed the deduction.
Shadow payroll is how host companies meet that duty.
Tax residency decides the rest. Under section 6 of the Income-tax Act, 2025, a person is resident after 182 days in India in a tax year. A second test counts 60 days plus 365 days over the previous four years.
Short visits differ. Domestic law exempts some foreign employees present for 90 days or fewer. Most DTAAs stretch that to 183 days, but only if the employer isn’t Indian and an Indian permanent establishment doesn’t bear the cost.
How does a shadow payroll work in practice?
Let’s say a US engineer moves to Pune on 1 June 2026, while her US employer keeps paying the equivalent of ₹4,00,000 a month into her US account.
By 29 November 2026 she has spent 182 days in India. That makes her resident for tax year 2026-27, though her salary for Pune work was taxable from day one.
| Monthly shadow payroll step | What happens |
|---|---|
| Convert home pay | ₹4,00,000 at the prescribed exchange rate (s.392(8)) |
| Add India benefits | Housing, school fees, any tax paid for her |
| Compute and deposit TDS | Average rate under s.392, by the 7th |
| EPF as an International Worker | 12% of ₹4,00,000 = ₹48,000 each from her and the employer |
| Report | Form 138 quarterly, Form 130 after the year |
The US has no social security agreement with India, so EPF applies on her full wages. That holds even though the validity of the International Worker rules is now before the Supreme Court, which has granted no stay.
A UK secondee looks different. With a Certificate of Coverage under the India-UK agreement in force from 15 July 2026, she can stay on UK contributions for up to five years.
How can Remunance help with expat payroll in India?
No Indian entity? Remunance can employ the expat on its own Indian payroll, so TDS, quarterly TDS returns and EPF run under our registrations. Any pay still coming from home gets folded into monthly TDS once you share the figures, along with the housing, school fees and allowances you fund in India. Our article on how an EOR helps with expat employees explains the set-up. For a secondment plan, get an expat payroll review from our India team.
What else do people ask about shadow payroll?
Is shadow payroll mandatory in India?
Not by that name. But TDS on salary for work done in India is mandatory. When pay comes from abroad, a shadow payroll is the usual way to compute it.
Who runs the shadow payroll for a secondee?
Usually the Indian host entity, since it holds the TAN. Foreign companies without an entity in India often use an employer of record, which employs the secondee locally and runs the same calculation.
Does shadow payroll mean double taxation?
It shouldn’t. The home country normally credits Indian tax under the treaty, and India gives relief under section 159.