Glossary
Tax equalisation (TEQ)
A policy where the employer absorbs the gap between an assignee's hypothetical tax and actual combined tax liability, so they pay roughly what they'd have paid staying home.
Tax equalisation is a policy, not a calculation trick. The assignee should pay roughly the same tax as if they had stayed home — no more, no less. This holds regardless of where the assignment actually places their income tax burden.
Hypothetical tax is withheld from the assignee’s paycheck as an estimate of home-country tax on their normal salary. It funds the settlement and is never remitted to any tax authority. Actual tax is the real liability — India tax on India-sourced income plus any residual home-country tax after treaty relief. At settlement, if actual tax exceeds hypothetical tax withheld, the employer pays the difference; that top-up is itself taxable, so it loops through a gross-up calculation.
The Labour Codes’ 50% wages-deeming rule does not change TEQ’s tax mechanics directly. But it changes the size of statutory entitlements like gratuity that feed into the taxable-income side of the comparison. A TEQ policy that ignores the deemed-wages base will under-fund the equalisation.
See the full tax equalisation guide for the three-base structure and a worked example.