diff --git a/tests/parser/features/test_assignment.py b/tests/parser/features/test_assignment.py
index 0dd63a0d09..29ec820484 100644
--- a/tests/parser/features/test_assignment.py
+++ b/tests/parser/features/test_assignment.py
@@ -39,7 +39,118 @@ def augmod(x: int128, y: int128) -> int128:
     print("Passed aug-assignment test")
 
 
-def test_invalid_assign(assert_compile_failed, get_contract_with_gas_estimation):
+@pytest.mark.parametrize(
+    "typ,in_val,out_val",
+    [
+        ("uint256", 77, 123),
+        ("uint256[3]", [1, 2, 3], [4, 5, 6]),
+        ("DynArray[uint256, 3]", [1, 2, 3], [4, 5, 6]),
+        ("Bytes[5]", b"vyper", b"conda"),
+    ],
+)
+def test_internal_assign(get_contract_with_gas_estimation, typ, in_val, out_val):
+    code = f"""
+@internal
+def foo(x: {typ}) -> {typ}:
+    x = {out_val}
+    return x
+
+@external
+def bar(x: {typ}) -> {typ}:
+    return self.foo(x)
+    """
+    c = get_contract_with_gas_estimation(code)
+
+    assert c.bar(in_val) == out_val
+
+
+def test_internal_assign_struct(get_contract_with_gas_estimation):
+    code = """
+enum Bar:
+    BAD
+    BAK
+    BAZ
+
+struct Foo:
+    a: uint256
+    b: DynArray[Bar, 3]
+    c: String[5]
+
+@internal
+def foo(x: Foo) -> Foo:
+    x = Foo({a: 789, b: [Bar.BAZ, Bar.BAK, Bar.BAD], c: \"conda\"})
+    return x
+
+@external
+def bar(x: Foo) -> Foo:
+    return self.foo(x)
+    """
+    c = get_contract_with_gas_estimation(code)
+
+    assert c.bar((123, [1, 2, 4], "vyper")) == (789, [4, 2, 1], "conda")
+
+
+def test_internal_assign_struct_member(get_contract_with_gas_estimation):
+    code = """
+enum Bar:
+    BAD
+    BAK
+    BAZ
+
+struct Foo:
+    a: uint256
+    b: DynArray[Bar, 3]
+    c: String[5]
+
+@internal
+def foo(x: Foo) -> Foo:
+    x.a = 789
+    x.b.pop()
+    return x
+
+@external
+def bar(x: Foo) -> Foo:
+    return self.foo(x)
+    """
+    c = get_contract_with_gas_estimation(code)
+
+    assert c.bar((123, [1, 2, 4], "vyper")) == (789, [1, 2], "vyper")
+
+
+def test_internal_augassign(get_contract_with_gas_estimation):
+    code = """
+@internal
+def foo(x: int128) -> int128:
+    x += 77
+    return x
+
+@external
+def bar(x: int128) -> int128:
+    return self.foo(x)
+    """
+    c = get_contract_with_gas_estimation(code)
+
+    assert c.bar(123) == 200
+
+
+@pytest.mark.parametrize("typ", ["DynArray[uint256, 3]", "uint256[3]"])
+def test_internal_augassign_arrays(get_contract_with_gas_estimation, typ):
+    code = f"""
+@internal
+def foo(x: {typ}) -> {typ}:
+    x[1] += 77
+    return x
+
+@external
+def bar(x: {typ}) -> {typ}:
+    return self.foo(x)
+    """
+    c = get_contract_with_gas_estimation(code)
+
+    assert c.bar([1, 2, 3]) == [1, 79, 3]
+
+
+def test_invalid_external_assign(assert_compile_failed, get_contract_with_gas_estimation):
     code = """
 @external
 def foo(x: int128):
@@ -48,7 +159,7 @@ def foo(x: int128):
     assert_compile_failed(lambda: get_contract_with_gas_estimation(code), ImmutableViolation)
 
 
-def test_invalid_augassign(assert_compile_failed, get_contract_with_gas_estimation):
+def test_invalid_external_augassign(assert_compile_failed, get_contract_with_gas_estimation):
     code = """
 @external
 def foo(x: int128):
diff --git a/vyper/codegen/function_definitions/internal_function.py b/vyper/codegen/function_definitions/internal_function.py
index 17479c4c07..228191e3ca 100644
--- a/vyper/codegen/function_definitions/internal_function.py
+++ b/vyper/codegen/function_definitions/internal_function.py
@@ -41,8 +41,8 @@ def generate_ir_for_internal_function(
 
     for arg in func_t.arguments:
         # allocate a variable for every arg, setting mutability
-        # to False to comply with vyper semantics, function arguments are immutable
-        context.new_variable(arg.name, arg.typ, is_mutable=False)
+        # to True to allow internal function arguments to be mutable
+        context.new_variable(arg.name, arg.typ, is_mutable=True)
 
     nonreentrant_pre, nonreentrant_post = get_nonreentrant_lock(func_t)
 
diff --git a/vyper/semantics/analysis/local.py b/vyper/semantics/analysis/local.py
index 790cee52d6..c99b582ad3 100644
--- a/vyper/semantics/analysis/local.py
+++ b/vyper/semantics/analysis/local.py
@@ -173,10 +173,13 @@ def __init__(
         self.func = fn_node._metadata["type"]
         self.annotation_visitor = StatementAnnotationVisitor(fn_node, namespace)
         self.expr_visitor = _LocalExpressionVisitor()
+
+        # allow internal function params to be mutable
+        location, is_immutable = (
+            (DataLocation.MEMORY, False) if self.func.is_internal else (DataLocation.CALLDATA, True)
+        )
         for arg in self.func.arguments:
-            namespace[arg.name] = VarInfo(
-                arg.typ, location=DataLocation.CALLDATA, is_immutable=True
-            )
+            namespace[arg.name] = VarInfo(arg.typ, location=location, is_immutable=is_immutable)
 
         for node in fn_node.body:
             self.visit(node)