I’m trying to achieve the decal on the right image but no material settings seem to let me achieve a normal decal that allows colors. Any help would be appreciated.
I don’t get what the problem is?
Make a Deferred Decal material (in the material settings)
Material Domain: Deferred Decal.
Blend Mode: Translucent.
Decal Blend Mode: Translucent.
Shading Model: Default Lit.
Use alpha in the color, and add normal output to the decal output.
It just … works.
The color texture looks like it has a white background, but it’s actually DTX5 transparent:
Sorry I should’ve been more clear. In your example, I’d want the normal to show outside the red and blue region as well.
Currently, I can’t use “Decal Blend Mode: Translucent” without normal details disappearing outside of the base color mask:
Gotcha.
You can do this with the “decal blend mode” in the Material properties.
If you set it to “Normal,” you get a decal that only affects the normal buffer, although it still blends out where alpha is 0.
You can add a second decal to affect the color. Or you can try to use pre-multiplied color – multiply color with transparency, don’t output transparency, and output normal.
Unfortunately there is no combination “normal plus premultiplied alpha color,” which would let you do this in a single decal. Would probably be reasonably easy to add to the engine, though 
What normal-only decal looks like:
