For individuals and corporations navigating Indian tax law, one fundamental question determines whether you owe tax to the Indian Income Tax Department: Where did the income accrue or arise?
While Indian residents are taxed on their global income, Non-Residents (NRs), NRIs, and foreign companies are primarily taxed on income that originates within Indian borders. However, defining exact geographical origins for modern digital businesses, remote jobs, and cross-border investments can be challenging.
To eliminate ambiguity, the Income Tax Act, 1961 establishes two foundational pillars: Section 5 (which defines the overall scope of total income based on residential status) and Section 9 (which creates legal deeming fictions to bring certain foreign-earned incomes into the Indian tax net).
At Delhi Tax Solutions, we assist NRIs, multinational companies, expats, and cross-border investors across Delhi NCR in structuring their tax affairs accurately. Here is your comprehensive guide to the treatment of income accrued or arising in India.
Accrue vs. Arise vs. Receive: Understanding the Terminology
Before diving into legal sections, it is crucial to distinguish between three terms commonly used in tax assessments:
- Received in India: Refers to the very first point of receipt of money. If salary or contract income is deposited directly into an Indian bank account for the first time, it is considered “received in India” and becomes immediately taxable, regardless of where the work was done.
- Accrued in India: Income accrues when the right to receive that income comes into existence (i.e., when the debt is created or services are completed), even if the actual payout happens later.
- Arisen in India: Income arises at the moment it turns into a tangible right or receivable for the taxpayer.
Key Takeaway: Once an income is taxed on an accrual basis, it cannot be taxed a second time when it is actually received in a bank account.
Section 5: Scope of Total Income Based on Residential Status
Section 5 of the Income Tax Act dictates that tax liability depends heavily on your residential status under Section 6 during the relevant Financial Year. The taxability of accrued income varies across the three categories of taxpayers:
| Category of Income | Resident & Ordinarily Resident (ROR) | Resident but Not Ordinarily Resident (RNOR) | Non-Resident (NR / NRI) |
|---|---|---|---|
| Income received or deemed to be received in India | Taxable | Taxable | Taxable |
| Income accruing, arising, or deemed to accrue in India | Taxable | Taxable | Taxable |
| Income accruing OUTSIDE India (From business controlled from India) | Taxable | Taxable | Not Taxable |
| Income accruing OUTSIDE India (From business controlled outside India) | Taxable | Not Taxable | Not Taxable |
Section 9: Incomes Deemed to Accrue or Arise in India
Section 9 is a legal “deeming provision.” Even if an activity physically takes place outside India or the money is transferred between foreign accounts, Section 9 treats the resulting income as if it accrued inside India under specific scenarios:
1. Business Connection in India — Section 9(1)(i)
If a non-resident earns profit directly or indirectly through a “business connection” in India, that portion of profit is deemed to accrue in India. A business connection exists if:
- The non-resident operates through a dependent agent in India who habitually concludes contracts or secures orders.
- The non-resident maintains a Significant Economic Presence (SEP) in India (e.g., crossing specific revenue thresholds from digital goods/services supplied to Indian users).
*Note: Only profits reasonably attributable to actual operations carried out in India are taxable.
2. Income from Property, Assets, or Capital Transfers in India
Any income derived from physical property, tangible/intangible assets, or sources located in India is deemed to accrue in India. Similarly, Capital Gains arising from transferring any capital asset situated in India (including shares of foreign entities deriving substantial value from Indian assets) are taxable in India.
3. Salary Earned for Services Rendered in India — Section 9(1)(ii)
If salary is earned for services physically performed within India, it is deemed to accrue in India, regardless of where the contract was signed or where the paycheck was deposited. Rest or leave periods forming part of the employment contract in India are also included.
4. Government Salaries Paid to Indian Citizens Abroad — Section 9(1)(iii)
Salaries paid by the Government of India to an Indian citizen for services rendered outside India (e.g., diplomats or embassy staff) are deemed to accrue in India. (However, allowances and perquisites paid to them abroad are exempt under Section 10(7)).
5. Dividends Paid by an Indian Company Outside India — Section 9(1)(iv)
Any dividend distributed by an Indian registered company to a foreign shareholder outside India is deemed to accrue in India and is subject to Indian tax rules.
6. Interest, Royalties, and Fees for Technical Services (FTS) — Section 9(1)(v), (vi), (vii)
Payments made by the Indian Government, Indian residents, or non-residents (for businesses run in India) toward Interest, Royalty (e.g., software usage, patents, brand licensing), or Fees for Technical Services (FTS) are automatically deemed to accrue in India.
Statutory Exceptions: Activities NOT Deemed to Accrue in India
To promote international trade, foreign investment, and economic development, the Income Tax Act explicitly exempts certain activities from being classified as income accrued in India:
- Purchases for Export: Operations of a non-resident confined solely to purchasing goods in India for export abroad.
- News Collection: Foreign news agencies collecting news and views in India for transmission outside India.
- Shooting Cinematograph Films: Foreign individuals, firms, or companies shooting feature films or documentaries in India (provided no Indian citizens/residents are partners/shareholders).
- Display of Uncut Diamonds: Foreign enterprises displaying uncut and unassorted diamonds in Special Notified Zones (SNZs).
Double Taxation Relief: Navigating DTAA Benefits
If an income is deemed to accrue in India under Section 9, but is also taxed in your home country of residence, you are at risk of double taxation. This is where Double Taxation Avoidance Agreements (DTAA) come into play.
Under Section 90(2) of the Income Tax Act, non-residents can choose to be governed by either the domestic Income Tax Act or the relevant DTAA—whichever is **more beneficial** to them.
To claim DTAA tax benefits (such as lower withholding tax rates on Royalties/FTS or complete exemption for business profits without a Permanent Establishment), non-residents must furnish:
- A valid Tax Residency Certificate (TRC) issued by their home country government.
- Form 10F electronically filed on the Indian Income Tax Portal.
- A No-Permanent Establishment (No-PE) declaration.
How Delhi Tax Solutions Can Help You
Navigating cross-border taxation, determining residential status, and applying Section 9 deeming provisions require deep technical expertise. Misinterpreting these rules can lead to unwanted tax notices, delayed refunds, or double taxation penalties.
At Delhi Tax Solutions, our team of experienced international tax experts specializes in:
- Accurate Residential Status Assessment (Section 6)
- NRI Tax Planning & ITR Filing
- DTAA Relief Claims & Form 10F Electronic Filing
- Form 15CA / 15CB Certification for Outward Remittances
- Handling Income Tax Scrutiny Notices for Non-Residents
Planning cross-border transactions or filing your NRI return in India? Contact Delhi Tax Solutions today to schedule a professional consultation and protect your global earnings!