Section 5 of the Income Tax Act, of 1961 states that there are three important considerations to determine if Income is Taxable in India or Not :
Residential Status of Income Earner / Tax Payer / Assessee
Place of income whether accrued or receipt and whether actual or deemed
Time of accrual or receipt of income.
Below Table Explains How the Taxability of Income in India changes based on Residential Status. (To learn more about residential status of Individual please click here or residential status of companies click here)
Sr No | Particulars | Resident and Ordinarily Resident (ROR) | Resident but not-Ordinarily Resident (RNOR) | Non-Resident (NR) |
1 | Income received or is deemed to be received in India | Taxable | Taxable | Taxable |
2 | Income accrues or arises or is deemed to accrue or arise in India | Taxable | Taxable | Taxable |
3 | Income accrues or arises outside India but businesses & profession controlled or set up in India | Taxable | Taxable | Not Taxable |
4 | Income accrues or arises outside India and businesses & professions controlled or set up outside India | Taxable | Not Taxable | Not Taxable |
Key Points Related to "Income Received" or "Deemed to Be Received in India"
All the income received or deemed to be received in India is taxable irrespective of the residential status of the person or place of accrual.
Receipt refers to the first point of receipt of money and does not include subsequent transfer/remittance/transmission of money after income is received.
Key Points Related to "Deemed to Accrue in India"
Any income accrued or received outside India will be "deemed to be accrued in India" if said income is related to :
through any business connection in India. (For an in-depth explanation of business connection and significant economic presence please read here)
through any property or any asset in India. (example for any plant or machinery given on hire in India and money is received outside India)
through the transfer of any capital asset in India. (for example famous Vodafone Case or to explain simply for transfer of any shares of a foreign company that derives its value more than 50% from assets/business situated within India. This will be taxable in India even if shares are foreign companies are transferred outside India. For in-detail analysis please read here)
Further, the following salary income shall be "deemed to be accrued in India" :
Salary received outside India in connection with the services rendered in India.
Salaries are paid by Government to Indian citizens for services rendered outside India.
Key Points Related to Interest Income / Royalty Income / Fees for Technical Services to "Deemed to Accrue or Arise in India"
An Interest / Royalty / Technical Fees paid by the following person will be deemed to accrue or arise in India :
Paid by the Government
Paid by Resident of India except if it is related to business/profession carried outside India or to earn income from any source outside India.
Paid by Non-Resident except the payment is related to business/profession carried or operated within India.
Remember, Interest Income / Royalty Income / Technical Fees shall be deemed to accrue or arise in India irrespective
Non-Resident has residence or any business connection in India or
Non-resident has rendered services in India or Outside India.
Thus if services are rendered outside India but relating to business in India, then they will be taxable in India
Circular 4/2015: A dividend paid by a Foreign Company will not be deemed to accrue or arise in India even if the Foreign Company derives its substantial value from assets situated in India. Dividends paid by India Company will also deemed to accrue or arise in India.
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