Residential Status under Income-tax Act and its Effect on Tax Incidence

Table of Contents

1. Relevance of residential status
2. What one must know for deciding residential status?
3. Residential status of an individual [Sec. 6]
4. Residential status of a Hindu undivided family [Sec. 6 (2)] 
5. Residential status of the firm and association of persons [Sec. 6(2)] 
6. Residential status of a company [Sec. 6(3)]
7. Residential status of every other person [Sec. 6(4)]
8. Relationship between residential status and incidence of tax [Sec. 5]
9. Connotation of receipt of income
10. Accrual of income
11. Income deemed to accrue or arise in India

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1. Relevance of residential status

There are two types of taxpayers – resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.

2. What one must know for deciding residential status?

The following norms one has to keep in mind while deciding residential status of an assessee:

• Different taxable entities – All taxable entities are divided in the following categories for the purpose of determining residential status:

a. an individual;

b. a Hindu undivided family;

c. a firm or an association of persons;

d. a joint stock company; and

e. every other person.

• Different residential status – An assessee is either:

a. resident in India, or

b. non-resident in India.

However, a resident individual or a Hindu undivided family has to be

a. resident and ordinarily resident, or

b. resident but not ordinarily resident.

Therefore, an individual and a Hindu undivided family can either be:

a. resident and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company and every other person) can either be:

a. resident in India; or

b. non-resident in India.

The table given below highlights the same—

Category	Individual/Hindu undivided family	Firm, association of persons, joint stock company and every other person
Category 1		Resident in India
Category 2	Non-resident in India	Non-resident in India

• Residential status for each previous year – Residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year.
• Different residential status for different previous years in same assessment year not possible – If a person is resident in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year(s) relevant to the same assessment year in respect of each of his other sources of income [sec. 6(5)].
• Different residential status for different assessment years – An assessee may enjoy different residential status for different assessment years. For instance, an individual who has been regularly assessed as resident and ordinarily resident has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1) in that year.
• Resident in India and abroad – It is not necessary that a person who is “resident” in India, cannot become “resident” in any other country for the same assessment year. A person may be resident in two (or more) countries at the same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other countries for the same assessment year.

3. Residential status of an individual [Sec. 6]

An individual may be

(a) resident and ordinarily resident in India,

(b) resident but not ordinarily resident in India, or

(c) non-resident in India.

3.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)]

To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows —

Step 1	First find out whether such individual is “resident” in India.	See para 3.1.1
Step 2	If such individual is “resident” in India, then find out whether he is “ordinarily resident” in India. However, if such individual is a “non-resident” in India, then no further investigation is necessary.	See para 3.1.2

3.1.1 Basic conditions to test as to when an individual is resident in India

Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions—

Basic condition (a)	He is in India in the previous year for a period of 182 days or more1
Basic condition (b)	He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year

3.1.1a Exceptions

The aforesaid rule of residence is subject to the following exceptions —

• Exception one (Special Case 1) – In Special Case 1, the period of “60 days” referred to in Basic condition (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is available only in the case of an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship. For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or may be outside India). To put it differently, the individual need not be an unemployed person. He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Alternatively, he may be an unemployed person who goes outside India to take an employment outside India.

In Special Case 1, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days².

• Exception two (Special Case 2) – In Special Case 2, the period of “60 days” referred to in Basic condition (b) above has been extended to 182 days by virtue of Explanation 1(b) to section 6(1). However, Special Case 2 covers only an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.

In Special Case 2, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days³.

• Exception three – Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22. For the provisions of this section, see para 3.3.1.

3.1.2 Additional conditions to test as to when a resident individual is ordinarily resident in India

Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions —

Additional condition (i)	He has been resident4 in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.
Additional condition (ii)	He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions [i.e., (a) or (b)] and the two additional conditions [i.e., (i) and (ii)].

3.1.3 Other Points

It is worthwhile to note the following propositions –

• It is not essential that the stay should be at the same place. It is equally not necessary that the stay should be continuous. Similarly, the place of stay or the purpose of stay is not material.
• Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the stay of one day. If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on which he leaves India shall be taken into account as stay of the individual in India.

3.2 Resident but not ordinarily resident [Sec. 6(1), (6)(a)]

An individual who satisfies at least one of the basic conditions [i.e., condition (a) or (b) mentioned in para 3.1.1] but does not satisfy the two additional conditions [i.e., conditions (i) and (ii) mentioned in para 3.1.2], is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances:

Case 1	If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 3.1.1] but none of the additional conditions [i.e., (i) and (ii) of para 3.1.2]
Case 2	If he satisfies at least one of the basic conditions [i.e., condition (a) or (b) of para 3.1.1] and one of the two additional conditions [i.e., (i) and (ii) of para 3.1.2]

3.3 Non-resident

An individual is a non-resident in India if he satisfies none of the basic conditions [i.e., condition (a) or (b)]. In the case of non-resident, additional conditions are not relevant.

3.3.1 Exceptions

Even if an individual satisfies none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the cases given below –

• First exception – This exception is given under section 6(1A) read with section 6(6)(d) and applicable from the assessment year 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions –

a. he is an Indian citizen;

b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000⁵ during the relevant previous year, and

c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

The rule given by above exception is not applicable in the case of an individual who becomes resident in India by satisfying any of the basic conditions given by section 6(1) [see para 3.1]. Moreover, the above exception is not applicable in the case of a foreign citizen (even if he is a person of Indian origin).

• Second exception – This exception is given by section 6(6)(c) read with Explanation 1(b) to section 6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions –

a. he is an Indian citizen or a person of Indian origin;

b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000⁶ during the relevant previous year;

c. he comes to India on a visit during the relevant previous year, and

d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.

3.3.1a Other Points

For the aforesaid two exceptions, the following should be kept in view –

• How to find out total income of Rs. 15,00,000 – Total income for the ceiling of Rs. 15,00,000 is calculated after ignoring income from foreign sources. “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). Income which is deemed to accrue or arise in India shall be included in computation of the ceiling of Rs. 15,00,000.
• Liable to tax – “Liable to tax” (in relation to a person and with reference to a country) means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently being exempted from such liability under the law of that country.
• Person of Indian origin – A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.

3.4 Rule of residence for an individual in brief

The tables given below summarise the rule of residence for the assessment year 2023-24:

Who is resident and ordinarily resident in India	He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)]. At the same time, he should also satisfy the two additional conditions.
Who is resident but not ordinarily resident in India	He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)]. He may satisfy one or none of the additional conditions.
Who is non-resident resident in India	He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) and basic condition (b)]. Additional conditions are not relevant in the case of a non-resident.

Note – Besides the provisions summarised in the above table, an individual becomes resident but not ordinarily resident in India if he comes within the two exceptions mentioned in para 3.3.1.

Basic Conditions at a Glance

In the case of an Indian citizen who leaves India during the previous year for the purpose of employment (or as a member of the crew of an Indian ship)	In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes on a visit to India during the previous year	In the case of an individual [other than that mentioned in columns (1) and (2)]
(1)	(2)	(3)
a. Presence of at least 182 days in India during the previous year 2022-23	a. Presence of at least 182 days in India during the previous year 2022-23	a. Presence of at least 182 days in India during the previous year 2022-23
b. Non-functional.	b. Non-functional7 .	b.  Presence of at least 60 days in India during the previous year 2022-23 and 365 days during 4 years immediately preceding the relevant previous year (i.e., during April 1, 2018 and March 31, 2022).

Additional Conditions at a Glance

1. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 2012-13 to 2021-22)].
2. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during April 1, 2015 and March 31, 2022).

Dive Deeper:
All-About the Residential Status under the Income-tax Act

4. Residential status of a Hindu undivided family [Sec. 6 (2)]

A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.

4.1 When a Hindu undivided family is resident or non-resident

A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.

The table given below highlights the same proposition —

Place of control	Residential status of family	Ordinarily resident or not
Control and management of the affairs of a Hindu undivided family is—
Wholly in India	Resident	See para 4.2
Wholly out of India	Non-resident	—
Partly in India and partly outside India	Resident	See para 4.2

In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”.

• What is “control and management” – Control and management is situated at a place where the head, the seat and the directing power are situated. The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family unless the decisions concerning the affairs of the family are taken at that place.

4.2 When a resident Hindu undivided family is ordinarily resident in India

A resident Hindu undivided family is an ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b) :

Additional condition (i)	Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition mentioned in para 3.1.1] immediately preceding the relevant previous year
Additional condition (ii)	Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year

If karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

5. Residential status of the firm and association of persons [Sec. 6(2)]

A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.

The above rule may be summarised as follows—

Place of control	Residential status
Control and management of the affairs of a firm/association of persons is—
Wholly in India	Resident
Wholly outside India	Non-resident
Partly in India and partly outside India	Resident

Note – A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the partners/members of the firm/association is not relevant in determining the status of the firm/association.

• What is “control and management” – While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in principal officer. Control and management means de facto control and management and not merely the right to control or management. Control and management is usually situated at a place where the head, the seat and the directing power are situated.

6. Residential status of a company [Sec. 6(3)]

Residential status of a company is determined as follows –

Section	Company	Residential status
6(3)(i)	Indian company	Always resident in India
6(3)(ii)	A foreign company (whose turnover/gross receipt in the previous year is more than Rs. 50 crore)	It will be resident in India if its place of effective management (POEM), during the relevant previous year, is in India
6(3)(ii)	A foreign company (whose turnover/gross receipt in the previous year is Rs. 50 crore or less)	Always non-resident in India

Notes –

1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in India. An Indian company can never be non-resident.
2. A foreign company is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose, a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017, dated January 24, 2017.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India.

7. Residential status of every other person [Sec. 6(4)]

Every other person is resident in India if control and management of its affairs is, wholly or partly, situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.

8. Relationship between residential status and incidence of tax? [Sec. 5]

Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.

8.1 Indian income and foreign income

In order to understand the relationship between residential status and tax liability, one must understand the meaning of “Indian income” and “foreign income”.

8.1.1 Indian income

Any of the following three is an Indian income—

1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

8.1.2 Foreign income

If the following two conditions are satisfied, then such income is “foreign income”—

1. income is not received (or not deemed to be received) in India; and
2. income does not accrue or arise (or does not deemed to accrue or arise) in India⁸.

8.1.3 Provisions in Brief

The above provisions may be explained in brief as follows :

Whether income is received (or deemed to be  received) in India during the relevant year	Whether income accrues (or arises or is deemed to accrue or arise) in India during the relevant year	Status of the income
Yes	Yes	Indian income
Yes	No	Indian income
No	Yes	Indian income
No	No	Foreign income

8.2 Incidence of tax for different taxpayers

Tax incidence of different taxpayers is as follows—

	Individual and Hindu undivided family
	Resident and ordinarily resident in India	Resident but not ordinarily resident in India	Non-resident in India
Indian income	Taxable in India	Taxable in India	Taxable in India
Foreign income	Taxable in India	Only two types of foreign incomes	Not taxable in India
		(i.e., Case 1 and Case 2 given below) are taxable in India
		Any other foreign income is not taxable in India

The following foreign incomes are taxable in the hands of a resident but not ordinarily resident in India—

Case 1 – If it is business income and business is controlled wholly or partly from India.

Case 2 – If it is income from a profession which is set up in India.

No other foreign income (like salary, rent, interest, etc.) is taxable in India in the hands of a resident but not ordinarily resident taxpayer.

Any other taxpayer (like company, firm, co-operative society, association of persons, body of individual, etc.)
	Resident in India	Non-resident in India
Indian income	Taxable in India	Taxable in India
Foreign income	Taxable in India	Not taxable in India

8.3 Conclusions

The following broad conclusions can be drawn —

1. Indian income – Indian income is always taxable in India irrespective of the residential status of the taxpayer.
2. Foreign income – Foreign income is taxable in the hands of resident (in case of a firm, an association of persons, a joint stock company and every other person) or resident and ordinarily resident (in case of an individual and a Hindu undivided family) in India. Foreign income is not taxable in the hands of non-resident in India.

In the hands of resident but not ordinarily resident taxpayer, foreign income is taxable only if it is (a) business income and business is controlled wholly or partly from India, or (b) professional income from a profession which is set up in India. In any other case, foreign income is not taxable in the hands of resident but not ordinarily resident taxpayers.

8.4 Provisions illustrated

Different situations are covered in the table given below —

Nature of income	Reasons	Conclusions – Is it taxable in India for the assessment year 2022-23
		Resident9 or resident and Ordinarily resident10	Resident but not ordinarily resident10	Non-resident
1. Rental income of Rs. 36,000 is received in India on May 10, 2022 (it may accrue outside India or in India)	It is Indian income. Indian income is always taxable	Yes	Yes	Yes
2. Interest income of Rs. 46,000 accrues in India on March 31, 2023 (it may be received in India or outside India)	It is Indian income. Indian income is always taxable	Yes	Yes	Yes
3. Income of Rs. 56,000 is deemed to be received in India on April 20, 2022 (it may accrue outside India or in India)	It is Indian income. Indian income is always taxable	Yes	Yes	Yes
4. Income of Rs. 66,000 is deemed to accrue or arise in India during the previous year 2022-23 (it may be received in India or outside India)	It is Indian income. It is always taxable	Yes	Yes	Yes
5. Business income/professional income of Rs. 76,000 is received and accrued outside India during the previous year 2022-23 (business is controlled from outside India or profession is set up outside India)	It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer. It is not taxable in the case of a non-resident. Since it is business/profession income and business is controlled from outside India or profession is set up outside India, it is not taxable in the case of resident but not ordinarily resident taxpayer	Yes	No	No
6. In situation 5, suppose business is controlled from India or profession is set up in India	It is foreign income. Since it is business/professional income and the business is controlled from India or profession is set up in India, it is taxable in all cases except non-resident	Yes	Yes	No
7. Rental income or salary income or interest income of Rs. 86,000 is received outside India in the previous year 2022-23 and at the same time it accrues or arises outside India	It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer. It is not taxable in the case of non-resident. Since it is foreign income which is neither business income nor professional income, it is not taxable in the case of resident but not ordinarily resident	Yes	No	No
8. Gift11 of Rs. 2 lakh received outside India by an individual on November 6, 2022 from a friend.	It is foreign income. It is taxable in the case of resident and ordinarily resident taxpayer. It is not taxable in the case of non-resident. Since it is foreign income which is neither business income nor professional income, is not taxable in the case of resident but not ordinarily resident	Yes	No	No
9. Gift14 of Rs. 1 lakh received in Delhi by an individual on November 30, 2022 from a friend	It is Indian income. It is taxable	Yes	Yes	Yes
10. Income of Rs. 96,000 earned and received outside India in 2018-19 but later on remitted to India in 2022-23	This income pertains to the previous year 2018-19. It cannot be taxed at the time of remittance in 2022-23	No	No	No

9. Connotation of receipt of income

Income received in India is taxable in all cases irrespective of residential status of an assessee. The following points are worth mentioning in this respect:

9.1 Receipts vs. Remittance

The “receipt” of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in “receipt” at the other place.

• Conclusions – An assessee after receiving an income outside India cannot be said to have received the same again when he brings or remits the same to India. The position remains the same if income is received outside India by an agent of the assessee (maybe a bank or some other person) who later on remits the same to India. Income after the first receipt merely moves as a remittance of money. The same income cannot be received by the same person twice, once outside India and again within India.

9.2 Cash vs. Kind

It is not necessary that income should be received in cash. Income may be received in cash or in kind. For instance, value of a free residential house provided to an employee is taxable as salary in the hands of the employee though the income is not received in cash.

9.3 Receipt vs. Accrual

Receipt is not the sole test of chargeability to tax. If an income is not taxable on receipt basis, it may be taxable on accrual basis.

9.4 Actual receipt vs. Deemed receipt

It is not necessary that an income should be actually received in India in order to attract tax liability. An income deemed to be received in India in the previous year is also included in the taxable income of the assessee. The Act enumerates the following as income deemed to be received in India:

• Interest credited to recognised provident fund account of an employee in excess of 9.5 per cent.
• Excess contribution of employer in the case of recognised provident fund (i.e., the amount contributed in excess of 12 per cent of salary).
• Transfer balance.
• Contribution by the Central Government or any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD.
• Tax deducted at source.

10. Accrual of income

Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The words “accrue” and “arise” are used in contradistinction to the word “receive”. Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise.

11. Income deemed to accrue or arise in India

In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or arise outside India. Section 9 applies to all assessees irrespective of their residential status and place of business. The categories of income which are deemed to accrue or arise in India are as under:

11.1 Income from business connection [Sec. 9(1)(i)]

The following conditions should be satisfied —

• Condition one – The taxpayer has a “business connection” in India.
• Condition two – By virtue of “business connection”† in India, income actually arises outside India.

If the above conditions are satisfied, income which arises outside India because of “business connection” in India, is deemed to accrue or arise in India.

11.1.1 A Few Instances of Business Connection

Some illustrative instances of a non-resident having business connection in India are —

1. maintaining a branch office in India for the purchase or sale of goods or transacting other business;
2. appointing an agent in India for the systematic and regular purchase of raw material or other commodities or for the sale of the non-resident’s goods or for other business purposes;
3. erecting a factory in India where the raw produce purchased locally is worked into a form suitable for export abroad;
4. forming a local subsidiary company to sell the products of the non-resident parent company;
5. having financial association between a resident and a non-resident company, etc.

11.1.2 Operations Not Taken as Business Connections

The following operations do not amount to “business connection” –

• Where all operations are not carried out in India – If all business operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably attributable to the operations carried out in India.
• Purchase of goods for export – In the case of non-resident, no income shall be deemed to accrue or arise in India to him through or from operations which are confined to the purchase of goods in India for the purpose of export.
• Collection of news and views – No income arises to a non-resident from the activity of collection of news and views in India for transmission out of India.
• Shooting of cinematograph films in India – No income arises to a non-resident from the activity of shooting of any cinematograph film in India, if a few conditions are satisfied.
• Fund management activity – In the case of an “eligible investment fund”, the fund management activity carried out through an “eligible fund manager” acting on behalf of such fund shall not constitute business connection in India of the said fund [sec. 9A].
• Display of uncut and unassorted diamond in a notified special zone – In the case of a foreign company engaged in the business of mining of diamonds, no income shall be deemed to accrue or arise in India through or from the activities which are confined to the display of uncut and unassorted diamond (without any sorting or sale) in any special zone notified by the Central Government.

11.2 Income through or from any property, asset or source of income in India [Sec. 9(1)(i)]

Income from any property, asset or source of income in India is deemed to accrue or arise in India.

11.3 Income through the transfer of capital asset situated in India [Sec. 9(1)(i)]

Any capital gain, within the meaning of section 45, earned by a person by transfer of any capital asset situated in India, is deemed to accrue or arise in India.

• An asset or a capital asset (being any share or interest in a company or entity registered or incorporated outside India) shall be deemed to be and shall always be deemed to have been situated in India if the share or interest derives, directly or indirectly, its value substantially from the assets located in India¹⁶.

11.4 Income under the head “Salaries” [Sec. 9(1)(ii)]

Income of an individual which falls under the head “Salaries” is deemed to accrue or arise in India if service is rendered in India¹⁷.

11.5 Salary payable abroad by the Government to a citizen of India [Sec. 9(1)(iii)]

Salary received by an Indian citizen from the Government of India for rendering service outside India is deemed to accrue or arise in India. Such salary is taxable in the hands of concerned employee even if he is non-resident. However, allowances and perquisites received from the Government by an Indian citizen for rendering service outside India, are exempt from tax.

11.6 Dividend paid by an Indian company [Sec. 9(1)(iv)]

Dividend received by a shareholder from an Indian company is always deemed to accrue or arise in India.

11.7 Income by way of interest, royalty and technical fees [Sec. 9(1)(v)/(vi)/(vii)]

These are deemed to accrue or arise in India in the following cases –

Rule 1 – When received from Government – Interest, royalty or technical fees received from the Central Government/any State Government, is deemed to accrue or arise in India.

Rule 2 – When received from a person resident in India – Interest, royalty or technical fees received from a resident person, is deemed to accrue or arise in India in the hands of recipient. However, this rule is not applicable in the following cases –

a. if borrowed money is utilised by the payer for carrying on a business/profession outside India or for earning any income outside India; or

b. payment of royalty/technical fees pertains to a business/profession carried on by the payer outside India or earning any income outside India.

Rule 3 – When received from a non-resident – Interest, royalty or technical fees received from a non-resident, is deemed to accrue or arise in India in the hands of recipient, in the following cases –

a. borrowed money is utilised by the payer for carrying on a business/profession in India; or

b. payment of royalty/technical fees pertains to a business/profession carried on by the payer in India or earning any income in India.

Interest received outside India by a foreign bank from its branch in India – In the hands of recipient, income shall be deemed to accrue or arise in India.

11.8 Meaning of royalty

Broadly the term “royalty” means consideration received or receivable for transfer of all or any right in respect of certain rights, property or information. It also includes consideration for transfer of all (or any) right for use (or right to use) a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Further, it includes consideration in respect of any right, property or information, whether or not—

1. the possession or control of such right, property or information is with the payer;
2. such right, property or information is used directly by the payer;
3. the location of such right, property or information is in India.

Moreover, it includes consideration for use of any patent, invention, model, secret formula or process. The expression “process” includes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

11.9 Deemed accrual of gift of money to a non-resident/foreign company [Sec. 9(1)(viii)]

Clause (viii) is applicable if the following conditions are satisfied –

1. The payer is resident in India (or money is received from a person resident in India).
2. The recipient is –

– a non-resident/foreign company and a sum of money is received on or after July 5, 2019; or

– a resident but not ordinarily resident and a sum of money is received on or after April 1, 2023.

3. Income arises outside India.
4. The transaction is not covered by any of the exceptions specified by section 56(2)(x).

If these conditions are satisfied, money received (exceeding Rs. 50,000 per financial year) by the non-resident (or foreign company or resident but not ordinarily resident), shall be deemed to accrue or arise in India. However, section 9(1)(viii) covers only some of money and it does not cover gift of any other property (movable or immovable).

If these conditions are satisfied, money received by the non-resident/resident but not ordinarily resident/foreign company, shall be deemed to accrue or arise in India (even if it is received outside India).

11.10 Other points

Income accruing or arising outside India will not be deemed to be received in India, merely because it has been included in a balance sheet in India. Once income is included in the total income on the accrual basis, it cannot be included again on the receipt basis in the same or subsequent years.

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1. In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, not include the period given in rule 126. Under rule 126, the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.
2. This provision is subject to one exception. It is applicable from the assessment year 2021-22.
3. This provision is subject to one exception. It is applicable from the assessment year 2021-22.
4. According to the basic conditions.
5. For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India.
6. For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India.
7. However, this condition has been activated from the assessment year 2021-22, in a few cases.
8. Salary accrued to a non-resident seafarer for services rendered outside India on a foreign going ship (with Indian flag or foreign flag) shall not be included in the total income merely because the said salary has been credited in the NRE account maintained with an Indian bank by the seafarer – Circular No. 13/2017, dated April 11, 2017.
9. In case of a firm, an association of persons, a joint stock company and every other person.
10. In case of an individual and a Hindu undivided family.
11. If aggregate amount of gift (a sum of money or property) received by a person during a financial year exceeds Rs. 50,000, it is taxable as “income”. This rule is, however, not applicable if gift is received by an individual from a relative or at the time of marriage or by will
12. In case of a firm, an association of persons, a joint stock company and every other person.
13. In case of an individual and a Hindu undivided family.
14. If aggregate amount of gift (a sum of money or property) received by a person during a financial year exceeds Rs. 50,000, it is taxable as “income”. This rule is, however, not applicable if gift is received by an individual from a relative or at the time of marriage or by will
15. It includes even profession connection.
16. “Substantially” means not less than 50 per cent – DIT v. Copal Research Ltd [2014] 49 taxmann.com 125 (Delhi). The Finance Act, 2015 has amended the law with effect from assessment year 2016-17. Under the amended version, the share18 or interest of a foreign company or entity shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets,–

(a) exceeds the amount of Rs. 10 crore; and

(b) represents at least 50 per cent of the value of all the assets owned by the company or entity. If a foreign company declares dividend outside India, it cannot be deemed to accrue or arise in India even if the foreign company declaring dividend have substantial assets (held by it directly or indirectly) located in India. This rule is applicable even if the foreign company satisfies the conditions given above – Circular No. 4/2015, dated March 26, 2015.

17. Conversely, if service is rendered outside India, salary income cannot be deemed to be earned in India. However, this rule has an exception which is mentioned in para 27.5.
18. However, this provision is not applicable in the case of any asset or capital asset being investment held by a non-resident, directly or indirectly, in Category-I or Category-II Foreign Portfolio Investor under the SEBI (Foreign Portfolio Investors) Regulations, 2014.
19. Computed under sections 23 and 24.
20. If a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other sources of income by virtue of section 6(5).