Section 9 of the Income Tax Act, 1961 – Income Deemed to Accrue or Arise in India

Shreya Patel

19 Jul, 2023

The most critical law component controlling India’s taxation system is the Income Tax Act 1961. Section 9 of this Act is crucial because it establishes the amount of Income considered to accrue or arise domestically. The tax liability of individuals and companies under Indian income tax rules is primarily determined by Section 9 of the Income Tax Act 1961. It primarily talks about the concept of Income that is considered to accrue or arise in India, even though it is obtained outside the country’s borders. Different taxpayer types, including residents, non-residents, and residential but non-ordinary residents, are subject to the provisions of Section 9. It guarantees that these taxpayers’ Income, whether inside or outside of India, is subject to taxation under the applicable Act requirements.

Co-relation between Section 5 and Section 9 of the Income Tax Act, 1961

The Income Tax Act mandates that foreign businesses and non-resident individuals that receive Income in India must pay taxes on that Income. This is true regardless of whether you receive money from India or whether it is assumed that you do. It also covers any income you make in India or assumed to have been made there.

The Act categorizes Income into several groups and stipulates which forms of revenue are under specific conditions deemed to have been obtained in India. These guidelines assist in determining if your Income is liable to Indian taxes. It’s vital to remember that unless it fits under the purview of the abovementioned provisions, non-residents cannot have their Income taxed in India. According to Section 9(1) of the Income Tax Act, Income must be deemed generated in India to be liable to taxes there. The factors for assessing whether Income has an Indian source and should be taxed in India are outlined in this section.

Four Main Elements of Section 9

Section 9 of the Act deals with four main elements –

• Section 9’s clause states that all Income derived from assets or properties in India is taxable. This indicates that the Income derived from the property or assets will be taxed if they are physically present in India. This rule is predicated on India’s asserting sovereignty over the assets and properties inside its boundaries.
• Income derived from an Indian business connection is likewise taxable. This clause emphasizes that regardless of where the expenses or investments were made, if the Income is produced from activities performed in India, it will be taxed. A commercial relationship can be developed in several ways, including offering services, owning real estate, holding stock, or possessing rights to earnings, copyrights, or patents.
• Under Section 9, you must pay taxes on any income derived from assets or properties in India. Everyone must follow this law, including foreign companies, non-residents, and Indian individuals who get Income from assets or properties in India.
• The provision further stipulates that regardless of the type of asset sold or the method of sale, all profits from selling capital assets in India will be taxed. It’s crucial to remember that this regulation only applies to transactions on or after April 1, 1962.

What is the residential status?

Residential status, especially in the context of the Income Tax Act of 1961 in India¹, refers to the classification of a taxpayer based on their presence and duration of stay in a country. The three primary kinds of residential status this statute recognizes are resident, resident not ordinarily resident, and non-resident.

• A taxpayer is said to be a resident if they satisfy one of the following requirements:
• They spent at least 182 days in India the previous year.

OR

• They have spent at least 60 days in India this fiscal year and have lived there for at least 365 days in the four years prior.

Residents who fulfil both of the following requirements fall under the category of “Resident, Not Ordinarily Resident”:

• They have lived in India for at least two of the last ten years.

AND

• They spent at least 730 days in India during the previous seven years.

Non-Resident Indian (NRI): A taxpayer is classified as an NRI for tax purposes if they do not meet the requirements for either resident or resident not ordinarily resident.

The taxpayer’s tax liabilities and duties are impacted by the decision of their residence status, making it essential.

Section 9(2) Deemed Income

The following Income is said to be incurred or arisen in India for taxation:

1. Income from Business Connection in India: Business Connection can be:
   1. Branch office situated in India
   2. A subsidiary of a foreign holding company situated in India
   3. Agent or organization of Non-Residents

Any profit earned by non-residents through the connection from such business is said to have been incurred within India and shall be taxable under the Income Tax Act, 1961.

• Income from assets or property situated in India:  Any income earned from any property, whether movable, immovable, tangible, or intangible, situated within India is said to be incurred within India for the levy of tax thereupon. For example, Mr X lives in Beijing. He gets the royalty for the book published in India. Such royalty earned is taxable in India as it is deemed to be accrued in India irrespective of whether it is received in or outside India.
• Income from transfer of Capital Assets situated in India: Income arising from capital assets is said to have incurred in India if such an asset is situated in India, irrespective of the transferor’s or transferee’s residential status.
• Salary earned for the service rendered within India: Any income earned as salary for the service rendered in India, irrespective of the actual payment of such salary, is made within or outside India.
• Salary earned for services rendered outside India: Salary paid by the government of India to any Indian citizen for rendering services outside India shall be considered to have been incurred in India.
• Interest Income: Any interest paid by the following is taxable in the hands of the recipient in India:
  • By Government; or
  • By Indian residents except when the interest is paid in connection with the money borrowed for using it in a business or profession situated outside India.
  • By NRIs, provided such interest shall be in connection with the money borrowed for using it in the business or profession in India.
• Royalty Income: Any royalty paid by the following is taxable in the hands of the recipient of such Income within India:
  • By Government; or
  • By Indian residents, except the royalty is paid in connection with the right or information used in the business or profession situated outside India.
  • By NRIs, provided such royalty shall be in connection with the right or information used in the business or profession in India.
• Fee for technical services: Fees paid for rendering technical services is taxable in the hands of the recipient of such Income in India if paid by the following:
  • By Government; or
  • By Indian residents, except the service is rendered in connection with the business or profession situated outside India.
  • By NRIs, provided such service shall be utilized in connection with the business or profession in India.

Conclusion

In conclusion, Section 9 of the Income Tax Act of 1961 is essential to India’s taxation structure. It defines the rules for calculating Income deemed to accrue or arise within the country, regardless of its source. The section covers various subjects, including Income from properties or assets in India, Income through connections in the business worldwide, and Income from the sale of capital assets. It also specifies the criteria for determining a taxpayer’s residence status, impacting their tax obligations. Individuals and companies to abide by Indian income tax laws and satisfy their tax duties; they must understand Section 9

FAQs

1. https://incometaxindia.gov.in/pages/acts/income-tax-act.aspx