Different Kinds of Incomes and Their Tax Implications

When your income tax return asks whether an income is “received in India” or “accrued in India,” it isn’t just legal jargon. These are two separate ideas under the Income Tax Act, and mixing them up can lead to under-reporting or over-reporting your tax liability. The Act sorts every rupee you earn into four categories, and which category your income falls into decides whether it lands in your taxable income at all.

Why income needs to be classified in the first place 🔗

India taxes people differently depending on their residential status. A resident and ordinarily resident (ROR) is taxed on income earned anywhere in the world, while a non-resident is taxed only on income connected to India. To apply this rule consistently, Section 5 of the Income Tax Act, 1961 lays down exactly which incomes count as “Indian” income for tax purposes, regardless of who earned them or where they physically reside.

Section 5 identifies four categories:

• Income received in India
• Income deemed to be received in India
• Income accruing or arising in India
• Income deemed to accrue or arise in India

Any one of these four is enough to bring an income within the scope of Indian taxation, no matter what your residential status is. The differences between residents and non-residents only show up when it comes to income earned outside India.

Income received in India 🔗

This is the most straightforward category. If money physically lands in your hands, your bank account, or on your behalf, in India, it is taxable in that year. It doesn’t matter where the income was earned or where the underlying work was done. A freelancer based in Dubai who gets a client’s payment credited directly to an Indian bank account has received income in India, and it’s taxable here regardless of where the freelancing work happened.

The place of receipt is decided by where the money first reaches the taxpayer, not where it’s later moved. If a US company pays into a US account and the funds are only transferred to India afterward, that’s not “receipt in India.” The first point of receipt is what counts.

Income deemed to be received in India 🔗

Section 7 of the Act lists specific incomes that the law treats as “received,” even though no actual cash has changed hands. These are mostly connected to retirement savings and employer contributions:

• Provident fund accretions: The annual increase in a recognised provident fund balance, to the extent specified under the Fourth Schedule, is treated as received income for that year.
• Transferred PF balances: When an employee’s provident fund balance moves from an unrecognised to a recognised fund, the transferred portion is deemed received.
• Pension scheme contributions: Employer or Central Government contributions to an employee’s account under the National Pension Scheme (Section 80CCD) fall under this category.

A common example: if the interest credited to your recognised provident fund account in a year exceeds the notified threshold, that excess is deemed to be received and taxed in that year itself, even though you can’t touch the money until retirement or withdrawal.

Why this distinction exists 🔗

Without this deeming fiction, taxpayers could indefinitely delay tax on employer-linked benefits simply because the cash isn’t withdrawn. Section 7 closes that gap by taxing the accretion as it happens rather than waiting for actual withdrawal.

Income accruing or arising in India 🔗

“Accrual” is a different concept from “receipt.” Income accrues when the legal right to receive it comes into existence, even if payment is still pending. If you complete a consulting assignment in Mumbai in March but the client only pays you in May, the income accrued in March, the moment your right to be paid was established.

The general test courts have applied is whether the income-generating activity, the transaction, the transfer of goods, the provision of a service, took place within Indian territory. If the source of the income is physically located in India, whether property, a business operation, or a contract performed here, the income is treated as accruing or arising in India.

Income deemed to accrue or arise in India 🔗

This is where things get more layered, and it’s the category most relevant to cross-border transactions. Section 9 of the Act extends India’s tax net to certain incomes even when the actual earning activity happens outside the country, as long as there is a sufficient economic connection to India. Key situations include:

• Business connection in India: Profits from a business are taxable in India to the extent they’re attributable to operations carried out in India, even for a foreign company operating through an Indian agent or branch.
• Assets situated in India: Capital gains from transferring a capital asset located in India are deemed to accrue in India. This also covers indirect transfers, such as selling shares of a foreign company whose value is substantially derived from Indian assets.
• Salary for services rendered in India: Even if the salary is paid abroad, if the underlying work was performed in India, it’s taxable here.
• Income from property, interest, royalty, and fees for technical services: These are deemed to accrue in India when paid by the government, an Indian resident, or when connected to a business or profession carried out in India, subject to specific exceptions.

The Act also lists a few narrower cases that count as Indian income, such as purchases made in India for export purposes, news collection by foreign media agencies operating in India, and the shooting of foreign films within the country under notified conditions.

A quick example 🔗

Suppose a US-based client pays an Indian freelance software developer for a project entirely built and delivered from Bengaluru. Even though the client and the payment source are outside India, the income accrues in India because that’s where the actual work, and hence the source, is located. This is different from mere “deeming,” but it illustrates how closely accrual is tied to where economic activity actually happens.

How residential status changes what gets taxed 🔗

All four categories above apply to everyone. What differs by residential status is whether foreign income, income that falls outside all four categories, also gets added to your Indian tax bill.

This is why RORs are taxed on their global income, while RNORs and non-residents are taxed largely on their India-linked income, with RNORs getting a narrow additional exception for India-controlled businesses. The four categories from Section 5 form the baseline that applies to every taxpayer; residential status only decides how much beyond that baseline gets added.

Avoiding double counting 🔗

One useful safeguard built into Section 5 is Explanation 2, which clarifies that once an income has been included in your total income on an accrual basis, it cannot be taxed again when it’s actually received. Similarly, Explanation 1 clarifies that income earned outside India doesn’t become “received in India” merely because it shows up in a balance sheet prepared in an Indian office. These clarifications prevent the same income from being taxed twice under two different heads of the same section.

Why this matters for accurate tax reporting 🔗

Getting these categories right isn’t just academic. Misclassifying a foreign remittance as “received” income when it was actually accrued earlier can lead to reporting it in the wrong assessment year. Overlooking a deemed accrual, like salary for work done in India but paid overseas, can result in under-reporting and potential scrutiny. For students studying tax law and for practitioners filing returns, the ability to correctly trace where and when an income first became taxable is the foundation of accurate compliance.

What do you think? If a resident Indian works remotely for a foreign company from a hill station in Himachal Pradesh but the company pays into a US account that’s later transferred to India, which category would that income fall under, and would your answer change if they were a non-resident instead?

References

1. https://www.incometaxindia.gov.in/w/residential-status
2. https://www.incometaxindia.gov.in/w/section-5-61
3. https://www.incometaxindia.gov.in/w/section-7-57
4. https://sortingtax.com/income-deemed-to-be-received-in-india-section-7/
5. https://www.incometaxindia.gov.in/w/income-deemed-to-accrue-or-arise-in-india
6. https://taxsummaries.pwc.com/india/individual/taxes-on-personal-income