Taxation of Income Deemed to Accrue or Arise in India

A non-resident who has never set foot in India can still owe tax here. That sounds odd until you realise Indian tax law taxes income on the basis of source, not just on the basis of who receives it or where they receive it. Section 9 of the Income-tax Act is the provision that draws this line. It lists the categories of income that are treated, by legal fiction, as accruing or arising in India, even when the money is paid or received abroad. For B.Com students studying residential status and tax liability, this is the section that connects the dots between “who is taxed” and “what actually gets taxed.”

What does deemed to accrue or arise really mean? 🔗

Under the Income-tax Act, income becomes taxable in a country if it accrues there, arises there, or is received there. A resident is taxed on global income, while a non-resident is taxed only on income that is received in India or that accrues or arises in India. The word deemed does the heavy lifting here. Even if income is generated outside India in a strict accounting sense, Section 9 can still pull it into the Indian tax net if it has a strong enough economic connection to India. This prevents companies and individuals from structuring transactions to shift profits out of India while still economically exploiting the Indian market.

The provision matters for both residents and non-residents, but it is especially significant for non-residents and foreign companies, since it is often the only route through which their India-linked earnings become taxable here.

Income from a business connection in India 🔗

The broadest category under Section 9 covers income accruing directly or indirectly through a business connection in India, or through any property, asset, or source of income situated in India, or through the transfer of a capital asset located in India. A business connection typically exists when a non-resident carries on business activity in India through an agent, branch, or representative who habitually concludes contracts on the non-resident’s behalf or plays the principal role leading to such contracts.

What exactly counts as a business connection? 🔗

Genuinely independent brokers, general commission agents, or agents who deal at arm’s length are usually excluded from this definition. However, if such an agent works mainly or wholly for one non-resident principal, the exclusion no longer applies, and a business connection is deemed to exist. There are also carve-outs built into the law: income from operations confined to the purchase of goods in India for export is not taxed, and a foreign news agency collecting news in India purely for transmission abroad is similarly excluded. Where a business does not carry out all its operations in India, only the portion of income reasonably attributable to the Indian operations is taxed here, not the entire global profit of the enterprise.

Significant economic presence: taxing the digital economy 🔗

Traditional business connection rules assumed some physical footprint, like an office or an agent. That assumption breaks down for digital businesses that earn substantial revenue from Indian users without any physical presence. To address this, the law introduced the concept of significant economic presence (SEP), which extends the definition of business connection to cover virtual and remote transactions. A non-resident is treated as having an SEP in India if transactions in goods, services, or property with Indian persons exceed a prescribed payment threshold, currently set at an aggregate of ₹20 million a year, or if the non-resident systematically solicits business or interacts with at least 300,000 users in India. This applies regardless of whether the non-resident has any residence, office, or employees in India.

The consequence can be significant. Indian tax law treats the entire profit attributable to such presence as taxable, and this can extend to indirect revenue streams such as advertising targeted at Indian users or income from selling data collected from Indian users. That said, only the income reasonably attributable to the Indian transactions or interactions is taxed, not the company’s worldwide earnings.

Income from property, assets, and capital gains situated in India 🔗

Any income arising from property located in India, whether it is rental income, income from an asset, or income from any other source of income situated in India, is deemed to accrue or arise here. This extends to capital gains. If a non-resident transfers a capital asset situated in India, such as land, a building, shares of an Indian company, or business assets located in India, the resulting capital gain is taxable in India.

The law also addresses a more complex situation: indirect transfers. If a non-resident transfers shares or interest in a foreign company, and that foreign company derives a substantial part of its value from assets located in India, the gain is still deemed to accrue in India. This provision closes the loophole where a foreign holding structure could otherwise be used to avoid Indian tax on assets that are, in substance, Indian.

Salary income linked to India 🔗

Salary earned for services rendered in India is deemed to accrue or arise in India, regardless of where the employer is based or where the salary is actually paid. This also covers salary relating to periods of leave connected with such Indian service. There is a reverse situation too: salary paid by the Government of India to an Indian citizen for services rendered outside India is deemed to accrue in India, ensuring that government employees posted abroad remain within the Indian tax net for that income, subject to specific exemptions for certain allowances.

Dividend, interest, royalty, and fees for technical services 🔗

These four income streams are where cross-border tax planning gets the most attention, because they are commonly paid by Indian businesses to foreign lenders, licensors, and consultants.

Dividend from Indian companies 🔗

Any dividend paid by an Indian company is deemed to accrue or arise in India, irrespective of where the shareholder is located or where the dividend is actually paid out. The residence of the paying company, not the recipient, is what triggers the deeming provision here.

Interest payments 🔗

Interest payable by the Government of India, or by a resident, is generally deemed to accrue in India. There is a fairness-driven exception: if the resident payer borrowed the money for a business or profession carried on outside India, or to earn income from a source outside India, the interest is not deemed Indian income. On the flip side, interest payable by a non-resident is deemed to accrue in India only if it relates to money borrowed and used for a business or profession carried on in India, or to earn income from an Indian source. A special rule also applies to foreign banks: interest paid by the Indian branch of a foreign bank to its own head office or another branch abroad is deemed to accrue in India, since the Indian branch is treated as a distinct taxable entity for this purpose.

Royalty and fees for technical services 🔗

Royalty covers payments for the use of patents, trademarks, copyrights, designs, secret formulas or processes, and industrial, commercial, or scientific equipment, including software. Fees for technical services (FTS) cover payments for managerial, technical, or consultancy services, including the provision of technical personnel. Both are deemed to accrue in India when payable by the Government, by a resident, or by a non-resident, following broadly the same use-based test applied to interest: payments by a resident are taxable in India unless the right or service was used for a business outside India, while payments by a non-resident are taxable in India only if the right or service was used for an Indian business or to earn Indian income. These payments are usually taxed on a gross basis through tax deduction at source, with the applicable rate often reduced under a Double Taxation Avoidance Agreement (DTAA) between India and the recipient’s home country.

Built-in exceptions that keep the rule fair 🔗

Section 9 is designed to prevent tax avoidance, not to tax every rupee that touches India. That is why it carries several carve-outs alongside the deeming rules. A non-resident purchasing goods in India purely for export earns no deemed Indian income from that activity. Foreign news agencies collecting news in India for transmission abroad, and foreign film production units shooting in India under specified conditions, are similarly excluded from certain deeming provisions. Business income is taxed only to the extent it is reasonably attributable to Indian operations, so a multinational with a small Indian office is not taxed on its entire worldwide profit. These exceptions matter as much as the deeming rules themselves, because they show that the objective is fairness in tax collection, not blanket taxation of anything connected to India.

It is also worth remembering that a DTAA can override or moderate these domestic provisions. Where India has a tax treaty with the recipient’s country, business profits are typically taxable in India only if the foreign enterprise has a permanent establishment here, and payments like royalty or FTS often attract a lower treaty rate than the rate prescribed under domestic law.

A quick note on the recent legislative update 🔗

Students should be aware that the Income-tax Act, 1961 has been replaced by the Income-tax Act, 2025, which took effect from 1 April 2026. The new law reorganises the old Section 9(1)(i) to (viii) framework into a set of restructured sub-sections, but the underlying principles covered above, business connection, significant economic presence, property and capital asset income, salary, dividend, interest, royalty, and fees for technical services, continue largely unchanged in substance. For exam purposes, understanding the categories and the logic behind them matters more than memorising clause numbers, since the new Act was drafted specifically to simplify and modernise the existing framework rather than to change its core policy.

What do you think? 🔗

What do you think? If a foreign company earns advertising revenue from Indian users but has no office, employees, or servers in India, should that income be taxed here purely on the strength of its user base? And do you think the balance between taxing India-linked income and avoiding double taxation through DTAAs is currently well calibrated for a digital-first global economy?

References

1. https://www.incometaxindia.gov.in/w/income-deemed-to-accrue-or-arise-in-india
2. https://taxsummaries.pwc.com/india/corporate/corporate-residence
3. https://www.internationaltaxreview.com/article/2a6a92avgpjm30oby5pts/significant-economic-presence-in-indian-tax-law-how-significant-will-it-be
4. https://www.nexdigm.com/doing-business-in-india/foreign-companies.php
5. https://www.indialawoffices.com/legal-articles/income-tax-act-2025