Direct Tax Laws & International Taxation · Non Resident Taxation

Income Deemed to Accrue or Arise in India (CA Final DT)

Updated 5 October 2026 · Fact-checked

Income deemed to accrue or arise in India is income the Income-tax Act, 2025 treats as Indian even if it is earned or paid abroad. It chiefly covers business connection, significant economic presence, Indian assets and sources, salary, interest, royalty and fees. To solve a question, identify the income type, test the condition, then tax only the attributable part.

Understand Income Deemed to Accrue or Arise in India

A non-resident is taxed in India only on income received in India, income that accrues or arises in India, and income deemed to accrue or arise in India. The deeming rules widen the second category. They pull in income that has a real link with India even when the money is earned or paid outside India.

The main limb is business connection. If a non-resident does business through a link with India, the income is taxed here. The link is often a dependent agent in India who habitually concludes contracts for the non-resident, habitually keeps stock in India for delivery, or habitually secures orders mainly or wholly for the non-resident. An independent agent acting in the ordinary course of his own business, who is not working wholly or almost wholly for that non-resident, does not create a business connection.

The second limb is significant economic presence (SEP). Here a non-resident with no physical presence can still create a business connection. SEP arises from transactions in goods, services or property with persons in India (including the download of data or software) where the payments in the tax year exceed a notified amount. It also arises from systematic and continuous soliciting of business or interaction with a notified number of users in India. The test applies whether or not the non-resident has a place of business, an agreement or a residence in India.

The third limb is income through or from any asset, property or source of income in India, or through the transfer of a capital asset situated in India. This includes indirect transfers: the sale of shares of a foreign company that derive their value substantially from assets in India.

Other deemed items include salary. Two cases are covered. First, salary for services rendered in India, which includes any rest period or leave period that falls between services in India. Second, salary payable by the Government to a citizen of India for services rendered outside India.

Interest, royalty and fees for technical services (FTS) are also deemed to accrue in India. This applies where they are payable by the Government, or by a resident, except where the money is used for a business or profession carried on outside India or for earning income from a source outside India. It also applies where they are payable by a non-resident, but only if the money is used for a business or profession carried on in India or for earning income from a source in India.

Dividend paid by an Indian company is deemed to accrue or arise in India, including when it is paid outside India. The conditions about use of the money for a business or source belong to interest, royalty and FTS, not to dividend.

Always remember the limit. Under business connection and SEP, only the income reasonably attributable to the Indian operations, transactions or activities is taxed. Also, if a tax treaty gives better relief, the non-resident can choose the treaty. For SEP in particular, the treaty position usually matters, because treaties generally need a permanent establishment.

Key rules to remember

Scope for a non-resident: Taxable = Income received in India + Income accruing or arising in India + Income deemed to accrue or arise in India; Foreign income not received in India and not deemed to accrue in India is outside the scope for a non-resident.
Attribution under business connection: Taxable income = Income reasonably attributable to operations carried out in India; Not the whole profit of the non-resident. The same limit applies to SEP, where only income attributable to the Indian transactions or activities is taxed.
Business connection through an agent: Dependent agent + (authority to conclude contracts OR stock for delivery OR securing orders mainly or wholly for the non-resident) + habitual exercise = business connection; An independent agent acting in the ordinary course of business, not working wholly or almost wholly for that non-resident, does not create it.
Excluded operations: Operations confined to purchase of goods in India for export = no business connection; Learn this exclusion for case questions. Other specified exclusions exist, so check the facts given.
SEP test: SEP = (Transactions in goods, services or property with payments above the notified amount) OR (Systematic and continuous soliciting or user interaction above the notified number); Thresholds are notified by the Government. Use the figure given in the question and do not rely on memory.
Indirect transfer: value test: Foreign shares deemed Indian if fair market value of Indian assets owned by the foreign company > ₹10 crore AND Indian assets ≥ 50% of the value of all assets owned by the foreign company; Both conditions must be met, and both are tested on the assets owned by the foreign company, not on the seller's holding. Exemption: a transferor who, together with its associated enterprises, neither holds the right of management or control nor holds voting power or share capital exceeding 5% of the foreign company is outside this rule. A holder above 5%, or one with management or control, is not excluded. Other statutory exemptions also exist, so check the facts given.
Indirect transfer: taxable portion: Taxable in India = Gain on foreign shares × (Fair market value of Indian assets ÷ Fair market value of all assets); This is the statutory proportion: only the income attributable to the assets in India is taxed. Use the valuations given in the question.
Salary: Salary payable for services rendered in India = deemed to accrue in India; Salary payable by the Government to a citizen of India for services rendered outside India = deemed to accrue in India; Rest period or leave that falls between services in India is also treated as services rendered in India. The second limb applies only to salary payable by the Government to an Indian citizen for services outside India.
Interest, royalty and FTS: Payable by the Government or a resident = deemed to accrue in India, except where used for a business or profession carried on outside India or for earning income from a source outside India; Payable by a non-resident = deemed to accrue in India only where used for a business or profession carried on in India or for earning income from a source in India; Test who the payer is first, then how the money is used. Use the facts given in the question.
Dividend: Dividend paid by an Indian company = deemed to accrue or arise in India; This holds even when the dividend is paid outside India. The conditions about use of the money for a business or source apply to interest, royalty and FTS, not to dividend.

How to solve Income Deemed to Accrue or Arise in India questions

Use the same six-step routine on every question. It keeps your answer in provision, facts and conclusion form.

1Fix the status first. The deeming rules matter mainly for a non-resident, so confirm residential status before anything else.
2Name the income and the head it falls under: business profit, capital gain, interest, royalty, FTS, salary or dividend.
3Pick the correct limb of deemed accrual: business connection, SEP, asset or source in India, indirect transfer, or a specific item like salary, dividend paid by an Indian company (even if paid outside India), or interest, royalty and FTS.
4Test the conditions with the facts given. For an agent, check authority, stock and orders, and whether the agent is independent. For SEP, compare payments or users with the notified limit. For indirect transfer, check the ₹10 crore and 50% tests on the foreign company's assets and the exemption (no management or control and not above 5% of voting power or share capital). Other statutory exemptions exist, so check the facts.
5Check the exclusions and treaty. Look for purchase for export, and check if a DTAA applies and whether a permanent establishment exists.
6Attribute and conclude. Tax only the part reasonably attributable to India, state the amount and give the final conclusion.

Quickest way: Three-gate check for deemed income

When to use it: Use it for MCQs and for the opening lines of a written answer when time is short.

Gate 1: Is the person a non-resident? If not, the deeming rules are rarely the issue.
Gate 2: Does the income have an Indian link: agent or presence in India, Indian users or payments over the limit, Indian asset or payer, services rendered in India, or dividend paid by an Indian company?
Gate 3: Is any exclusion or treaty benefit available? If not, tax only the attributable part and state the amount.

Common mistakes in Income Deemed to Accrue or Arise in India

Taxing the entire profit of the non-resident once a business connection exists.
Students remember the existence of a business connection but forget the attribution limit.
Fix: Write the rule first: only income reasonably attributable to operations carried out in India is deemed to accrue. Then compute that part.
Treating every agent in India as creating a business connection.
The word agent triggers an automatic answer.
Fix: Check whether the agent is dependent, whether authority to conclude contracts or stock or order securing is habitual, and whether an independent agent in ordinary course is involved.
Applying SEP without checking the notified threshold, or ignoring the treaty.
Students think SEP means all digital income is taxable.
Fix: Compare payments or users with the notified figures from the question. Then check if a treaty applies, because a treaty generally needs a permanent establishment.
Taxing indirect transfers when only one of the two value tests is met.
Students recall the ₹10 crore figure or the 50% figure but not both.
Fix: Write both conditions and test each with numbers on the foreign company's assets. Also check the exemption (no management or control and not above 5%) before computing.
Taxing the whole gain on a foreign share sale instead of the proportion linked to Indian assets.
The question gives the total gain and students tax all of it.
Fix: Multiply the gain by the fair market value of Indian assets divided by the fair market value of all assets, using the values given.
Forgetting that purchase of goods in India for export is excluded.
The exclusion is a short statement that is easy to miss in a long case.
Fix: Scan the facts for operations confined to purchase for export and conclude no business connection from those operations.

Worked examples

Example 1

Zentra Inc., a non-resident company, sells machinery to Indian customers. Its Indian representative, Mr. Rao, works only for Zentra, negotiates prices and habitually signs sale contracts on its behalf. Profit on India sales for the tax year is ₹60,00,000. Of this, 25% is reasonably attributable to the operations carried out in India. State the taxability.

Show the solution

Zentra is a non-resident, so only Indian-source and deemed Indian income is taxable.
Mr. Rao works only for Zentra and habitually exercises authority to conclude contracts. He is a dependent agent, not an independent agent in the ordinary course of business.
That creates a business connection in India, so income from it is deemed to accrue or arise in India.
Only income reasonably attributable to the operations in India is taxed, not the whole profit.
Attributable income = ₹60,00,000 × 25% = ₹15,00,000.

Answer: Business connection exists through the dependent agent. ₹15,00,000 is deemed to accrue or arise in India and is taxable. Any treaty relief must be checked separately.

Example 2

Oaktree Holdings, a foreign company, owns 20% of the share capital and voting power of Delta Ltd., a foreign company. The fair market value of all assets owned by Delta is ₹200 crore, of which assets in India are worth ₹120 crore. Oaktree sells all its Delta shares and earns a gain of ₹50 crore. State how much is deemed to accrue in India under the indirect transfer rule.

Show the solution

Test 1: The fair market value of Delta's Indian assets is ₹120 crore, which is more than ₹10 crore. Satisfied.
Test 2: ₹120 crore ÷ ₹200 crore = 60%, which is at least 50%. Satisfied.
Check the exemption: it needs a transferor who, with its associated enterprises, neither holds management or control nor holds voting power or share capital exceeding 5%. Oaktree holds 20%, which exceeds 5%, so the exemption is not available.
The shares are deemed to derive their value substantially from assets in India. The gain is taxable only in proportion to the Indian assets.
Taxable portion = ₹50 crore × (₹120 crore ÷ ₹200 crore) = ₹50 crore × 60% = ₹30 crore.

Answer: ₹30 crore of the gain is deemed to accrue or arise in India, subject to any treaty relief and the valuation rules in the law.

Exam tips

Write the provision in one line before applying it. Examiners give marks for the rule, the application and the conclusion separately.
In case-scenario MCQs, look for the trigger words: dependent or independent agent, habitually, notified threshold, purchase for export and substantially from assets in India.
Use the numbers given in the question for SEP thresholds. Do not quote figures from memory, because they are notified and can change.
For indirect transfer, always show both value tests and the proportion workings. Partial marks are given for steps.
Mention the treaty at the end of the answer when the question names a country or a DTAA. Keep the point short.

Practice questions from Non Resident Taxation

Income Deemed to Accrue or Arise in India in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Income Deemed to Accrue or Arise in India: frequently asked questions

What does income deemed to accrue or arise in India mean?

It is income that the Act treats as Indian income even if the money is earned or paid outside India. It applies mainly to non-residents. Examples are income through a business connection, SEP, Indian assets, salary for services in India, and dividend paid by an Indian company, even when paid outside India.

What is significant economic presence under the Income-tax Act, 2025?

It is a deemed business connection for a non-resident who has no physical presence in India. It arises from transactions with Indian persons above a notified amount, or from systematic soliciting or user interaction above a notified number. Only the income attributable to those transactions or activities is taxed.

Is the whole profit of a non-resident taxed in India under business connection?

No. Only the income reasonably attributable to the operations carried out in India is taxed. This is one of the most tested points.

How is an indirect transfer taxed?

If shares of a foreign company derive their value substantially from Indian assets, the gain is taxed in India in proportion to the fair market value of those assets. The foreign company's Indian assets must exceed ₹10 crore and be at least 50% of the value of all its assets. A transferor who, with associated enterprises, neither holds management or control nor holds more than 5% of voting power or share capital is excluded. Other statutory exemptions also exist.

Can a tax treaty override the deemed accrual rules?

A non-resident can opt for the Act or the treaty, whichever is more beneficial. Treaties usually need a permanent establishment before business profits are taxed in India. So check the treaty in every cross-border case.