Direct Tax Laws & International Taxation · Non Resident Taxation

Special Rates and Presumptive Taxation of Non-Residents

Updated 5 October 2026 · Fact-checked

Non-residents with no permanent establishment link pay tax at flat special rates, on gross income, on royalty, fees for technical services, dividend and interest, usually 20% before surcharge and cess. Shipping, aircraft and oil-services businesses use presumptive profit percentages instead of accounts. Identify the income, apply the rate, check the treaty, then add surcharge and cess.

Understand Special Rates and Presumptive Taxation of Non-Residents

A non-resident is taxed in India only on income that is received in India or accrues or arises, or is deemed to accrue or arise, in India. Passive income such as royalty, fees for technical services (FTS), dividend and interest is easy to earn from India without any office here. Computing expenses against it would be hard for the tax department. So the law taxes it at a flat special rate on the gross amount.

Under these special rates, you do not deduct expenses and you do not claim Chapter VI-A type deductions on that income. The usual headline rate for royalty, FTS, dividend and interest of a non-resident is 20%, with a lower rate (such as 5%) for specified interest, for example on certain infrastructure debt or bonds. Always confirm the rate list for tax year 2026-27 in your study material, because the rate is the whole answer in many questions.

The special rate applies when the income is not effectively connected with a permanent establishment (PE) in India. If the royalty or FTS is effectively connected with an Indian PE, it is taxed as business profits on a net basis at the normal rate for that person (35% for a foreign company, slab or 30% regime for a non-corporate). Always test for PE first.

Some non-resident businesses are taxed on a presumptive basis. You do not look at their books. You apply a fixed percentage to a defined receipt and treat that as profits and gains. The common cases are shipping (7.5% of freight and similar receipts), aircraft operations (5%) and services or facilities in the prospecting or extraction of mineral oil (10% of the amount paid or payable). No further expense or deduction is allowed against the presumed income.

Finally, the tax treaty may give a lower rate. A non-resident can choose the domestic law or the treaty, whichever is more beneficial, but must hold the documents (such as a tax residency certificate) to claim treaty relief. Surcharge and 4% health and education cess are added on top of the base rate.

Key rules to remember

Special rate on gross income: Tax = Gross income × special rate (no expenses deducted); Applies to royalty, FTS, dividend and interest of non-residents not connected with an Indian PE. Usual rate 20%; confirm the rate table for tax year 2026-27.
Shipping business presumptive income: Deemed profits = 7.5% × (freight/demurrage/handling receipts); Receipts: amount paid or payable to the non-resident for carriage from any port in India, plus amount received or deemed received in India for carriage from any place. Taxed at the rate for that person.
Aircraft business presumptive income: Deemed profits = 5% × (amount paid/payable in India + amount received/deemed received in India); Covers carriage of passengers, livestock, mail or goods from India by a non-resident aircraft operator.
Oil prospecting services presumptive income: Deemed profits = 10% × amount paid/payable for services and facilities in prospecting for or extraction of mineral oil; Includes amount received or deemed received in India. The 10% is the deemed profit, not the tax rate.
Effective tax (before surcharge and cess): Tax = Presumptive income × normal rate for the person; Example: 7.5% × 35% = 2.625% of gross shipping receipts for a foreign company.
Final tax payable: Base tax + surcharge (if any) + cess at 4% on (tax + surcharge); Apply surcharge as per the rate table for that person and income level.
Treaty choice: Tax = lower of domestic-law tax and treaty tax; Treaty benefit needs documents such as a tax residency certificate. The treaty can only reduce tax, not increase it.

How to solve Special Rates and Presumptive Taxation of Non-Residents questions

Use this order for any question on non-resident special rates or presumptive tax. It keeps you from using the wrong method.

1Confirm the person is a non-resident and that the income is taxable in India (received in India or accrues or is deemed to accrue in India).
2Classify the income: royalty, FTS, dividend, interest, or business of shipping, aircraft or oil services.
3Check for a PE. If the income is effectively connected with an Indian PE, tax it as business profits on a net basis, not at the special rate.
4For special-rate income, take the gross amount, apply the rate and ignore all expenses and deductions.
5For presumptive business, build the receipt base carefully (both India-source receipts and amounts paid or payable), apply 7.5%, 5% or 10%, then apply the normal rate for the person.
6Check whether the treaty gives a lower rate and whether the documents are available. Take the more beneficial position.
7Add surcharge, if applicable, then 4% cess. State the final tax and the TDS or return implication in one line.

Quickest way: Rate-and-base shortcut

When to use it: Use it for numerical questions with a time limit of about 8 to 10 minutes.

Underline each income and tag it SR (special rate), PE (business) or PRES (presumptive).
SR items: add the gross amounts and multiply by 20%, or the specific lower rate if the question says so.
PRES items: base × 7.5%, 5% or 10%, then multiply by the person's tax rate (35% for a foreign company).
Strike out expenses the question gives. They are almost always a trap for SR and PRES items.
Add surcharge only if the income crosses the threshold. Then add 4% cess and box the answer.

Common mistakes in Special Rates and Presumptive Taxation of Non-Residents

Deducting expenses from royalty, FTS or interest before applying 20%.
Students are used to computing net business income.
Fix: For special-rate income, tax the gross amount. Write 'no deduction allowed' in your answer to earn the mark.
Applying the special rate when the royalty or FTS is effectively connected with an Indian PE.
Students stop reading after seeing the word 'royalty'.
Fix: Check the PE fact first. If the income is attributable to the PE, compute net business income at the normal rate.
Treating the 7.5% for shipping as the tax rate.
The percentage looks like a rate.
Fix: It is the deemed profit. Apply the person's normal rate (35% for a foreign company) to get tax.
Leaving out freight received outside India for carriage from an Indian port, or freight received in India for carriage into India.
Students look only at where the money was received.
Fix: Include amounts paid or payable for carriage from any port in India, wherever received, plus amounts received or deemed received in India for carriage from any place.
Ignoring the treaty or applying it automatically without conditions.
The rule that the more beneficial of treaty and domestic law applies is half remembered.
Fix: State that the treaty rate applies only if lower and only if the required documents (such as a tax residency certificate) are available.
Forgetting cess or applying surcharge when income is below the threshold.
Students add surcharge by habit.
Fix: Check the income level against the surcharge table, then always add 4% cess on tax plus surcharge.

Worked examples

Example 1

Zeta Inc., a foreign company with no PE in India, earns the following from Indian payers in tax year 2026-27: royalty ₹40,00,000, FTS ₹10,00,000 and dividend ₹5,00,000. It claims expenses of ₹8,00,000 against these receipts. No treaty benefit is available. Compute the tax payable.

Show the solution

Zeta Inc. is a non-resident with no PE, so royalty, FTS and dividend are all taxed at the special rate of 20% on gross income.
Gross income = ₹40,00,000 + ₹10,00,000 + ₹5,00,000 = ₹55,00,000.
The expenses of ₹8,00,000 are not allowed against special-rate income.
Tax at 20% = ₹55,00,000 × 20% = ₹11,00,000.
Total income is below ₹1 crore, so no surcharge applies.
Cess at 4% = ₹11,00,000 × 4% = ₹44,000.

Answer: Total tax payable = ₹11,00,000 + ₹44,000 = ₹11,44,000. The expenses of ₹8,00,000 are ignored.

Example 2

Ocean Lines Ltd., a foreign shipping company, has these receipts for the year: freight paid or payable for carriage of goods shipped at Indian ports ₹1,20,00,000 (received outside India); freight received in India for carriage from a foreign port to India ₹30,00,000; demurrage and handling charges received in India ₹6,00,000. Its actual expenses for Indian operations were ₹1,40,00,000. Compute tax under the presumptive provisions at the foreign company rate of 35%.

Show the solution

Shipping income of a non-resident is computed on a presumptive basis at 7.5% of the specified receipts, and actual expenses are ignored.
Receipt base = ₹1,20,00,000 + ₹30,00,000 + ₹6,00,000 = ₹1,56,00,000.
Deemed profits = ₹1,56,00,000 × 7.5% = ₹11,70,000.
Tax at 35% = ₹11,70,000 × 35% = ₹4,09,500.
Income is below ₹1 crore, so no surcharge applies.
Cess at 4% = ₹4,09,500 × 4% = ₹16,380.

Answer: Total tax payable = ₹4,09,500 + ₹16,380 = ₹4,25,880. Actual expenses of ₹1,40,00,000 are not deductible.

Exam tips

Read the first line of the facts for PE, residence and the nature of income. These decide which regime applies.
In case-scenario MCQs, expect one distractor that deducts expenses or uses 7.5% as the tax rate. Check for those two traps.
For descriptive answers, write in provision-facts-conclusion form: state the rule, apply it to the numbers, then conclude with the tax.
Learn the three presumptive percentages together: 7.5% shipping, 5% aircraft, 10% oil services.
Always mention the treaty option in one line, even when no treaty is given. It shows awareness and can earn the mark.

Practice questions from Non Resident Taxation

Special Rates and Presumptive Taxation of Non-Residents in other exams

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

Special Rates and Presumptive Taxation of Non-Residents: frequently asked questions

What is the special tax rate on royalty and FTS of a non-resident?

The usual rate on gross royalty and FTS of a non-resident without a PE connection is 20%, plus surcharge if applicable and 4% cess. A tax treaty may provide a lower rate. If the income is connected with an Indian PE, it is taxed as business profits instead.

How is a non-resident shipping business taxed in India?

It is taxed on presumptive income at 7.5% of freight, demurrage, handling and similar receipts covered by the provision. Actual expenses are not allowed. The deemed profit is then taxed at the normal rate for that person.

Can I deduct expenses against interest or dividend income of a non-resident?

No. Where the special rate applies, tax is levied on the gross income. No expenses or deductions are allowed against it.

Does the treaty rate always apply to non-residents?

No. The non-resident gets the more beneficial of the domestic law and the treaty. To claim treaty rates, the non-resident must meet the conditions and provide required documents such as a tax residency certificate.