Scope of Total Income and Incidence of Tax by Residential Status

Understand Scope of Total Income and Incidence of Tax

Key rules to remember

Resident and ordinarily resident (ROR)

Taxable = income received or deemed received in India + income accruing or deemed to accrue in India + income accruing outside India (even if not received in India)

Global income is taxable. Foreign income already taxed abroad may qualify for relief, which is a separate topic.

Resident but not ordinarily resident (NOR)

Taxable = income received or deemed received in India + income accruing or deemed to accrue in India + foreign income only if derived from a business controlled in India or a profession set up in India

Foreign income such as foreign rent or foreign interest, received abroad and not from such a business or profession, is not taxable.

Non-resident (NR)

Taxable = income received or deemed received in India + income accruing or deemed to accrue in India

Foreign income received abroad is outside the scope of tax.

Deemed accrual: dividend

Dividend paid by an Indian company outside India = deemed to accrue in India (section 9(4))

Place of payment does not matter. The payer's Indian residence does.

Deemed accrual: interest, royalty, fees for technical services

Deemed to accrue in India if payable by the Government, by a resident (unless used for business or income outside India), or by a non-resident (if used for business or income in India) (section 9(5) to (7))

Section 9(11) applies this whether or not the non-resident has a residence, place of business or business connection in India, or rendered services in India.

Deemed accrual: salary

Salary is deemed to accrue in India if earned in India (services rendered in India, or rest or leave period preceded and succeeded by such services), or if the Government pays an Indian citizen for services rendered outside India (section 9(3))

Salary for services abroad paid by a private employer is not covered by this rule.

Indirect transfer of shares

Foreign company or entity shares are deemed situated in India if the Indian assets exceed ₹10 crore and represent at least 50% of all assets (section 9(10))

Valued at fair market value on the specified date, without reducing liabilities. Certain small holders and Category I or II FPIs are excluded.

How to solve Scope of Total Income and Incidence of Tax questions

1. 1Fix the residential status of the individual for the tax year: ROR, NOR or NR. Use the status given in the question or work it out first.
2. 2List every income item separately. Do not net or group items before classifying them.
3. 3For each item, note where it is received and where it accrues. Check whether any deeming rule in section 9 pulls it into India, such as dividend from an Indian company, salary for India services, or interest, royalty or fees for technical services from an Indian payer.
4. 4Check whether the amount was received in India, or deemed received in India, even if earned abroad.
5. 5Apply the status ladder: ROR takes all, NOR takes Indian-linked items plus foreign business controlled from India or profession set up in India, NR takes only Indian-linked items.
6. 6Mark each item as taxable or exempt from scope with a one-line reason, then add up the taxable items.
7. 7State the total clearly and say which items are excluded and why.

Quickest way: Two-column tick method

Common mistakes in Scope of Total Income and Incidence of Tax

• Treating all foreign income of an NOR as exempt.

  Students remember that NOR is taxed on less foreign income and stretch this to all foreign income.

  Fix: An NOR is taxed on foreign income from a business controlled in India or a profession set up in India, even if received abroad.

• Ignoring the place of receipt and looking only at where income is earned.

  Students think accrual is the only test.

  Fix: Receipt in India alone makes income taxable for every status. Check receipt and accrual separately.

• Treating dividend from an Indian company paid abroad as foreign income.

  The payment location is outside India, so it looks foreign.

  Fix: Section 9(4) deems such dividend to accrue in India, so it is taxable even for a non-resident.

• Taxing a non-resident's salary for services rendered abroad because the employer is Indian.

  Students link taxability to the employer's nationality.

  Fix: Salary is taxable in India if earned in India. For services abroad, the deemed rule applies only if the Government pays an Indian citizen.

• Taxing royalty or technical fees paid by an Indian resident without checking where the right or service is used.

  Students stop at 'paid by a resident'.

  Fix: Read the exception: no deemed accrual if the payment is for a business or profession carried on by the resident outside India, or for earning income from a source outside India.

Worked examples