Direct and Indirect Taxation · Residential Status and Scope of Total Income

Income Deemed to Accrue or Arise, Received in India

Updated 10 October 2026 · Fact-checked

Under section 5 of the Income-tax Act, 2025, a non-resident is taxed only on income received or deemed received in India, or accruing or deemed to accrue in India. To solve a question, test each income for receipt in India, actual accrual in India, and deemed accrual, then apply the person's residential status.

Understand Income Deemed to Accrue or Arise, Received in India

Tax in India depends on two things: who earns the income (the residential status) and where the income arises or reaches the person. Section 5 joins these two. This topic covers the second part: when an income counts as received in India or as accruing or arising in India.

Received means the income reaches the person, or someone on their behalf, in India. Accrues or arises means the person gets the right to the income. Section 5(1)(a) and (b) and section 5(2)(a) and (b) tax income that is received or deemed received in India, and income that accrues or arises, or is deemed to accrue or arise, in India. So a non-resident is taxed on these two kinds of income. A resident is taxed on these and, subject to the exception for a not ordinarily resident person, on foreign income too.

The Act also deems some income to accrue in India even though, in fact, it may arise abroad. The main deemed-accrual cases are income through a business connection in India, or through a property, asset or source of income in India, and income from the transfer of a capital asset situated in India. A business connection means a real link between a non-resident and a business activity in India, such as an agent who regularly works for the non-resident here. Only the part of the income that is attributable to the operations carried out in India is deemed to accrue in India. Buying goods in India for export is not treated as creating such a connection.

Other common deemed-accrual items are salary for services rendered in India, salary paid by the Government to an Indian citizen for services outside India, and dividend paid by an Indian company. Interest, royalty and fees for technical services paid by the Government or by a resident can also be deemed to accrue in India, with exceptions where the money is used for a business or profession carried on outside India. Learn these in the form your study material gives them, with the exact conditions.

Two protective rules sit in section 5 itself. Under section 5(3), foreign income is not deemed received in India merely because it appears in a balance sheet prepared in India. Under section 5(4), income already included as accrued or arisen is not taxed again as received in India.

Key rules to remember

Resident (section 5(1)): Total income = income received or deemed received in India + income accruing or arising (or deemed) in India + income accruing or arising outside India; The third limb is cut down for a not ordinarily resident person: foreign income is included only if derived from a business controlled in or a profession set up in India.
Non-resident (section 5(2)): Total income = income received or deemed received in India + income accruing or arising (or deemed) in India; Foreign income that is not received in India is outside the net, unless it is deemed to accrue in India.
Balance sheet rule (section 5(3)): Foreign income is not deemed received in India only because it is taken into account in a balance sheet prepared in India; Use it to reject the argument that book entries in India make foreign income taxable.
No double inclusion (section 5(4)): Income included as accrued or arisen is not included again as received in India; Taxed once. The same income is not added on the receipt basis after the accrual basis.
Business connection: Taxable amount = only the part of income attributable to operations carried out in India; Full profit of the non-resident is not taxed, only the India-attributable part.

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

Use this order for any question on receipt, accrual or deemed accrual. It works for MCQs and for written cases.

1Fix the residential status of the person first: resident and ordinarily resident, not ordinarily resident, or non-resident.
2List each income item separately with the place of receipt and the place where it accrued or arose.
3Ask if the income was received or deemed received in India. If yes, it is taxable for every status.
4If it was not received here, ask if it accrued or arose in India, or is deemed to do so (business connection, property, asset or source in India, capital asset in India, salary for services in India, dividend of an Indian company).
5For foreign income not received in India, check status: taxable for a resident and ordinarily resident; for a not ordinarily resident, only if from a business controlled in or a profession set up in India; not taxable for a non-resident.
6For a business connection, include only the portion attributable to operations in India.
7Apply section 5(3) and 5(4): ignore balance sheet entries, and do not tax the same income twice.
8Write the taxable amount for each item and total them with a one-line reason.

Quickest way: Status and place grid

When to use it: Use it in MCQs and in long cases with many incomes where time is short.

Draw three columns: resident and ordinarily resident, not ordinarily resident, non-resident.
For each item mark two things: received in India (Y/N) and India-source or deemed India-source (Y/N).
If either mark is Y, tick all three columns.
If both are N, tick only the resident and ordinarily resident column. For the not ordinarily resident column tick it only if the income comes from a business controlled in or a profession set up in India.
Add the ticked items for the status asked.

Common mistakes in Income Deemed to Accrue or Arise, Received in India

Taxing a non-resident on foreign income because it appears in Indian books or balance sheet.
Students think India-based accounting means India-based receipt.
Fix: Remember section 5(3): taking foreign income into account in a balance sheet prepared in India is not receipt in India.
Taxing the full global profit of a non-resident with a business connection in India.
The words 'deemed to accrue' make students include everything.
Fix: Include only the part attributable to operations carried out in India.
Treating all foreign income of a not ordinarily resident as exempt.
Students mix up the non-resident and not ordinarily resident rules.
Fix: A not ordinarily resident is taxed on foreign income derived from a business controlled in or a profession set up in India. Foreign income received in India is taxable anyway.
Ignoring income that is received in India but earned abroad.
Students look only at the place of earning.
Fix: Receipt in India alone makes income taxable for every status, subject to section 5(4) against double inclusion.
Taxing the same income twice, once on accrual and again on receipt.
Both limbs of section 5 seem to apply.
Fix: Under section 5(4), income already included on an accrual basis is not included again as received in India.
Treating salary for services in India as foreign income because it is paid abroad.
Students focus on the place of payment.
Fix: Salary earned for services rendered in India is deemed to accrue in India, so it is taxable for a non-resident wherever it is paid.

Worked examples

Example 1

Rohit is a not ordinarily resident in India for tax year 2026-27. His incomes are: (a) interest on an Indian bank deposit, received in India, ₹40,000; (b) rent from a house in London, received in London, ₹3,00,000; (c) profit from a Singapore business controlled from Delhi, received in Singapore, ₹5,00,000; (d) profit from a Dubai business controlled from Dubai, received in Dubai, ₹2,00,000. Find the income taxable in India.

Show the solution

Status is not ordinarily resident, so foreign income is taxable only if it is received in India or derived from a business controlled in or a profession set up in India (section 5(1)(c)).
(a) Interest is received in India and accrues in India. Taxable: ₹40,000.
(b) London rent accrues outside India and is received outside India. It is not from a business or profession. Not taxable.
(c) The Singapore business is controlled from Delhi, so the profit falls within section 5(1)(c). Taxable: ₹5,00,000.
(d) The Dubai business is controlled outside India and the profit is received outside India. Not taxable.
Total = ₹40,000 + ₹5,00,000 = ₹5,40,000.

Answer: ₹5,40,000 is taxable in India.

Example 2

Mr. Kumar is a non-resident for tax year 2026-27. He earns: (a) salary of ₹8,00,000 for services rendered in India, received in Singapore; (b) dividend of ₹50,000 from an Indian company, received in Singapore; (c) interest of ₹20,000 from a Singapore bank, received in Singapore. Compute the income taxable in India under section 5.

Show the solution

For a non-resident, section 5(2) taxes income received in India or accruing, or deemed to accrue, in India.
(a) Salary is for services rendered in India, so it is deemed to accrue in India. Place of receipt does not matter. Taxable: ₹8,00,000.
(b) Dividend paid by an Indian company is deemed to accrue in India even if paid abroad. Taxable: ₹50,000.
(c) Singapore bank interest accrues outside India and is received outside India. A non-resident is not taxed on it. Not taxable.
Total = ₹8,00,000 + ₹50,000 = ₹8,50,000.

Answer: ₹8,50,000 is taxable in India.

Exam tips

Always write the residential status in the first line of the answer. Step marks depend on it.
In MCQs, look for the trap word: 'received outside India', 'balance sheet in India' or 'controlled from India'.
Show a short table of item, place of receipt, place of accrual and taxable amount. It earns step marks and saves time.
For business connection questions, state that only the India-attributable part is taxed, then compute it.
Quote section 5(1), 5(2), 5(3) and 5(4) by number. Do not give section numbers for the deemed-accrual provisions unless your study material gives them.

Practice questions from Residential Status and Scope of Total Income

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

What is income deemed to accrue or arise in India?

It is income that the Act treats as arising in India even if it arises, or is paid, outside India. Examples are income through a business connection in India, income from a property, asset or source in India, and salary for services rendered in India. It is taxable for a non-resident.

What is business connection in India?

It is a real link between a non-resident and business activity in India, for example through a person who regularly acts for the non-resident here. Only the part of income attributable to operations carried out in India is deemed to accrue in India.

Is foreign income received in India taxable?

Yes. Income received or deemed received in India is taxable for a resident, a not ordinarily resident and a non-resident. If it was first taxed as accrued income, section 5(4) stops it from being taxed again as received.

Does showing foreign income in an Indian balance sheet make it taxable?

No. Under section 5(3), income accruing or arising outside India is not deemed received in India only because it is taken into account in a balance sheet prepared in India.