Section 9 of Income-tax Act, 2025: Income Deemed to Accrue or Arise in India

Summary: Section 9 of the Income-tax Act, 2025 determines when income accruing or arising outside India is deemed to accrue or arise in India. It covers income connected with Indian property, assets, sources, business operations and capital assets, together with salary, dividends, interest, royalty, fees for technical services and certain gifts. The provisions reorganise the earlier Section 9 of the Income-tax Act, 1961 into separately identifiable sub-sections, including rules governing business connection, significant economic presence and indirect transfers. For non-resident businesses, the determination involves examining activities conducted in India, the role of dependent and independent agents, prescribed digital-presence thresholds and the income attributable to Indian operations. Indirect transfers require examination of the value of Indian assets, the prescribed valuation date and available exemptions. Interest, royalty and technical-service fees may be deemed to arise in India even where the recipient has no physical presence in the country. However, deemed accrual does not automatically determine the final tax liability. Applicable double taxation avoidance agreements, permanent establishment provisions, exemptions and withholding requirements must also be examined. Indian businesses making cross-border payments should separately consider TDS, treaty documentation and prescribed remittance reporting, while Indian concerns involved in qualifying indirect transfers must examine their reporting obligations.

Introduction

Section 9 is where a non-resident’s file starts. Before rate, treaty or form, the first question is whether India can tax the income at all. Can India tax a foreign company that earns money from Indian customers but has no office here? Can it tax the sale of shares of a foreign company just because that company owns assets in India? Section 9 answers both. It is Section 9 in the 1961 Act and in the Income-tax Act, 2025.

Short answer: The concepts carry over. What changed is the layout. The old Section 9(1) clauses and their Explanations are now separate sub-sections, and “significant economic presence” (SEP) now sits inside the definition of business connection.

The Quick Summary

• Section 9(2) is the basic rule: income through an Indian asset or source, property, business connection, or transfer of an Indian capital asset is deemed to arise in India.
• Section 9(9) defines business connection, including agents and SEP.
• Section 9(10) covers indirect transfers: foreign shares that get their value from Indian assets.
• Sections 9(3) to 9(8) cover salary, dividend, interest, royalty, fees for technical services (FTS) and certain gifts.
• Section 9(11) says interest, royalty and FTS can arise in India even without any presence here.
• Deemed to arise is not the same as taxable. Exemptions, computation rules and a tax treaty (DTAA) still matter.
• “Previous Year” is now “Tax Year”.

Old Section vs New Section

Rule	1961 Act	2025 Act
Basic rule: business connection, property, asset or source, transfer of an Indian capital asset	Section 9(1)(i)	Section 9(2)
Salary	Section 9(1)(ii) and (iii)	Section 9(3)
Dividend paid by an Indian company	Section 9(1)(iv)	Section 9(4)
Interest	Section 9(1)(v)	Section 9(5)
Royalty	Section 9(1)(vi)	Section 9(6)
Fees for technical services	Section 9(1)(vii)	Section 9(7)
Certain gifts	Section 9(1)(viii)	Section 9(8)
Business connection, agents, exclusions, attribution	Explanations 1 to 3A to Section 9(1)(i)	Section 9(9)
Significant economic presence (SEP)	Explanation 2A	Section 9(9)
Indirect transfers	Explanations 5 to 7 to Section 9(1)(i)	Section 9(10)
No presence needed for interest, royalty, FTS	Explanation to Section 9	Section 9(11)
Eligible fund management	Section 9A	Section 9(12)
Meaning of “through”	Explanation 4 to Section 9(1)(i)	Section 9(13)

What Has Actually Changed

Area	Change
SEP	It now sits inside the definition of business connection in Section 9(9). The amounts are in Rule 13 of the Income-tax Rules, 2026 (earlier Rule 11UD).
Indirect-transfer reporting	Section 506 and Form 163 replace Section 285A and Form 49D, and Section 458 sets the penalty.
Tax treaties	Section 159 replaces Section 90.

The Basic Rule: Section 9(2)

Section 9(1) says the income covered by Sections 9(2) to 9(8) is deemed to accrue or arise in India. Section 9(2) covers income accruing or arising, directly or indirectly, through or from:

• an asset or source of income in India;
• property in India;
• a business connection in India; or
• the transfer of a capital asset situated in India.

The word “through” is wide. Under Section 9(13), it includes “by means of”, “in consequence of” and “by reason of”.

Take two simple cases. Ingrid, a Swedish national, owns a flat in Kolkata let to an Indian tenant. The rent comes from property in India, so it is deemed to arise here. Separately, a foreign fund sells shares of an Indian company at a gain. The gain comes from an Indian capital asset, and the fund’s non-resident status does not exempt it by itself.

Business Connection: Section 9(9)

Business connection is a main ground for taxing a non-resident’s business income in India. Under Section 9(9)(a), it includes:

• any business carried on in India, where all or part of the operations are in India; and
• a significant economic presence in India.

Business through an agent

A business is also carried on in India through a person acting for the non-resident who:

1  Concludes contracts. The person habitually exercises authority to conclude contracts for the non-resident, habitually concludes them, or habitually plays the principal role leading to contracts that the non-resident routinely concludes without material change. The contracts are in the non-resident’s name, or for transferring ownership or the right to use property, or for the non-resident’s services.

2  Keeps stock. The person has no such authority but habitually keeps a stock of goods in India and regularly delivers them for the non-resident.

3  Secures orders. The person habitually secures orders in India mainly or wholly for the non-resident, or for it and other non-residents under common control.

For example, Brightwave Inc., a US software company, has no office in India. It engages Meera in Bengaluru to meet customers. She negotiates prices and scopes, and customers sign what she has agreed. She plays the principal role in concluding the contracts, so Brightwave can have a business connection in India, even though it has no office here.

Independent agents

A broker, general commission agent or other agent with an independent status, acting in the ordinary course of business, does not create a business connection. But an agent working mainly or wholly for the non-resident, or for its controlling, controlled or commonly controlled group, is not treated as independent.

So appointing an Indian agent does not automatically create a business connection. Look at the agent’s authority, activities, independence and relationship with the non-resident.

Sethi & Co., a Mumbai broker, sells goods for six foreign exporters in the ordinary course of business. It has an independent status, so it does not create a business connection for any of them. If 90% of its business came from one Dutch exporter, it would no longer be independent for that exporter, and a business connection could arise.

Activities that do not create a business connection

Operations confined to the following are excluded:

• buying goods in India for export;
• collecting news and views in India for transmission abroad, by a non-resident running a news agency or publishing newspapers, magazines or journals;
• displaying uncut and unassorted diamonds in a notified special zone, by a foreign company that mines diamonds; and
• shooting a film in India, by a non-citizen individual, a firm with no Indian-citizen or resident partner, or a company with no Indian-citizen or resident shareholder.

These are not blanket exemptions. A similar activity outside these conditions is not excluded.

A London daily’s correspondent in Delhi only collects news and sends it abroad. The operations are confined to collecting news, so there is no business connection. If the newspaper also began selling advertising space in India, the exclusion would not cover that activity.

Only the Indian income is taxed

A business connection does not make a non-resident’s worldwide income taxable here. Under Section 9(9)(f), only the income reasonably attributable to the operations carried out in India, or to the SEP transactions and activities, is deemed to arise in India.

Significant Economic Presence (SEP)

Businesses can now earn heavily from Indian customers without an office or staff in India. SEP brings that into the business connection rules. A non-resident has SEP in India where there is:

Limb	Condition
Transactions with persons in India	A transaction in goods, services or property with a person in India, including data or software downloads, where total payments in the tax year exceed a prescribed amount
Users in India	Systematic and continuous soliciting of business, or interaction with a prescribed number of users in India

The amounts are set by Rule 13 of the Income-tax Rules, 2026 (earlier Rule 11UD): ₹2 crore of payments in the tax year, or 3 lakh users in India. Either one is enough.

SEP applies irrespective of whether:

• the agreement is entered into in India;
• the non-resident has a residence or place of business in India; or
• the non-resident renders any services in India.

A transaction or activity confined to buying goods in India for export does not create SEP.

Under Section 9(9)(g), the income attributable to a business or SEP also includes income from:

• advertising aimed at a customer who lives in India or who views it from an Indian IP address;
• sale of data collected from such a person; and
• sale of goods or services using data collected from such a person.

Take two companies in one tax year. StreamNova, a UK company, earns ₹3 crore from Indian customers. That is above ₹2 crore, so it has SEP. CodeLoom, a Singapore company, earns only ₹1 crore but interacts with 4 lakh Indian users. It also has SEP, under the user test.

SEP does not make all of StreamNova’s worldwide revenue taxable. Only the income attributable to its Indian transactions and activities is deemed to arise here.

Indirect Transfers: Section 9(10)

This is one of the most important rules for cross-border deals. A foreign holding company owns shares in an Indian subsidiary. An investor sells the holding company’s shares to another foreign investor. Both parties are abroad, and the shares are foreign, yet the sale can be taxed in India. This rule grew out of the Vodafone case; our post “Section 9(10) and the Vodafone Case” tells that story.

Under Section 9(10), a share or interest in a foreign company or entity is deemed to be situated in India if it gets its value substantially from assets in India. That is so if, on the specified date, the Indian assets:

• are worth more than ₹10 crore;and
• represent at least 50% of the value of all the assets of the company or entity.

How the assets are valued: Fair market value on the specified date, without deducting liabilities on those assets, in the prescribed manner.

The specified date is the end of the accounting period before the transfer. It is the date of transfer instead, if the book value of the assets on that date is 15% or more above their book value at the end of that period.

The accounting period is each 12 months ending 31 March. If the foreign entity regularly uses another 12-month period for its home tax law or for reporting to shareholders, that period applies. Special rules cover a new entity and one that ceases to exist.

If the foreign entity also holds assets outside India, only the part of the income reasonably attributable to the Indian assets is taxed, in the prescribed manner.

Worked example

Orange Ltd., a US company, owns 100% of Grapes Ltd., a Singapore company. Grapes Ltd. owns 90% of Mango Ltd., an Indian company, and also holds foreign investments. Orange sells all its shares in Grapes Ltd. to Kiwi Ltd., a UK company.

Particulars	Amount
Fair market value of all assets of Grapes Ltd.	₹5,000 crore
Fair market value of Mango Ltd.	₹3,000 crore
Value of Grapes Ltd.’s 90% holding in Mango Ltd.	₹2,700 crore
Sale consideration	₹2,100 crore
Cost of acquisition	₹1,000 crore

• Step 1: The test. ₹2,700 crore ÷ ₹5,000 crore = 54%. The Indian assets are above ₹10 crore and at least 50%, so the test is met.
• Step 2: The gain. ₹2,100 crore − ₹1,000 crore = ₹1,100 crore.
• Step 3: The share attributable to India. ₹1,100 crore × ₹2,700 crore ÷ ₹5,000 crore = ₹594 crore.

This is an illustration. The final amount is worked out in the manner the Rules prescribe.

Exceptions

Section 9(10) does not apply to income from the transfer outside India of shares or interests that are:

• held by a non-resident, directly or indirectly, as an investment through a Category I or Category II foreign portfolio investor (under the Regulations of 2014) or a Category I foreign portfolio investor (under the Regulations of 2019); or
• held by a small holder. Where the foreign entity directly owns the Indian assets, the transferor (with its associated enterprises) must have held no right of management or control, and no more than 5% of the voting power, capital or interest, at any time in the 12months before the transfer. Where the entity owns the Indian assets indirectly, similar tests apply to the transferor’s rights in both entities.

An investor holds 3% of Grapes Ltd. and has no management or control rights. It sells its shares. Even though Grapes Ltd. gets most of its value from India, the small-holder exception applies, so Section 9(10) does not tax the sale.

Reporting: Form 163

The tax rule is separate from the reporting duty. Under Section 506 and Rule 235 of the Income-tax Rules, 2026, the Indian concern furnishes Form 163. It replaces Form 49D under the old Section 285A. The form is due within 90 days from the end of the tax year, or within 90 days of the transaction where management or control rights are transferred.

For failure, Section 458 allows a penalty of 2% of the transaction value where the transaction transfers management or control, and ₹5 lakh in any other case.

Suppose a transfer that falls within Section 9(10) takes place on 10 August 2026. If management or control rights are transferred, Form 163 is due within 90 days of the transaction, by 8 November 2026. Otherwise it is due within 90 days from the end of tax year 2026-27, which is 29 June 2027. If the Indian concern fails to file in a control-transfer case worth ₹100 crore, the penalty can be 2% of that, which is ₹2 crore.

Other Income Deemed to Arise in India

Salary: Section 9(3)

Salary is deemed to arise in India if it is earned in India. That covers pay for services rendered in India, and pay for a rest or leave period between periods of service in India that is part of the employment contract. Salary paid by the Government to an Indian citizen for services abroad is also covered. Exemptions are checked separately.

Claire, a UK engineer, works in Pune for six months of the tax year, and her UK employer pays her into a UK bank account. The salary for those six months is earned in India, so it is deemed to arise here. The place of payment does not matter.

Dividend: Section 9(4)

A dividend paid by an Indian company is deemed to arise in India even if it is paid outside India.

An Indian company declares a dividend to a shareholder in Singapore and pays it into a Singapore account. The dividend is deemed to arise in India, even though it is paid abroad. How much tax applies then depends on the Act and the treaty.

Interest: Section 9(5)

Interest is deemed to arise in India when it is payable by:

• the Government;
• a resident, unless the loan is used for a business or profession outside India, or to earn income from a source outside India; or
• a non-resident, where the loan is used for a business or profession carried on in India.

A special rule covers the Indian permanent establishment (PE) of a non-resident bank. Interest it pays to its head office or another part of the bank abroad is deemed to arise in India. The PE is treated as a separate person for this purpose.

Nashik Auto Ltd. borrows from a Japanese bank and uses the money for its plant in India. The interest it pays is deemed to arise in India. If it had used the loan for its factory in Vietnam, the interest would not be deemed to arise in India.

Royalty: Section 9(6)

Royalty is deemed to arise in India on the same payer tests as interest, with one difference: when the payer is a non-resident, royalty is also covered where the right is used to earn income from a source in India, not only for a business or profession carried on in India.

Royalty covers consideration for:

• transferring or licensing patents, designs, trade marks and similar property, or using them;
• information about how they work, or technical, industrial, commercial or scientific know-how;
• using industrial, commercial or scientific equipment (other than amounts taxed under the presumptive scheme for mineral-oil exploration);
• copyright rights in literary, artistic or scientific work, including films and tapes for television or radio; and
• services connected with these activities.

It also covers rights to use computer software, including under a licence, whatever the medium. And it counts whether or not the payer has possession or control of the right, uses it directly, or has it located in India.

A Pune accounting firm buys a licence for accounting software from LedgerSoft Inc., a US vendor with no office in India. The licence fee is royalty and is deemed to arise in India. Under Section 9(11), the vendor’s lack of presence in India does not matter. The treaty can change the answer, though. In Engineering Analysis Centre of Excellence (2021), the Supreme Court held that payments for end-user software licences are not royalty under the treaties. So where the vendor can claim treaty benefits, the Pune firm may have no tax to deduct.

Fees for technical services: Section 9(7)

FTS means consideration for managerial, technical or consultancy services, including supplying technical or other personnel. It excludes payments for construction, assembly, mining or like projects done by the recipient, and anything chargeable as salary. The payer tests are the same as for royalty.

Orion Advisory, a Singapore consulting firm, advises an Indian company on a new product, and the Indian company pays it ₹50 lakh. Under the Act, that is fees for technical services and arises in India. The India–Singapore treaty is narrower: it taxes such fees only if the advice makes available technical knowledge or skills that the Indian company can use on its own. But payments to a foreign firm for a construction or assembly project it carries out itself are not FTS.

Try This: Royalty Receipts

For each receipt, ask two questions: who is paying, and where is the right, know-how or service used? A payment by the Government or by a resident is covered, unless it is used for a business or profession outside India, or to earn income from a source outside India. A payment by a non-resident is covered only if it is used for a business or profession in India, or to earn income from a source in India.

Example. Hanbit Electronics, a South Korean company, receives royalty in one tax year:

Receipt	Payer and use	Deemed to arise in India?
₹50,000	Government of India, under an approved agreement	Yes. The Government is the payer
₹1,00,000	Calcutta Co. Ltd., a resident, for technical know-how used in its business in India	Yes
₹75,000	Mumbai Co., a resident, for drawings used in its business in Singapore and Malaysia	No. Resident payer, but the use is outside India
₹50,000	Keshoram, a non-resident, for a formula used in a business in India	Yes. Non-resident payer, use in India
₹40,000	X, a non-resident, for drawings and know-how used in a business in the UK	No. Non-resident payer, use outside India

The royalty deemed to arise in India is ₹2,00,000.

These answers apply the Act only. A treaty can still change the tax, and the Indian payer must still look at TDS.

No presence needed: Section 9(11)

Interest, royalty and FTS are deemed to arise in India and are included in total income whether or not the non-resident has a residence, place of business or business connection in India, or renders services here. This is a key difference from ordinary business income.

What this means for the Indian payer

Interest, royalty and FTS are the payments an Indian business most often makes to non-residents. Section 9 decides whether the amount is chargeable here. It does not decide the rate, which comes from the Act or the treaty. Before the money leaves India, the payer must also look at tax deduction at source on payments to non-residents (Section 393, earlier Section 195) and Forms 145 and 146 (earlier Forms 15CA and 15CB). If tax is not deducted when it should have been, the payer can lose the deduction for the expense and face interest.

Certain gifts: Section 9(8)

A sum of money received as a gift and taxable as income (Section 2(49)(u)), which arises outside India and is paid by a resident to a non-resident who is not a company, a foreign company, or a person not ordinarily resident, is deemed to arise in India. It applies only where gifts from non-relatives total more than ₹50,000 in the tax year. Gifts from a relative, or on occasions such as marriage, stay outside it. The rule stops a resident’s gift to someone abroad from escaping Indian tax just because the recipient is outside India.

Eligible fund management: Section 9(12)

An eligible investment fund managed in India through an eligible fund manager does not get a business connection in India, and is not resident in India under Section 6, for that reason alone. This does not exclude income that would be taxed anyway, and it does not change the fund manager’s own total income. The conditions are in Schedule I.

Tax Treaties (DTAA)

Deemed accrual under Section 9 does not end the analysis. Under Section 159 (earlier Section 90), where India has a notified agreement with another country, the Act applies only to the extent it is more beneficial to the taxpayer. So a non-resident can rely on the treaty where it gives a better result.

• A non-resident must produce a certificate of residence from the other country to claim treaty relief (Section 159(8)).
• The general anti-avoidance rules in Chapter XI (earlier Chapter X-A) apply even if they are not beneficial (Section 159(6)).
• Many treaties still use the permanent establishment (PE) concept. It is narrower than business connection and has no equivalent of the SEP user test. So a non-resident with SEP under Section 9(9) may still escape tax under a treaty. Treaty definitions of royalty and FTS can also differ from the Act.

A company resident in a treaty country has SEP in India under Section 9(9) because of its Indian user base. Under the treaty, it has no permanent establishment in India. With a certificate of residence from its home country, it may claim that the treaty does not let India tax its business profits. The outcome depends on the treaty.

Where It Goes Wrong

• Assuming no office means no tax. SEP and Section 9(11) can both reach a non-resident with no presence in India.
• Stopping at the Act on software. A software licence fee can be royalty under the Act, but under most treaties an end-user licence is not. Check both before deciding on TDS.
• Testing only the 50% in an indirect transfer. The ₹10 crore floor, the valuation date and the small-holder and FPI exceptions all need checking.
• Forgetting Form 163. The reporting duty sits with the Indian concern, not the seller, and Section 458 carries the penalty.

What I Would Check

1  Which head of income in Sections 9(2) to 9(8) does the receipt fall under?

2  For business income, is there a business connection through an agent, and is the agent really independent? Does an exclusion apply? Then test for SEP.

3  How much of the income is attributable to India?

4  For shares of a foreign company, do the ₹10 crore and 50% tests apply, and does any exception apply?

5  Is TDS due on the payment, and has Form 163 reporting been checked for an indirect transfer?

6  Does the treaty give a better result, and is the certificate of residence in hand?

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Disclaimer: This article is for general education and information only. Your tax depends on your own facts, the rules for the relevant Tax Year and any applicable tax treaty. It is not tax or legal advice.