Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year .

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Sr. No Particulars Resident Ordinary Resident (ROR) Resident Not Ordinary Resident (RNOR) – 5(1) Non Resident (NR)– 5(2)
1 Income received in India Taxed Taxed Taxed
2 Income Deemed to be receive in India Taxed Taxed Taxed
3 Income accrues or arises in India Taxed Taxed Taxed
4 Income deemed to accrues or arises in India Taxed Taxed Taxed
5 Income accrues or arises outside India Taxed NO NO
6 Income accrues or arises outside India from business/profession controlled/set up in India Taxed Taxed NO
7 Income Other than Above (No Relation In India) Taxed NO NO

Note-

1. Residential status is as per section 6 of Income Tax Act, 1961.

2. Deemed income is not actually accrued but is supposed to be accrued notionally.

3. The income accrued is when the assessee obtains the rights to receive it.

4. Previous year means the financial year immediately preceding the assessment year.

Explanation 1 & 2:-

Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Certain Examples of incomes which treated as incomes deemed to have accrued or arisen in India:

  • If Mr. X Transfer his Residential Property situated in Delhi then Capital gain arising on transfer of such Capital Asset is deemed to accrue in India. It means Capital gain arising on transfer of property situated in India.
  • Income from business connection in India.
  • Dividend paid by an Indian company.
  • Income from any property, asset or other source of income located in India.

Salary:-

In respect of services rendered in India.

Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.

Interest income:-

Received from Government of India.

Received from a resident is treated as income deemed to have accrued or arisen in India in all cases,

except

where such interest is earned in respect of funds borrowed by the resident and used by resident for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.

Received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.

Royalty:

Received from Government of India.

Received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.

Received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.

INDIA:

As per Section. 2(25A) of the Income Tax Act, 1961, the term “India” means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the air space above its territory and territorial waters.

Income is defined u/s 2(24) of the Act.

As per section 2(13) business includes……..

Trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture

Profits arising from an isolated transaction are taxable as business profits, if it is treated as an adventure in the nature of trade, commerce or manufacture.

In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary. As already defined under section 2(13), the income derived from any adventure in the nature of trade is also treated as business income.

As per Section 2(36) profession” includes vocation.

A profession is an occupation requiring purely intellectual skill or manual skill e.g., lawyer, CA, engineer, surgeon, author etc.

Extract of Section 5 of Income Tax Act, 1961

Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

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4 Comments

  1. MANOJ GARG says:

    if mr x was leaving in Canada during first 4 months of financial year 2020-21 and then he moved to India permanently and obtain citizenship in India, whether his 4 months salary in Canada taxable in India

  2. Jay says:

    Hi. I have query.
    If my company does a MTT (Merchanting Trade Transaction) wherein we buy from X country and sell to Y country. Then, when paying for the goods to supplier in X country, do we need to withhold TDS if TRC is not provided by supplier?

  3. Bhargavi Gopalakrishnan says:

    Kindly clarify the explanation 1 and 2 as given in section 5 is applicable to section 5(1)(c) or Section 5(2)(a) or both and if it applies only to section 5(2) then any income accrued or arises outside india is not taxable to a NRI in india unless( it is received or deemed to be received in india). Kindly give practical examples to interpret those explanation 1 and 2 as given under section 5

  4. Rajeev says:

    If any person, win the lottery outside of India and the prize money bring to India is taxable or not? for example – I am going to dubai and win the jackpot in this case prize money is taxable?

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