What makes an Income Accrue or Arise in India although earned outside India?

A look at what constitutes as Income on Indian soil and what is not from the perspective of the IT department. The IT department defines certain incomes as Accruing or Arising in India. This is the basis of calculating your income and income tax. Let’s know more. The IT department says that for any company or individual (resident or non-resident) who also has business in geographical locations outside India, only the part of income which can be reasonably attributed to have been earned in operations happening in India will be considered for calculation of Income tax.

Residential Matters:

There arises a question of who/what is a Resident of India and who/what is not a resident of India. The IT department has defined these entities. An Individual is defined as a resident in India in the previous year if he/she satisfies one of the following conditions:

1. He/she has spent a total of 182 or more days in India in the assessment year.
2. If he/she has spent a total of 60 days or more in the assessment year and has spent a total of 365 days in the previous four years. For example in case the assessment year is 2020-21, then if you have spent >60 days in India between 1st April 2020 and 31st March 2021 and a total of >365 days during 1st April 2017-31st March 2021.
3. The following person will be treated as resident only if their period of stay in India is fulfilled as mentioned below:
4. a) Indian Citizen who leaves India as a member of crew of an Indian Ship or for the purpose of employment outside India then their period of stay should be 182 days or more in aggregate during the previous year.
5. b) Indian Citizen or Person of Indian Origin within the meaning of Explanation to clause (e) of Section 115C who, being outside India, comes on visit to India then their period of stay should be 182 days or more in aggregate during the previous year.
6. c) Indian Citizen or Person of Indian Origin having total income, other than income from foreign sources, exceeding Rs 15 Lakh then their period of stay should be 120 days or more in aggregate during the previous year. (Inserted by Finance Act,2020) [Period of stay exceeds 120 days but does not exceeds 182 days then he is said to be “Resident but not ordinarily resident”. If period of stay exceeds 182 days then he is said to be “Ordinary Resident” for the relevant year.]

The IT department also states very clearly that if a person is deemed resident for one source of income, then, he will be counted as resident for all incomes in that particular year. A person is said to be not ordinarily resident in India if that person satisfies any one of the following criteria:-

1. a) Has been a non-resident in India in nine out of ten years preceding the year of assessment.
2. b) Has spent less than 792 days combined during a period of 7 years prior to the assessment year.

Now that we have suitably understood who is defined as a Resident Indian for the purposes of Income tax, let’s look at which of their income is deemed Indian.

The following are considered to be income accrued in India. Any income which is gained from or through any business connection in India. This could be directly or indirectly. Incomes which are received from a property which is situated inside Indian borders. Through or from any source based in India and from the sale of a capital asset inside India. Thus what the IT department says is that if they can clearly define that the source of the income is in India then the Income too is accrued in India. To put the above discussion into clearer terms:

1). Any salary paid in India is deemed to have accrued in India. Even any charges which are collected as payable for a service rendered in India is regarded as income earned in India.

2). If a government employee or citizen of India is reimbursed by the Government for rendering any service outside India then it is deemed as accrued in India.

3). Any dividend which is paid by an Indian company outside India to a resident as defined earlier will be considered as an income earned in India.

4). Interest payable by the government is considered as accrued in India. This would apply for all kinds of government securities and saving instruments like bonds.

5). Any interest received from a resident except if that person has borrowed money from you to pursue business activities outside India. The logic behind this could be that this would ensure positive cash flow into India.

6). If the interest is paid by a non-resident to you then it will be added to your income except if that person has used the money borrowed from you to use for business activities in India. The logic behind this would be to boost investments in India.

7). The same concepts of point 4, 5 and 6 are applicable for any income generated from Royalties or copyrights.

8). For any income from fees for technical services provided the IT department uses the yardsticks as mentioned in points 4, 5 and 6. Although at a cursory glance some of the ideas discussed above might sound to be the stuff that our Auditor/Financial Planner should be concerned with and not us, it is imperative that we understand the philosophy behind them so that we are more in control of our income tax assessments. With the increasing benefits of technology the tax man is becoming more and more competent in keeping track of your activities vis-à-vis your income tax implications. Thus it is highly advisable that we are very clearly aware of all the rules and regulation and ensure 100% compliance. After all it’s our hard earned money that will work hard for the Indian economy.

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(Republished with Amendments by Team Taxguru)