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Non-Resident Taxation Series | June 2026
Section 5 draws the taxing boundary. For a non-resident, India can only tax what is received or accrues in India. For a resident, everything from everywhere gets taxed. This article explains the scope of total income under Section 5 for each residential status, with a worked example and all statutory clarifications.
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 2: Scope of Total Income – Section 5.
Also in this series: Residential Status – Section 6 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | NRI Provisions | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Also in this series: Residential Status – Section 6 | Deemed Income – Section 9 | Tax Rates – Sections 207 to 217 | TDS on Non-Residents | NRI Provisions | DTAA – Section 159 | Representative Assesse and Agent | PE | ITR Filing
Table of Contents
- 2-Minute Snapshot
- Scope for Residents (ROR): Section 5(1)
- Scope for Non-Residents: Section 5(2) What “received in India” and “accrues in India” actually mean
- Worked Example: Non-Resident with Multiple Income Sources
- Two Statutory Clarifications: Sections 5(3) and 5(4)
- Practical Compliance Checklist
- Frequently Asked Questions
Section 5
The boundary provision. Determines which income falls inside the Indian tax net for each residential status.
2 Limbs
A non-resident is taxed on income received in India OR accruing in India. Foreign income with no India connection is excluded entirely.
3 Limbs
A resident (ROR) is taxed on income received in India, accruing in India, AND accruing outside India. All three limbs apply.
Section 9
Extends the “accrues in India” concept through the deemed income provisions. Royalty, FTS, interest, and indirect gains are all caught here.
SnapshotScope of Income in 2 Minutes
Once you know your residential status from Section 6, the next question is what income India can actually tax. Section 5 of the Income Tax Act, 2025 (corresponding to Section 5 of the Income Tax Act, 1961) answers this with a simple but powerful framework.
Think of your total income as a pot. For a full resident, every drop of income from anywhere in the world goes into that pot. For a non-resident, only drops with an Indian connection go in. For an RNOR, it is somewhere in between.
| Status | Income Taxable in India | Governing Provision |
|---|---|---|
| Resident and Ordinarily Resident (ROR) | All income worldwide: received in India + accruing in India + accruing outside India | Section 5(1)(a), (b), (c) |
| Resident but Not Ordinarily Resident (RNOR) | Received in India + accruing in India + foreign income from business controlled in India or profession set up in India only | Section 5(1)(a), (b), (c) with RNOR restriction |
| Non-Resident (NR) | Received in India + accruing or arising in India (including deemed income under Section 9) | Section 5(2)(a), (b) |
Part IScope for a Resident (ROR): Section 5(1)
Under Section 5(1), the total income of a resident includes all income from whatever source derived which satisfies any one of three conditions:
(a) It is received or deemed to be received in India in that year by or on behalf of the person, or
(b) It accrues or arises, or is deemed to accrue or arise, to the person in India in that year, or
(c) It accrues or arises to the person outside India in that year
Condition (c) is what makes a resident’s position comprehensive. Foreign salary, foreign rental income, dividends from a Singapore company, capital gains on a Dubai property: all of it gets taxed in India as well because it accrues outside India and condition (c) pulls it in.
The RNOR Exception Within Condition (c)
If the person is “not ordinarily resident” under Section 6(13), condition (c) applies with a restriction. Foreign income is included only when it is derived from a business controlled in India or a profession set up in India. Other foreign income stays outside.
Example: An RNOR earns a salary from a US employer for work done in the US. That foreign salary is not taxable in India since it is not from a business controlled in India. But if the same RNOR runs a consultancy practice that was set up in India and serves foreign clients from abroad, the consultancy income is taxable in India even though the work happened outside India.
Part IIScope for a Non-Resident: Section 5(2)
Under Section 5(2), the total income of a non-resident includes all income from whatever source which satisfies either of two conditions:
(a) It is received or deemed to be received in India in that year by or on behalf of the person, or
(b) It accrues or arises, or is deemed to accrue or arise, to the person in India in that year
That is it. Just two limbs. Both require an Indian connection. Income that accrues abroad and is received abroad with no Indian nexus is simply not taxable in India for a non-resident.
What “Received in India” Means
Income is received in India when the first receipt happens in India. If an NRI directs their foreign employer to remit salary directly into an NRO account in India, that salary is received in India and becomes taxable here.
Important distinction: If the same salary is first received in an overseas account and the NRI later transfers some money to India for personal use, that transfer is not income received in India. It is a movement of already-received income. The original receipt abroad was the taxable event, and India cannot tax it for a non-resident. Remitting money to India does not make it taxable.
What “Accrues or Arises in India” Means
Income accrues or arises in India when it is earned from an Indian source. Rent from an Indian property accrues in India. Interest from an Indian bank deposit accrues in India. Salary for work done in India accrues in India. These are taxable for a non-resident.
What “Deemed to Accrue or Arise in India” Means
This is the most far-reaching concept for non-residents. Section 9 of the Act deems certain incomes to arise in India even when the actual payment happens outside. Royalty from an Indian company wired to a foreign account, FTS paid by an Indian business to a Singapore firm, interest paid by an Indian company to a non-resident lender: all of these are deemed to arise in India under Section 9 even though not a rupee was received in India. We cover Section 9 in full in the next article of this series.
Part IIIWorked Example: Non-Resident with Multiple Income Sources
Arjun is a software engineer who moved to the US in 2019. In FY 2025-26 he is a non-resident. Let us go through each income source and determine taxability in India.
| Income Source | Amount | Taxable in India? | Reason |
|---|---|---|---|
| Salary from US employer for work done in US | USD 1,20,000 | No | Accrues outside India, received outside India. Neither limb of Section 5(2) is satisfied. |
| Rental income from flat in Pune | Rs. 6,00,000 | Yes | Accrues in India. Section 5(2)(b) applies. |
| Interest from NRO savings account in India | Rs. 40,000 | Yes | Received in India. Section 5(2)(a) applies. |
| Dividends from US company shares | USD 2,000 | No | Accrues outside India from a foreign company. No Indian connection. Section 5(2) is not satisfied. |
| Royalty from Indian tech company for use of his patented algorithm | Rs. 3,00,000 | Yes | Deemed to arise in India under Section 9(6). Paid by a resident Indian company for rights used in India. |
| Capital gain from selling his Pune flat | Rs. 15,00,000 | Yes | Arises in India under Section 5(2)(b). Transfer of a capital asset situated in India also caught under Section 9(2)(d). |
Result: Arjun’s Indian taxable income = Rs. 6,00,000 + Rs. 40,000 + Rs. 3,00,000 + Rs. 15,00,000 = Rs. 24,40,000. His US salary and US dividends are completely outside India’s taxing reach as a non-resident.
Part IVTwo Statutory Clarifications: Sections 5(3) and 5(4)
Section 5(3): Foreign Income in Indian Books Does Not Create Taxability
Section 5(3) says income accruing or arising outside India shall not be deemed to be received in India merely because it is taken into account in a balance sheet prepared in India.
This protects companies that maintain consolidated accounts in India but have global operations. The mere appearance of foreign income in an Indian balance sheet does not pull it into taxability for non-residents or RNOR entities.
Section 5(4): No Double Counting
Section 5(4) says if income has already been included in total income on the basis that it accrued or was deemed to accrue, it cannot again be included on the basis that it was received or deemed to be received.
This prevents the same income from being taxed twice under two different limbs of Section 5 in the same year.
ChecklistPractical Compliance Checklist
If you are a non-resident with Indian rental income or bank deposits
- Rental income accrues in India under Section 5(2)(b). It is taxable regardless of where you receive the rent payment.
- Interest on NRO accounts is received in India and is taxable. Interest on NRE and FCNR(B) accounts is exempt under Schedule VII as long as you remain non-resident or RNOR.
- TDS will be deducted by the bank on NRO interest at 30% or lower DTAA rate. Verify your Form 26AS matches.
If you transfer money from your overseas account to India
- Remitting foreign earnings to India does not create new taxable income. India taxes the original income, not the remittance.
- Maintain bank statements and transfer records showing the source of funds transferred to India. This avoids unnecessary scrutiny treating remittances as unexplained income.
If you are an RNOR who recently returned to India
- Your foreign salary from a non-Indian employer for services rendered abroad is not taxable in India under Section 5(1)(c) RNOR restriction.
- Income from a consultancy, business, or profession that was set up in India is taxable even if the work is done from abroad.
- Track which income streams are connected to Indian-setup businesses versus genuinely foreign sources.
Wrapping Up
Section 5 draws a clean, logical boundary. India only reaches into your pocket for what genuinely has an Indian connection. For non-residents, that connection must exist through either receipt in India or accrual in India. Remitting money to India does not create that connection. But having Indian property, Indian bank accounts, Indian business income, or royalties from Indian companies does.
The deemed income concept under Section 9, which extends “accrues in India” to cover royalties, FTS, interest, dividends, indirect transfers, and business connections, is what makes Section 5 much broader than it appears on its face. That is covered in full in the next article of this series.
Frequently Asked Questions
Yes. The rental income accrues in India under Section 5(2)(b) because the source is an Indian property. The fact that the tenant transfers rent to your UK account does not change the accrual. Income from an Indian source accrues in India regardless of where the payment is received. Your tenant is required to deduct TDS if applicable, and you must include this income in your Indian tax computation.
No. Capital gains from selling US stocks accrue outside India. The source is a US security, the transaction happened on a US exchange, and the proceeds are received in the US. Neither limb of Section 5(2) is satisfied. India has no taxing right on this income for a non-resident. It is taxable only in the US.
This depends on where the services are rendered. If you work for an Indian company but perform all your services from Dubai, the salary does not fall under Section 9(3) as income for services rendered in India. However, the salary is being credited to an NRE account in India, which means it is received in India under Section 5(2)(a). NRE accounts are typically exempt only for interest income under Schedule VII, not for salary credited to them. The salary receipt in India makes it taxable. Structuring the salary to be paid into an overseas account would remove this income from Indian taxability, provided services are genuinely rendered outside India.
The subsidiary is a separate Indian legal entity and its profits are taxed in India in its own hands as an Indian company. The foreign parent company is not directly taxed on the subsidiary’s profits unless dividends are declared and paid upward. When the subsidiary pays a dividend to the foreign parent, that dividend is deemed to arise in India under Section 9(4) and TDS is applicable. The foreign parent is taxed on the dividend, not on the underlying subsidiary profits.
Disclaimer: For informational and educational purposes only. Based on the Income Tax Act 2025 (30 of 2025), Income Tax Rules 2026, and provisions as amended by the Finance Act 2026, current as of June 2026. Does not constitute legal or tax advice.
