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Non-Resident Taxation Series | June 2026
Section 9 is the provision that surprises most non-residents. It makes certain income taxable in India even when the payment happens entirely outside India. This article explains every limb of Section 9, including indirect transfer, Significant Economic Presence, royalty, FTS, and interest, with exact statutory conditions and worked examples.
Non-Resident Taxation Series – fiscalzenith.com
You are reading Article 3: Income Deemed to Accrue or Arise in India – Section 9.
Also in this series: Residential Status – Section 6 | Scope of Income – Section 5 | 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 | Scope of Income – Section 5 | 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
- Business Connection and SEP: Section 9(2)(c) and 9(9) Dependent agent, significant economic presence, what is excluded
- Indirect Transfer: Section 9(10) The Rs. 10 crore and 50% test; three exceptions with 12-month look-back
- Salary: Section 9(3)
- Dividend: Section 9(4)
- Interest: Section 9(5) Including the PE banking rule
- Royalty: Section 9(6)
- Fees for Technical Services: Section 9(7) The presence-independence rule under Section 9(11)
- Fund Management Exception: Section 9(12)
- Practical Compliance Checklist
- Frequently Asked Questions
Section 9
Deems 7 categories of income to arise in India even when payment happens entirely outside India.
Rs. 10 Cr
Indian asset value threshold for indirect transfer rule. Foreign company shares become Indian assets if this and the 50% test are both met.
50%
Minimum proportion of total assets that must be Indian assets to trigger the indirect transfer provision under Section 9(10).
Section 9(11)
Royalty and FTS are taxable in India whether or not the non-resident has any presence or renders services in India.
SnapshotSection 9 in 2 Minutes
Section 9 of the Income Tax Act, 2025 (corresponding to Section 9 of the Income Tax Act, 1961) extends the phrase “accrues or arises in India” far beyond its literal meaning. Under Section 9(1) read with Section 9(2), certain categories of income are deemed to accrue or arise in India regardless of where the payment is made.
In plain terms: if the underlying activity, asset, or relationship has a meaningful Indian connection, India taxes that income even if the cheque was written in London.
| Income Category | Deemed Under | Key Condition |
|---|---|---|
| Business connection income | Section 9(2)(c) and 9(9) | Operations or significant economic presence in India |
| Capital gains on Indian asset transfer | Section 9(2)(d) | Asset situated in India, including foreign company shares under Section 9(10) |
| Salary | Section 9(3) | Services rendered in India, or paid by Government to Indian citizen abroad |
| Dividend | Section 9(4) | Paid by an Indian company anywhere in the world |
| Interest | Section 9(5) | Payable by Government, Indian resident (with exceptions), or non-resident for Indian business |
| Royalty | Section 9(6) | Payable by Government, resident (with exceptions), or non-resident for Indian business or income |
| Fees for Technical Services | Section 9(7) | Same conditions as royalty; taxable even without presence in India under Section 9(11) |
Part IBusiness Connection and SEP: Sections 9(2)(c) and 9(9)
Income arising through a business connection in India is deemed to arise in India. Only the portion of income reasonably attributable to Indian operations is taxable [Section 9(9)(f)].
What is a Business Connection? [Section 9(9)(a)]
Business connection includes two things. First, any business carried on in India, whether directly or through a dependent agent. A dependent agent is a person in India who acts on behalf of the non-resident and habitually concludes contracts on the non-resident’s behalf, or habitually plays the principal role in concluding contracts, or maintains a stock of goods in India from which deliveries are made, or habitually secures orders mainly for the non-resident [Section 9(9)(b)].
Second, Significant Economic Presence (SEP) in India.
Significant Economic Presence: Section 9(9)(d)
A non-resident has SEP in India if aggregate payments from transactions with any person in India exceed the prescribed threshold, or if there is systematic and continuous soliciting of business or engaging in interaction with a prescribed number of users in India, irrespective of whether agreements are entered into in India or the non-resident has any residence or place of business here.
Income attributable to SEP [Section 9(9)(g)]: Income from advertisements targeting Indian customers identified by IP address or location, revenue from selling data collected from Indian users, and revenue from selling goods or services using data from Indian users.
The purchase of goods in India for export is explicitly excluded from SEP [Section 9(9)(e)].
What Does NOT Create a Business Connection? [Section 9(9)(c)]
- Dealings through an independent agent acting in their ordinary course of business
- Purchasing goods in India for export
- Collecting news in India for transmission abroad (news agency or publisher)
- Displaying uncut diamonds in notified special zones by foreign mining companies
- Shooting a film in India when the non-resident entity has no Indian citizen shareholders
Part IIIndirect Transfer Rule: Section 9(10)
This is the most far-reaching part of Section 9. Shares of, or interest in, a company or entity registered outside India are deemed to be situated in India if the share or interest derives its value substantially from assets located in India [Section 9(10)(a)].
What Does “Substantially” Mean? [Section 9(10)(b)]
The share or interest is deemed to derive its value substantially from Indian assets if on the “specified date” BOTH of the following conditions are satisfied:
Condition 1: The value of Indian assets exceeds Rs. 10 crore [Section 9(10)(b)(i)]
Condition 2: Those Indian assets represent at least 50% of the value of all assets of the company or entity [Section 9(10)(b)(ii)]
Assets are valued at fair market value without reducing for any liabilities [Section 9(10)(c)].
What is the “Specified Date”? [Section 9(10)(d)]
The specified date is the last day of the accounting period of the company that ended before the date of transfer, or the date of transfer itself if the book value of assets on the transfer date exceeds the book value at the end of the last accounting period by more than 15%.
Example of indirect transfer: Raj, a UK citizen, holds 30% in a Mauritius company (MauCo). MauCo owns land in Mumbai valued at Rs. 50 crore, which is 70% of MauCo’s total assets. Raj sells his 30% stake to a German investor for EUR 5 million. Test: Indian assets exceed Rs. 10 crore (Rs. 50 crore qualifies). Indian assets are 70% of total (exceeds 50%). Both conditions met. MauCo shares are deemed situated in India. Raj’s capital gain is taxable in India even though the entire transaction happened outside India.
Proportionate Taxation [Section 9(10)(f)]
Where not all assets of the foreign company are in India, only the proportionate capital gains income attributable to Indian assets is taxable. You do not tax the entire gain on the foreign company’s shares, only the India-attributed portion.
Three Exceptions to the Indirect Transfer Rule [Section 9(10)(g)]
Exception (i): FPI investment. If the share or interest in the foreign company is held as an investment by a Category I or Category II FPI under the SEBI (Foreign Portfolio Investors) Regulations, 2014 (prior to their repeal), or a Category I FPI under the SEBI (Foreign Portfolio Investors) Regulations, 2019, the indirect transfer rule does not apply.
Exception (ii): Less than 5% stake, direct Indian asset holding. Where the foreign company directly owns Indian assets, the indirect transfer rule does not apply if, at any time in the twelve months preceding the date of transfer, the transferor (whether individually or along with its associated enterprises) satisfies BOTH of the following:
- (A) Does not hold the right of management or control in relation to the company or entity, AND
- (B) Does not hold voting power, share capital, or interest exceeding 5% of the total voting power, total share capital, or total interest of the company or entity
Exception (iii): Less than 5% stake, indirect Indian asset holding. Where the foreign company indirectly owns Indian assets through another entity, the indirect transfer rule does not apply if, at any time in the twelve months preceding the date of transfer, the transferor (whether individually or along with its associated enterprises) satisfies ALL THREE of the following:
- (A) Does not hold the right of management or control in relation to such company or entity,
- (B) Does not hold any right in, or in relation to, such company or entity which would entitle it to the right of management or control in the company or entity which directly owns the Indian assets, AND
- (C) Does not hold such percentage of voting power, share capital, or interest in the company that results in holding (individually or with associated enterprises) more than 5% of total voting power, share capital, or interest of the company that directly owns the Indian assets
“Associated enterprises” has the meaning assigned to it in Section 162 of the Income Tax Act, 2025 [Section 9(10)(g)(iv)].
Part IIISalary: Section 9(3)
Salary is deemed to arise in India if:
- It is earned for services rendered in India, including rest and leave periods between two Indian service stints (where both the preceding and succeeding service periods are in India), or
- It is paid by the Government of India to an Indian citizen for services rendered outside India
Example: An Indian government employee posted in Germany has her salary taxable in India under Section 9(3). The Government of India is the payer, she is an Indian citizen, and services are rendered outside India. All three conditions are met.
Part IVDividend: Section 9(4)
Any dividend paid by an Indian company outside India is deemed to accrue or arise in India and is taxable in the non-resident’s hands.
This means even if an Indian company wires a dividend directly to a non-resident shareholder’s overseas bank account, that dividend is deemed to arise in India. TDS is applicable on it at the time of payment.
Part VInterest: Section 9(5)
Interest is deemed to arise in India when payable by:
- The Government of India, or
- A resident, EXCEPT when the debt was incurred for a business or profession carried on outside India, or for earning income from a source outside India, or
- A non-resident, when the debt was used for a business or profession carried on by that non-resident in India
The PE Banking Rule: Section 9(5)(b)
Interest payable by the Permanent Establishment of a non-resident bank in India to its own head office or to another branch outside India is also deemed to arise in India and is taxable. The Indian PE is treated as a person separate and independent from the non-resident of which it is a PE [Section 9(5)(b)(ii)(A)].
Example: Barclays has a branch in Mumbai, its Indian PE. The Mumbai branch borrows funds from the London head office and pays interest on that borrowing. That interest is deemed to arise in India under Section 9(5)(b) and is taxable separately from Barclays’ other operations.
Part VIRoyalty: Section 9(6)
Royalty is deemed to arise in India when payable by the Government, by a resident (unless the right is used for business or income outside India), or by a non-resident when the right is used for business or income in India.
What is “Royalty”? [Section 9(6)(b) and (c)]
Royalty includes consideration for:
- Transfer or grant of rights in patents, trademarks, models, designs, secret formulas or processes, copyrights
- Imparting information about technical, industrial, commercial, or scientific knowledge
- Transfer of rights in computer software including licensing, regardless of the medium [Section 9(6)(c)(i)]
- Use of industrial, commercial, or scientific equipment (except amounts under Section 61(2) Table Sl. No. 5 for mineral oil services)
- Transfer of rights in films, radio tapes, or other recordings
- Transmission by satellite, cable, optic fibre, or similar technology, whether or not the process is secret [Section 9(6)(c)(iii)]
Key clarification [Section 9(6)(c)(ii)]: Royalty includes consideration regardless of whether the payer has possession or control of the property, whether the payer directly uses the property, and whether the property is located in India.
Example: A US software company licenses its enterprise software to an Indian company for USD 50,000 per year. The Indian company pays the licence fee to the US company’s US bank account. That payment is royalty deemed to arise in India under Section 9(6). The Indian company must deduct TDS. If the India-US DTAA provides a lower rate, the US company must furnish its TRC and Form No. 41 to claim it.
Part VIIFees for Technical Services: Section 9(7)
Fees for Technical Services (FTS) are deemed to arise in India under the same conditions as royalty: payable by the Government, by a resident (unless for foreign business), or by a non-resident using the services for Indian business or income.
FTS means consideration for any managerial, technical, or consultancy services, including provision of technical personnel. It excludes consideration for construction, assembly, mining, or similar project work, and amounts taxable as salary [Section 9(7)(b)].
The Presence-Independence Rule: Section 9(11)
For interest (Section 9(5)), royalty (Section 9(6)), and FTS (Section 9(7)), income is deemed to arise in India whether or not:
- (a) the non-resident has a residence, place of business, or business connection in India, or
- (b) the non-resident has rendered services in India
What this means in practice: A UK management consulting firm advises an Indian bank by email and video call from London. All work happens in London. The fee of Rs. 2 crore is paid in GBP to the UK firm’s London account. That fee is still FTS arising in India under Section 9(7) read with Section 9(11). The Indian bank must deduct TDS at the applicable rate (or lower DTAA rate if TRC and Form No. 41 are furnished). Physical absence from India provides no protection.
Part VIIIFund Management Exception: Section 9(12)
Fund management activity carried out by an eligible investment fund through an eligible fund manager acting on behalf of that fund does NOT constitute a business connection of the fund in India [Section 9(12)(a)]. Additionally, the fund shall not be deemed resident in India under Section 6 merely because the fund manager is situated in India [Section 9(12)(b)].
This protects offshore funds from being dragged into Indian tax residency or business connection treatment simply because their portfolio manager works in India. The conditions for both the fund and the fund manager to qualify as “eligible” are prescribed in Schedule I of the Act.
IFSC relaxation [Section 9(12)(f)]: The Central Government may, by notification, relax one or more of the Schedule I conditions for an eligible investment fund and its eligible fund manager if the eligible fund manager is located in an International Financial Services Centre and has commenced operations on or before 31st March 2030.
ChecklistPractical Compliance Checklist
If you are a foreign company receiving royalty or FTS from India
- The income is taxable in India under Section 9(6) or 9(7) even if you have no presence in India and all work was done outside India (Section 9(11) removes the presence requirement).
- The Indian payer must deduct TDS. If your country has a DTAA with India providing a lower rate, furnish TRC and Form No. 41 to the Indian payer before payment is made.
- Furnishing TRC and Form No. 41 after payment has been made and TDS already deducted at the higher rate requires filing an ITR to claim the refund of excess TDS.
If you hold shares of a foreign company with significant Indian assets
- Get a valuation of the foreign company’s assets. If Indian assets exceed Rs. 10 crore AND are more than 50% of the total asset value on the specified date, any transfer of your shares creates a taxable indirect transfer under Section 9(10).
- Check whether you qualify for any of the three exceptions (FPI registration, less than 5% stake with no management rights). The 12-month look-back period applies to the 5% test.
- If liable, compute only the proportionate gain attributable to Indian assets, not the total gain on the foreign company shares.
If you are a foreign digital company with Indian users
- Evaluate whether your transactions with Indian users or payments from India exceed the SEP threshold prescribed by the CBDT under Section 9(9)(d).
- If SEP exists, income from Indian user advertising, data sales using Indian data, and goods/services sold using Indian user data is taxable in India under Section 9(9)(g).
If you are a non-resident bank with an Indian branch
- Interest paid by your Indian branch (PE) to the head office or foreign branches is separately taxable in India under Section 9(5)(b). Ensure this is correctly computed and included in the Indian branch’s tax return.
- The Indian PE is treated as a separate and independent person from the non-resident bank for this purpose.
Wrapping Up
Section 9 is extensive but follows one consistent logic: if the economic activity, asset, or relationship that generates your income has a meaningful Indian connection, India taxes that income regardless of where the payment lands. Understanding each limb of Section 9 is the single most important step in mapping and managing Indian tax exposure as a non-resident.
Once you know what is taxable in India under Section 9, the next question is at what rate. That is answered by Sections 207 to 217, covered in the next article of this series.
Frequently Asked Questions
Yes. The fee is FTS under Section 9(7) and is deemed to arise in India regardless of where the services are rendered (Section 9(11)). The Indian company must deduct TDS. However, if Singapore has a DTAA with India that provides a lower rate or exempts such payments, your company can claim that benefit by furnishing a Tax Residency Certificate and Form No. 41 to the Indian payer before the payment is made.
Not necessarily, thanks to Section 9(12). Fund management activity by an eligible fund manager in India does not constitute a business connection for the fund if both the fund and the manager qualify as “eligible” under Schedule I. The conditions include restrictions on the fund’s income, investor base, corpus, and manager’s compensation. If those conditions are satisfied, the fund has neither a business connection in India nor Indian residency despite the India-based manager.
The basic test is met: Indian assets exceed Rs. 10 crore and are 100% of total assets (exceeds 50%). However, check exception (ii) to Section 9(10)(g). If, at any time in the twelve months before the transfer, you (individually and along with associated enterprises) held less than 5% of the Mauritius company’s total voting power or share capital, and did not hold management or control rights, the exception applies and your transfer is not taxable in India under the indirect transfer rule.
No. Under Section 9(5), interest payable by a resident is normally deemed to arise in India. But the exception applies when the debt is used for a business or profession carried on outside India, or for earning income from a source outside India. If the Indian company used the loan money to acquire a US business, the exception applies. The interest paid to the US company is not deemed to arise in India and is not taxable here.
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.
