Income Tax 2025

Appearance

Scope of total income ​

5(1) ​

Subject to the provisions of this Act, the total income of any tax year of a person, who is a resident, includes all income from whatever source derived, which

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

  • (b) accrues or arises, or is deemed to accrue or arise, to the person in India in that year; or

  • (c) accrues or arises to the person outside India in that year, but when such person is “not ordinarily resident” in India under section 6(13), it shall be included only when it is derived from a business controlled in or a profession set up in India.

5(2) ​

Subject to the provisions of this Act, the total income of a tax year of a person, who is a non-resident, includes all income from whatever source derived, which––

  • (a) is received or deemed to be received in India in that year by or on behalf of the person; or
  • (b) accrues or arises, or is deemed to accrue or arise, to the person in India in that year.

5(3) ​

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

5(4) ​

If an income has been included in a person’s total income on the basis that it––

  • (a) has accrued or arisen; or
  • (b) is deemed to have accrued or arisen

to the person, it shall not again be included on the basis that it is received or deemed to be received by the person in India.

Explanation

Section Summary: ​

Section 5 of the Income Tax Act defines the scope of total income for both residents and non-residents in India. It specifies which types of income are included in the total income for a tax year, based on the taxpayer's residential status. The section ensures that income is taxed in India if it is received, accrues, or arises in India, or if it is derived from a business or profession controlled in India (for certain residents). It also prevents double taxation of the same income.

Key Changes: ​

  1. Resident vs. Non-Resident Treatment: The section clarifies the distinction between residents and non-residents, particularly for income earned outside India. For residents, foreign income is generally included in total income, but for "not ordinarily resident" individuals, only income from a business or profession controlled in India is included.
  2. Double Taxation Prevention: Section 5(4) explicitly prevents the same income from being taxed twice—once when it accrues or arises and again when it is received.
  3. Balance Sheet Clarification: Section 5(3) clarifies that merely including foreign income in a balance sheet prepared in India does not make it taxable in India.

Practical Implications: ​

  1. Residents:
    • Residents must include all income, whether earned in India or abroad, in their total income.
    • "Not ordinarily resident" individuals only need to include foreign income if it is derived from a business or profession controlled in India.
  2. Non-Residents:
    • Non-residents are taxed only on income received in India or income that accrues or arises in India. Foreign income is not taxable.
  3. Businesses and Professionals:
    • Income from businesses or professions controlled in India is taxable, even if earned abroad, for residents and "not ordinarily resident" individuals.
  4. Double Taxation:
    • Taxpayers can avoid double taxation by ensuring that income is not included twice—once when it accrues and again when it is received.

Critical Concepts: ​

  1. Residential Status:

    • Resident: A person who meets the conditions under Section 6 of the Income Tax Act.
    • Not Ordinarily Resident (NOR): A resident who does not meet the additional conditions under Section 6(13).
    • Non-Resident: A person who does not meet the conditions to be a resident.

  2. Accrues or Arises:

    • Income is considered to accrue or arise when it is earned, even if not yet received.

  3. Deemed to Accrue or Arise:

    • Certain incomes are treated as accruing or arising in India, even if they are earned outside India, based on specific provisions of the Act.

  4. Double Taxation Prevention:

    • Section 5(4) ensures that income is not taxed twice—once when it accrues and again when it is received.

Compliance Steps: ​

  1. Determine Residential Status:
    • Assess whether you are a resident, not ordinarily resident, or non-resident under Section 6.
  2. Identify Income Sources:
    • For residents, include all income (Indian and foreign).
    • For non-residents, include only income received or accruing in India.
  3. Avoid Double Counting:
    • Ensure income is not included twice—once when it accrues and again when it is received.
  4. Documentation:
    • Maintain records of income sources, especially for foreign income, to substantiate claims.

Examples: ​

  1. Resident Example:

    • Mr. A is a resident of India. He earns ₹10 lakh from a job in India and ₹5 lakh from investments in the US. Both amounts are included in his total income.

  2. Not Ordinarily Resident Example:

    • Ms. B is a "not ordinarily resident" individual. She earns ₹8 lakh from a business in India and ₹3 lakh from a business in the UK. Only the ₹8 lakh is included in her total income because the UK income is not from a business controlled in India.

  3. Non-Resident Example:

    • Mr. C is a non-resident. He earns ₹12 lakh from a job in the US and ₹2 lakh from rent in India. Only the ₹2 lakh is included in his total income because it accrues in India.

  4. Double Taxation Prevention Example:

    • Ms. D earns ₹15 lakh from a business in India. The income is included in her total income when it accrues. She cannot include it again when she receives the payment.

This section ensures clarity on what constitutes taxable income based on residential status and prevents double taxation, making compliance more straightforward for taxpayers.