Under the Income-tax Act, 1961, income can be taxed in India based not only on where it is received but also based on where it is deemed to be received or deemed to accrue or arise. These deeming provisions ensure that certain incomes are taxed in India even if they are not actually received or earned in India, especially in the case of non-residents.
Income Deemed to be Received in India – Section 7
“Deemed to be received” means the income is considered received in India for tax purposes, even if not actually received.
Section 7 of the Income-tax Act defines certain incomes that are deemed to be received in India in the previous year:
Examples:
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Employer’s Contribution to Recognized Provident Fund:
The amount contributed by an employer to a recognized provident fund in excess of the prescribed limit (currently ₹7.5 lakh per annum for aggregate employer contributions to EPF, NPS, and superannuation fund) is deemed income.
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Transferred Balance from Unrecognized to Recognized Provident Fund:
When the balance from an unrecognized provident fund is transferred to a recognized provident fund, certain parts of it may be deemed received income.
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Taxable Part of Accumulated Balance of Recognized Provident Fund:
At the time of withdrawal, if any portion of the accumulated balance is taxable, it is deemed to be received at the time of withdrawal.
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Advance Salary or Arrear Salary:
Any salary paid in advance or in arrears is deemed to be received in the year it is paid.
These amounts are taxable in India in the hands of the employee or taxpayer as per the slab rate applicable.
Income Deemed to Accrue or Arise in India – Section 9:
Section 9 is one of the most important deeming sections. It deals with income that may not have been earned or received in India but is deemed to accrue or arise in India based on the source or connection.
Key Categories under Section 9(1):
1. Income through or from a business connection in India:
- If a non-resident earns income through a business connection in India, that income is deemed to accrue or arise in India.
- Example: A foreign company with an agent or branch in India generating income.
2. Income from any Property, Asset, or Source of income in India:
- If any income arises from a property or asset located in India (e.g., rent), it is taxable in India.
3. Capital Gains on transfer of capital assets situated in India:
- Any gain from the sale of capital assets situated in India is taxable.
- Example: A non-resident selling land located in India.
4. Salary Income for services rendered in India:
- Salary is taxable in India if services are performed in India, regardless of where the salary is paid.
- Even if an employee receives salary outside India, if work is done in India, it is taxable.
5. Salary paid by the Government to Indian citizens for services outside India:
- Government salary paid to Indian citizens for services outside India (like diplomats) is taxable in India.
6. Dividend Paid by an Indian Company:
- Dividends declared by Indian companies are deemed to accrue or arise in India and are taxable as per current tax laws.
7. Interest, Royalty, or Fees for Technical Services:
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Interest, royalty, or fees for technical services paid by:
- Government of India, or
- A resident, or
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A non-resident with a business connection in India,
is deemed to accrue or arise in India.