Section 9 Income Tax Act: Income Deemed to Accrue or Arise in India
A practical guide to Indian-source income under Section 9 of the Income-tax Act, 1961, including business connection, digital presence, indirect transfers and payments to non-residents.
Understanding Section 9
Section 9 of the Income-tax Act, 1961 specifies income treated as accruing or arising in India even when payment, contractual arrangements or some activities take place outside India. The rule is especially relevant to non-residents. Its operation must be read with sections 5, 6, 90 and 90A, applicable tax treaties and the law relevant to the tax year.
Section 9(1)(i): Business connection and Indian assets
This clause covers income arising directly or indirectly through a business connection, property, assets or a source of income in India, or transfer of a capital asset situated in India. Explanation 1 generally limits business income to the portion reasonably attributable to Indian operations, subject to special significant-economic-presence rules. It also contains specified exclusions for export purchases, news gathering, film shooting and diamond display, each subject to statutory conditions.
Explanation 2: Dependent agents and business connection
A business connection may arise where a person in India habitually concludes contracts or plays the principal role leading to their conclusion, maintains and regularly delivers stock, or habitually secures orders for the non-resident, as described in the provision. A genuinely independent agent acting in the ordinary course of business may fall outside this rule; the exception is restricted for agents working mainly or wholly for connected principals.
Explanation 2A and 3A: Significant economic presence
Significant economic presence (SEP) may create an Indian business connection through prescribed levels of transactions with persons in India or systematic and continuous engagement with prescribed numbers of Indian users. Under Rule 11UD of the Income-tax Rules, 1962, the prescribed thresholds have been INR 2 crore in aggregate payments and 300,000 users, respectively. The income attributable to relevant transactions or activities is the amount potentially covered, not necessarily the entire global income. Explanation 3A additionally addresses certain targeted advertising and India-related data income. From 1 April 2026, export-only purchases are expressly excluded from SEP under the Finance Act, 2025.
Explanations 4 to 7: Indirect transfer of Indian assets
The word through includes by means of, in consequence of and by reason of. Shares or interests in a foreign company or entity can be treated as situated in India where they derive substantial value from Indian assets. Explanation 6 generally requires Indian assets worth more than INR 10 crore and at least 50% of the total asset value, measured under prescribed valuation rules. Explanation 7 includes safeguards for qualifying small shareholders and apportions gains to Indian assets where appropriate. Relevant foreign portfolio investment exceptions and detailed conditions must be checked.
Section 9(1)(ii) and (iii): Salary
Salary earned for services rendered in India is deemed to accrue in India, including qualifying rest or leave periods forming part of the service contract. Salary payable by the Government of India to an Indian citizen for services outside India is separately covered, subject to any applicable exemption.
Section 9(1)(iv): Dividend
Dividend paid by an Indian company outside India is deemed to accrue or arise in India. The applicable tax treatment depends on the recipient, the relevant tax year, domestic charging provisions and treaty relief.
Section 9(1)(v): Interest
Interest payable by the Government is covered. Interest payable by a resident is generally covered unless the borrowing is used for a business, profession or income source outside India as specified by law. Interest payable by a non-resident may be covered where the borrowing is used for business, profession or income sources in India. The provision also contains a special rule for interest involving an Indian permanent establishment of a non-resident bank.
Section 9(1)(vi): Royalty
Royalty broadly includes consideration for the use or transfer of specified intellectual-property rights, information, equipment, copyrights and connected services, subject to exclusions and special rules. The source of payment and the use of rights or information determine deemed accrual under the statutory conditions. The explanations address computer software, rights to use, location and control, and transmission processes. Treaty definitions and binding judicial decisions may affect the result.
Section 9(1)(vii): Fees for technical services
Fees for technical services (FTS) generally mean consideration for managerial, technical or consultancy services, including provision of personnel. The definition excludes consideration for construction, assembly, mining or similar projects undertaken by the recipient and income taxable as salary. Government payments and specified resident or non-resident payments are covered, subject to the statutory foreign-use exclusions and treaty provisions.
Section 9(1)(viii): Certain gifts
Specified sums of money paid by a resident to a non-resident or a resident but not ordinarily resident are deemed to accrue or arise in India. Whether the receipt is taxable must also be examined under section 56(2)(x), applicable exceptions and relevant thresholds.
Section 9(2) and final explanation
Section 9(2) contains a narrow historical exception for certain pensions payable abroad to persons permanently residing outside India. The concluding explanation clarifies that interest, royalty and fees for technical services can be deemed to accrue in India even without the non-resident having a residence, place of business or business connection in India, or rendering services in India.
Tax treaties, withholding and practical application
Section 90(2) generally permits a taxpayer to rely on a more beneficial applicable tax treaty. Examine permanent-establishment provisions, beneficial ownership, treaty royalty or FTS definitions, tax residency certificate requirements, section 195 withholding obligations and relevant reporting. A deemed-accrual rule alone does not determine the final rate or liability.
Income-tax Act, 2025 and transition
The Income-tax Act, 2025 applies from 1 April 2026, with transitional rules for earlier periods. Section 9 of the 1961 Act remains important when reviewing earlier assessment years and proceedings governed by that Act. For current tax years, consult the corresponding provisions and schedules of the 2025 Act directly rather than assuming section numbers remain identical.
Official legislation and guidance
Disclaimer
This article is for general information and does not replace the official statutory text or professional advice. Statutory amendments, notifications, rules, court decisions and treaty provisions can change the outcome for a particular taxpayer.