Section 5
Section 5: scope of total income
Section 5 sets out exactly which income is included in a person's "total income" for a tax year, and this differs depending on whether the person is a resident or a non-resident (as determined under section 6). It is the section that operationalises the basic idea that residents are taxed on worldwide income while non-residents are taxed only on India-linked income.
Total income of a resident
Under Section 5(1), a resident's total income for a tax year includes all income from whatever source derived, which is (a) received or deemed to be received in India in that year, (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.
However, if the resident is "not ordinarily resident" in India under section 6(13), foreign income under (c) is included only if it is derived from a business controlled in, or a profession set up in, India.
Total income of a non-resident
Under Section 5(2), a non-resident's total income for a tax year includes only income which is (a) received or deemed to be received in India in that year, or (b) accrues or arises, or is deemed to accrue or arise, to the person in India in that year. Purely foreign-sourced, foreign-received income of a non-resident falls outside the scope of Indian total income under this section.
Other rules in this section
Section 5(3) clarifies that income accruing or arising outside India is not treated as "received" in India merely because it is reflected in a balance sheet prepared in India.
Section 5(4) prevents double-counting: if income has already been included in total income on the basis that it accrued or arose (or is deemed to have accrued or arisen), it cannot be included again on the basis that it was received or deemed to be received in India.
Frequently asked questions
Is a resident taxed on income earned outside India?
Generally yes, a resident's total income includes income accruing or arising outside India. The exception is a person who is "not ordinarily resident" under section 6(13) - for such a person, foreign income is included only if it comes from a business controlled in, or profession set up in, India.
What income is a non-resident taxed on in India?
Only income that is received or deemed to be received in India, or that accrues/arises or is deemed to accrue/arise in India - not income that is both earned and received entirely outside India.
Can the same income be taxed twice under Section 5, once as accrued and again as received?
No - Section 5(4) specifically prevents income already included on an accrual basis from being included again on a receipt basis.
Related sections
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