s.5 — Scope of total income
What residential status decides: a resident is taxed on worldwide income, a not ordinarily resident person largely on income received or accruing in India, and a non-resident only on income received or accruing in India.
Income-tax Act, 1961
s.5
Income-tax Act, 2025
s.5
In force from 1 April 2026, but s.536(2)(c) preserves the 1961 Act for tax years beginning before that date.
In short
Section 5(1) of the Income-tax Act, 2025, which governs tax year 2026-27 onwards, includes in the total income of a resident all income from whatever source derived which (a) is received or deemed to be received in India in the year by or on behalf of the person, (b) accrues or arises, or is deemed to accrue or arise, to him in India in the year, or (c) accrues or arises to him outside India in the year, but for a person not ordinarily resident under section 6(13) income under clause (c) is included only when derived from a business controlled in or a profession set up in India. Section 5(2) includes in the total income of a non-resident only income received or deemed to be received in India and income accruing or arising or deemed to accrue or arise in India; the deeming rules are in section 9. Section 5(3) says income accruing outside India is not deemed received in India only because it is taken into account in a balance sheet prepared in India, and section 5(4) that income included on an accrual basis is not included again on receipt. For years up to 2025-26 the rule is section 5 of the Income-tax Act, 1961 to the same effect, with the not ordinarily resident exception, by reference to section 6(6), in the proviso to section 5(1), the two rules in Explanations 1 and 2, and the deeming rules in section 9. Residence is tested for the tax year (the previous year under the 1961 Act) whose income is assessed, and residence for one source is residence for all (section 6(12) of the 2025 Act; section 6(5) of the 1961 Act). Residential status also decides who is an assessee under the Black Money Act: section 2(2) of that Act covers a person resident in India within the meaning of section 6 in the previous year, and a non-resident or not ordinarily resident person who was resident in the year to which the income relates or in which the undisclosed asset located outside India was acquired, that year being determined without giving effect to section 72(c) of that Act.
What the provision does
Sets the territorial reach of the charge by residential status: worldwide income for a resident, worldwide income except income accruing abroad, not received in India and not derived from a business controlled in or a profession set up in India, for a not ordinarily resident person, and Indian-source or Indian-received income for a non-resident. It does not itself decide residential status, which is section 6, and it does not override a tax treaty, which applies under section 159(4) of the 2025 Act (section 90(2) of the 1961 Act) where more beneficial.
Threshold questions
- What is the person's residential status for the year under section 6
- If not ordinarily resident, is any foreign income derived from a business controlled in or a profession set up in India
- Was the income received or deemed received in India, or did it accrue or is it deemed to accrue in India
- Has the same income already been included on an accrual basis
- Does a treaty give a more beneficial result under section 159(4) of the 2025 Act or section 90(2) of the 1961 Act
In practice
The recurring disputes.
What is a business controlled in India for a not ordinarily resident person
Section 5(1)(c) of the 2025 Act, like the proviso to section 5(1) of the 1961 Act, brings in foreign income derived from a business controlled in India. The Revenue reads control in the sense of the residence cases, so that any real direction from India brings in the income; the assessee reads it as the seat of the business's central management, which a returning individual's occasional instructions do not move. The residence cases on control and management are the nearest guide to the words, and they cut both ways: they treat real direction from India as control even if it is exercised only to a small extent, but they also require the control to be actually exercised and not illusory or merely notional (Erin Estate, Supreme Court), and Patanjali Sastri J, in the Madras High Court in Subbiah Chettiar, found it difficult to accept that an isolated or casual act of management by a karta living abroad is enough. Where the line falls on a given record is open.
Whether a finding of residence brings in all foreign income of the year
The Revenue's case is that once the individual is resident and ordinarily resident, all his income accruing outside India in the year is included, whatever its timing within the year, because there is no split year. The assessee's answers lie in not ordinarily resident status, in the treaty, which may allocate the income to the other State, and in the credit for foreign tax under section 159 or section 160 of the 2025 Act (section 90 or section 91 of the 1961 Act). The absence of a split year is settled; how the treaty applies to income of the part of the year spent abroad depends on the treaty and the tie-breaker.
Residence for one source and residence for all
Section 6(12) of the 2025 Act (section 6(5) of the 1961 Act) makes a person resident for one source resident for all, so the Revenue need not tie the residence finding to the income in dispute. The assessee answers that the rule cannot make a person resident who is not resident on the tests in section 6, and that a treaty may still allocate particular income away from India. How far a treaty allocates particular income away from India once residence for all sources is found is decided treaty by treaty, and is open on each.