Section 5 Of Income Tax Act 1961

Q: Q5: What’s the benefit of RNOR status?

A: RNORs get partial relief — their foreign income is mostly tax-free unless connected to Indian business/profession.

Table of Contents

Section 5 of Income Tax Act 1961 – Scope of total income

Section 5(1) of Income Tax Act 1961

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

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

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

Section 5(2) of Income Tax Act 1961

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

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

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Explanation of Section 5 of Income Tax Act 1961

Sure! Here’s a comprehensive breakdown of Section 5 of the Income Tax Act, 1961 (not 1956 — the correct act is Income Tax Act, 1961, as there is no Income Tax Act of 1956). Section 5 deals with the Scope of Total Income.

📘 Section 5 – Scope of Total Income

Section 5 of the Income Tax Act, 1961 defines the scope of total income for different types of taxpayers based on their residential status. The income that is taxable in India depends on whether the person is:

Resident and Ordinarily Resident (ROR)
Resident but Not Ordinarily Resident (RNOR)
Non-Resident (NR)

💡 Key Provisions:

Type of Income	ROR	RNOR	NR
Income received or deemed to be received in India	✅ Taxable	✅ Taxable	✅ Taxable
Income accruing or arising or deemed to accrue/arise in India	✅ Taxable	✅ Taxable	✅ Taxable
Income accruing or arising outside India	✅ Taxable	❌ Not Taxable (except if from a business controlled or profession set up in India)	❌ Not Taxable

🧠 Infographic: Section 5 Overview

Here’s a visual summary for easier understanding:

+-----------------------------+--------+--------+--------+
| Income Type                | ROR    | RNOR   | NR     |
+-----------------------------+--------+--------+--------+
| Received in India          | Taxed  | Taxed  | Taxed  |
| Accrued in India           | Taxed  | Taxed  | Taxed  |
| Foreign Income (General)   | Taxed  | No     | No     |
| Foreign Income from        |        |        |        |
| Indian Business/Profession | Taxed  | Taxed  | No     |
+-----------------------------+--------+--------+--------+

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

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

(b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

Scope of total income. visual selection 1

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

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

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Scope of total income. visual selection 2

Scope of total income. visual selection 3

Scope of total income. visual selection 4

📌 Examples for Better Clarity

✅ Example 1: Resident and Ordinarily Resident (ROR)

Rohit, an Indian resident, earns:

₹10 lakhs from a job in India
₹5 lakhs from rental property in the UK

Taxable in India?
✅ Yes. Both incomes are taxable.

✅ Example 2: Resident but Not Ordinarily Resident (RNOR)

Anuj moved back to India after staying in the US for 10 years. He:

Earns ₹6 lakhs in India
Gets ₹4 lakhs interest from a US bank

Taxable in India?
✅ Indian income is taxable.
❌ Foreign bank interest is NOT taxable unless linked to an Indian business.

✅ Example 3: Non-Resident (NR)

Priya, living in Canada, earns:

₹3 lakhs from dividends from Indian companies
₹7 lakhs from a Canadian job

Taxable in India?
✅ Indian dividends are taxable.
❌ Canadian salary is NOT taxable in India.

Absolutely! Let’s continue with more practical insights, visual structure ideas, and a downloadable-style infographic breakdown of Section 5 of the Income Tax Act, 1961.

🎯 Additional Concepts to Understand in Section 5

🔸 1. Income Received vs. Income Accrued

Received in India – Physically or legally received in India.
Accrued in India – Earned for services rendered or assets located in India, even if received later.

🔍 Example: You’re a freelancer in the US but receive money from an Indian client — it’s considered accrued in India.

🔸 2. Global Income

Applies only to ROR.
Includes income from:
- Foreign salaries
- Investments in foreign stocks
- Overseas businesses
- Rental income from foreign properties

🔸 3. Business Controlled from India

Even for RNOR, income from a business or profession controlled from India is taxable.

🔍 Example: An RNOR operates a digital marketing agency in Dubai but manages it from Mumbai — the income is taxable in India.

📚 Use Case Scenarios

🌍 Scenario 1: Indian working in Germany (Non-Resident)

Salary in Germany ✅ Not taxable
Rent received from house in India ✅ Taxable

👨‍💼 Scenario 2: NRI returning to India (RNOR)

FD interest in UAE ✅ Not taxable
Income from online consulting for Indian firm ✅ Taxable

🛡️ Tax Planning Tips

NRI? Keep foreign income in foreign accounts – Only Indian income is taxable.
Returning NRIs can plan RNOR status – Up to 2-3 years of tax benefits on foreign income.
Maintain proper residential records – The number of days in India directly affects your tax liability.

🔄 How Section 5 Connects with Other Sections

Section 5 is foundational — it tells what income is taxable based on where it’s earned and the taxpayer’s residential status.

Here’s how it links to other key sections:

Section	Purpose
Section 6	Defines residential status (Resident, RNOR, NR)
Section 9	Specifies income deemed to accrue or arise in India
Section 10	Lists incomes that are exempt from tax
Section 4	Establishes that income tax is charged on total income of a person in a year

So essentially:

Section 4 says: “Income is taxable.”
Section 5 says: “What income is included in ‘total income’?”
Section 6 says: “Depends on your residential status.”
Section 9 says: “Some foreign-sourced income may still be taxable if linked to India.”

❌ Common Mistakes Taxpayers Make

1. Assuming Foreign Income is Always Tax-Free

❗ RORs often forget to report foreign bank interest or salary — it’s fully taxable.

2. Misreporting Residential Status

🤦 Many NRIs become Residents due to extended stay and don’t update their status — this can lead to foreign income being taxed.

3. Bringing Money to India and Thinking It’s Taxable

✅ Remittance (bringing money) is not taxable if it was earned abroad and not taxable based on your status.

📘 Glossary of Terms

Term	Meaning
Accrue	Income is earned but not yet received
Deemed to accrue/arise	Considered as earned in India even if not physically
Ordinarily Resident	A resident with deeper ties to India
Non-Resident (NR)	Person who hasn’t stayed 182+ days in India during the year

🎯 Real-Life Examples (Advanced Scenarios)

👨‍⚖️ Case 1: ROR with Foreign Mutual Funds

An Indian resident has invested in US mutual funds and earns $1,000 interest.

Taxability:
✅ Fully taxable in India under “Income from Other Sources.”
Also needs to be disclosed in the Schedule FA (Foreign Assets) of ITR.

👩‍⚕️ Case 2: RNOR Freelancer Paid by Indian & Foreign Clients

Shruti lives in India but works remotely for a US and an Indian client.

US payments received in Indian account
Indian payments from a Mumbai-based firm

Taxability:

US client income: Not taxable for RNOR unless business is controlled from India.
Indian client income: Fully taxable.

📝 Summary Table – Quick Reference

Resident Status	Indian Income	Foreign Income	Deemed Income (Indian link)
ROR	✅ Taxable	✅ Taxable	✅ Taxable
RNOR	✅ Taxable	❌ (Generally)	✅ Taxable
NR	✅ Taxable	❌	✅ Taxable

Frequently Asked Questions (FAQs)

Q1: Is income received outside India but transferred to India taxable?

A: If you’re an ROR, yes. If you’re RNOR or NR, no — unless it accrues or arises in India.

Q2: How is residential status determined?

A: Based on the number of days a person stays in India:
(a) 182+ days in India = Resident
(b) Less than that = Non-resident
(c) Further rules help classify as ROR or RNOR.

Q3: What is “deemed to accrue or arise in India”?

A: Income from:
(a) Indian business/profession
(b) Salaries for services rendered in India
(c) Royalties, technical fees, etc., from Indian entities

Q4: Do NRIs have to pay tax on foreign income?

A: No, unless the income accrues/arises in India or is deemed to do so

Q5: What’s the benefit of RNOR status?

A: RNORs get partial relief — their foreign income is mostly tax-free unless connected to Indian business/profession.