You can owe tax on money you haven’t actually received. You can owe Indian tax on income earned without ever setting foot in India. Welcome to “deemed” income — where the law decides what counts, not your bank statement.
We’ve now covered who is taxable, the scope of total income, and how residential status affects that scope. But residency alone doesn’t finish the job. Sections 7 to 10 of the Income Tax Act, 2025 handle the harder question: what actually counts as income received, and what counts as income deemed to accrue or arise in India, even when the obvious, literal answer would say otherwise. Sections 7 to 10 address situations where ordinary receipt, accrual, or ownership concepts would not by themselves fully determine the tax treatment.
Applicability note: These provisions apply for tax years beginning on or after 1 April 2026. Sections 7 to 10 largely reorganise and restate corresponding provisions of the earlier law, while Section 9 continues the rules dealing with business connection, Significant Economic Presence, and specified categories of income deemed to accrue or arise in India.
Section 7 of the Income Tax Act 2025: Income Deemed to Be Received
Income tax generally follows the rules of receipt or accrual, but Section 7 creates specific situations where the law deems income to have been received even when no cash has actually changed hands.
PF Annual Accretion
Deemed received each year it accrues
The yearly addition to a recognised provident fund balance, within Schedule XI limits
Transferred PF Balance
Deemed received on transfer between funds
Per the conditions in Schedule XI, when a balance moves between recognised funds
Employer Pension Contribution
Deemed received in the year contributed
Government or employer contributions to an employee’s pension account
Section 7 also settles a genuinely practical question: exactly when does a dividend count as your income? A dividend is deemed to be income of the tax year in which it is declared, distributed, or paid, as the case may be — the Act doesn’t pick a single trigger event in isolation, but ties the timing to whichever of these actually applies to the dividend in question. For an interim dividend specifically, the amount is taxable in the tax year in which it is unconditionally made available to the shareholder, not the year the board merely announces it. This timing matters for advance tax calculations and for reporting the payout in the correct Tax Year, especially where a company declares a dividend in one year but the payment only reaches shareholders in the next.
Section 8: Income on Receipt of Capital Asset or Stock-in-Trade from a Firm, AOP or BOI
Picture a partnership quietly handing its most valuable asset, a property, a brand, a block of shares, or inventory carried at old book value, to a retiring or incoming partner instead of accounting for it at current market value. Section 8 addresses exactly this situation, where a specified entity distributes an asset to a specified person in connection with a change in the entity’s constitution.
The “specified entity” under this provision is a firm, an association of persons (AOP), or a body of individuals (BOI), and the “specified person” is a partner of that firm or a member of that AOP or BOI. Where, in connection with the reconstitution or dissolution of a specified entity, a specified person receives a capital asset or stock-in-trade from that entity, the specified entity is deemed to have transferred that asset, and the fair market value of the asset on the date of receipt is treated as the deemed full value of consideration for that deemed transfer. This isn’t simply an ordinary transfer being taxed at its actual price — the receipt itself is what triggers the deeming fiction, and it’s the entity’s deemed transfer, not the partner’s receipt, that the Act taxes. The resulting income is then computed under the applicable provisions, depending on what was actually received:
- Capital asset — the income is computed under the relevant capital-gains provisions of the Act
- Stock-in-trade — the income is computed under the relevant profits-and-gains-of-business-or-profession provisions of the Act
The liability falls on the specified entity, not on the partner or member who receives the asset. What Section 8 does not do is hand you a ready-made “taxable gain” figure — fair market value replaces the sale consideration in the computation, but the actual income still has to be worked out under the ordinary computation rules for that head, and the entity’s book value should not automatically be treated as its tax cost of acquisition for that purpose.
Ravi retires from a three-partner architecture firm. As part of the settlement, the firm transfers a Pune office unit to him, carried on the firm’s books at ₹40 lakh but worth ₹1.2 crore in the current market. The FMV of ₹1.2 crore is treated as the deemed full value of consideration under Section 8. The resulting taxable income is then computed under the applicable capital-gains or business-income provisions, as the case may be, in the tax year the reconstitution takes effect. Book value should not automatically be treated as the tax cost of acquisition for that computation — what’s actually taxable depends on the tax cost and other applicable computation inputs, depending on the nature of the asset and the applicable provisions.
Section 9 of the Income Tax Act 2025: Income Deemed to Accrue or Arise in India
This is the section that gives India’s tax net its cross-border reach, and it’s built around one core idea: certain income stays taxable in India because of its connection to India, regardless of where the recipient actually sits when they earn it.
- Business connection — where a non-resident carries on business through an agent, branch, or arrangement in India, income reasonably attributable to those Indian operations is deemed to accrue here. Where only part of the business is carried out in India, only the attributable portion is taxed, not the whole.
- Significant Economic Presence (SEP) — a non-resident can create an Indian business connection purely through digital activity, without any physical presence at all, where transactions with Indian residents exceed prescribed value thresholds, or where the non-resident systematically solicits business from a prescribed number of Indian users.
- Royalty, interest, and fees for technical services — these may be deemed to accrue or arise in India where the specific conditions in Section 9 are satisfied, including provisions dealing with payments by residents, use of the relevant right, property, or services in India, and certain payments by non-residents connected with Indian business or sources.
- Salary — deemed to accrue in India if earned for services rendered in India, including certain leave periods tied to an Indian employment contract.
- Capital gains arising from the transfer of a capital asset situated in India, including qualifying indirect transfers covered by the Act, where the statutory conditions for such indirect transfers are met.
- Dividends paid by an Indian company — deemed to accrue in India even when paid outside India.
- A specified sum paid by a resident to certain non-resident recipients — income arising outside India, in the nature of a specified sum, paid by a person resident in India to a non-resident who is not a company, to a foreign company, or to a person not ordinarily resident in India, is also deemed to accrue or arise in India. The “specified sum” here refers to a sum covered by Section 92(2)(m), which addresses specified money or property received without consideration, subject to the statutory exclusions and conditions attached to that provision. This isn’t merely a generic “gift tax” rule; it extends the deeming provision to a defined category of sums paid across this specific set of resident-to-non-resident (or resident-to-RNOR) relationships, subject to the conditions attached to that category under the Act.
Several specific carve-outs also apply, including: a non-resident whose Indian activity is confined to purchasing goods for export generally isn’t deemed to have Indian-source income from that activity alone; the same applies to a non-resident news agency whose Indian presence is limited to collecting news for transmission abroad; and a separate carve-out exists for income of a non-resident connected with the shooting of a cinematograph film in India, subject to its own statutory conditions. Each carve-out applies strictly on its own statutory conditions, not as a general exemption for any offshore-facing business.
The table below summarises the broad categories — but each one is subject to the specific statutory conditions attached to it in the Act; falling into a category isn’t, by itself, automatic proof of taxability without those conditions being met.
| Category of Income | When It’s Deemed to Accrue in India |
|---|---|
| Business profits | Attributable to a business connection or SEP in India, to the extent reasonably linked to Indian operations, subject to statutory conditions |
| Royalty / FTS | Where paid by an Indian resident, or the right/service is used in India, subject to statutory conditions |
| Salary | Where services are rendered in India, subject to statutory conditions |
| Capital gains | Where the asset transferred is situated in India, including qualifying indirect transfers meeting statutory conditions |
| Dividend | Where paid by an Indian company, regardless of where the payment is made |
| Specified sum (Section 9(8)) | Paid by a resident to a non-resident (not a company), a foreign company, or an RNOR, subject to statutory conditions |
It’s worth being precise about what this section does and doesn’t settle on its own: business connection and attribution questions are inherently facts-and-circumstances determinations, not mechanical tests. Whether a given arrangement actually creates a business connection, and how much income is genuinely attributable to Indian operations, depends on the specifics of each case rather than a fixed formula.
Section 10: Apportionment of Income Between Spouses Governed by Portuguese Civil Code
This is the most narrowly-targeted provision in this group, and one most taxpayers outside the covered territories will never encounter. Section 10 applies to husband and wife governed by the community of property system known as Communiao dos Bens under the Portuguese Civil Code of 1860, in force in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu. Under this system, property and income are jointly held by law. Section 10 requires that income under each head, other than salary, be apportioned equally between husband and wife for tax purposes, reflecting the underlying civil-law reality that neither spouse individually owns the income in question. Salary income remains taxed in the hands of the spouse who actually earns it, since that’s a personal entitlement the community-property regime doesn’t touch.
- Assuming a partner receiving a firm’s asset is personally taxed — under Section 8, the tax liability sits with the specified entity (firm, AOP, or BOI), not the recipient partner or member
- Treating SEP as requiring an Indian office or staff — it doesn’t. Purely digital transactions or user engagement can trigger it without any physical presence, subject to the statutory thresholds
- Assuming Section 9 always taxes the full amount of foreign business income — where only part of the business is carried out in India, only the portion reasonably attributable to Indian operations is in scope
- Overlooking Section 10’s actual test — this provision doesn’t turn on marriage location alone; it applies specifically to spouses governed by the Communiao dos Bens community-of-property system under the Portuguese Civil Code of 1860, as recognised in Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu
Frequently Asked Questions
When exactly does a dividend count as income under Section 7?
A dividend is deemed to be income of the tax year in which it is declared, distributed, or paid, as the case may be. An interim dividend is deemed received in the tax year in which the amount is unconditionally made available to the shareholder, not the year the board merely announces it.
Who pays tax when a firm transfers an asset to a retiring partner?
Under Section 8, the fair market value of the capital asset or stock-in-trade on the date of receipt is deemed to be the full value of consideration for the deemed transfer. The resulting income is then computed under the applicable provisions for capital gains or business income, and the tax liability sits with the specified entity (the firm, AOP, or BOI), not the partner or member who receives the asset.
Can a foreign company be taxed in India without any physical presence here?
Yes, potentially, through the Significant Economic Presence provisions under Section 9. Where digital transactions with Indian residents or systematic soliciting of Indian users exceed prescribed thresholds, a business connection can arise without any office, staff, or physical footprint in India, subject to the facts of the particular case.
Does Section 9 tax a non-resident’s entire global business income if part of it touches India?
No. Where only part of a non-resident’s business operations are carried out in India, only the income reasonably attributable to those Indian operations is deemed to accrue in India, not the business’s worldwide profit.
Is a sum of money paid by an Indian resident to a non-resident taxable in India under Section 9?
It can be, under Section 9(8). Income arising outside India, in the nature of a specified sum, paid by a person resident in India to a non-resident who is not a company, to a foreign company, or to a person not ordinarily resident in India, is deemed to accrue or arise in India, subject to the conditions attached to that category under the Act. This is a specific deeming provision rather than a general “gift tax” rule.
Who does Section 10’s spousal apportionment rule actually apply to?
It applies to husband and wife governed by the community of property system known as Communiao dos Bens under the Portuguese Civil Code of 1860, in force in the State of Goa and the Union Territories of Dadra and Nagar Haveli and Daman and Diu. It requires non-salary income to be apportioned equally between the spouses for tax purposes; it has no application to marriages elsewhere in India that aren’t governed by this specific community-of-property system.
Income Tax Act 2025 — Chapter I to III Series
Charge of Income-tax & Scope of Total Income (§4–5)
Who’s taxed, on what, and how residential status decides the scope.
Part 3Residential Status of Individuals Under Section 6
The day-count tests that decide which category you fall into.
Part 4Residential Status of HUF, Firms, Companies & Other Entities
Control, management, and POEM — how Section 6 applies beyond individuals.
Deemed Receipt & Income Deemed to Accrue in India (§7–10)
The provisions that decide what actually counts as Indian income.
Incomes Not Forming Part of Total Income (§11–12)
The exemptions chapter — what stays out of your taxable income altogether.
Sections 7 to 10 exist for different reasons, not one single reason. Sections 7, 8, and 9 largely address situations where a literal reading of receipt, transfer, or Indian-source accrual concepts would leave a genuine gap, a delayed dividend, an asset quietly moved out of a firm at book value, or a digital business with no office but plenty of Indian customers. Section 10 is different in kind: it isn’t an anti-avoidance rule at all, but a recognition that under the Portuguese Civil Code’s community-of-property system, income genuinely belongs to both spouses jointly, and the tax computation has to reflect that civil-law reality rather than ignore it. Together, these four sections keep the definition of “taxable income” aligned with the actual legal and economic reality each situation presents.
Sources & References
- Income-tax Act, 2025 [Act No. 30 of 2025] — full text, as amended by Finance Act, 2026Income Tax India, incometaxindia.gov.in
- Income Tax India — Section 9, Income Deemed to Accrue or Arise in India (Income-tax Act, 2025)Income Tax India, incometaxindia.gov.in
- The Income-Tax (No. 2) Bill, 2025 — As Passed by Lok SabhaPRS Legislative Research
Sections 7 to 10 discussed here are summarised for reader convenience. Business connection, attribution, and SEP determinations under Section 9 in particular are fact-specific — always verify against the official text linked above and consult a Chartered Accountant before relying on this for a filing or structuring decision.
Disclaimer: This article is for general informational purposes only and does not constitute tax or legal advice. The Income-tax Act, 2025 and related rules are subject to notifications and amendments by the CBDT. Please consult a qualified Chartered Accountant for advice specific to your situation.
