Income Deemed to Accrue or Arise in India: Business Connection and Significant Economic Presence (Income Tax Act 2025)

Section 9 of the Income-tax Act, 2025 lists income that is deemed to accrue or arise in India even if the money is earned or received abroad. It matters most for non-residents, because India taxes them only on income that is received in India or accrues or arises (or is deemed to) here. The key triggers are a business connection in India, which now expressly includes significant economic presence (payments above Rs 2 crore in a tax year, or 3,00,000 users, under rule 13), plus interest, royalty and fees for technical services paid by Indian payers, and share transfers that derive substantial value from India.

This guide walks through each limb of section 9 in the order of the section. Every figure comes from the Act (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026, with the section or rule number next to it. Examples use tax year 2026-27 and are illustrations, not advice. Last reviewed against that text on 10 November 2026.

What does "deemed to accrue or arise in India" mean?

Normally income is taxed in India if it is received here or actually accrues or arises here. Section 9(1) adds a second route: the income described in section 9(2) to 9(8) "shall be deemed to accrue or arise in India". Once it is deemed to arise here, it falls within the scope of total income of a non-resident. For how scope of total income and residential status fit together, see our guide on scope of total income and residential status.

Section 9(13) also settles the word "through" used throughout: it means and includes "by means of", "in consequence of" or "by reason of". So income earned indirectly through an Indian asset or business connection is covered, not only income earned directly.

Which types of income are deemed to arise in India?

Section	Income deemed to accrue or arise in India
9(2)	Income through or from an asset or source of income in India, property in India, a business connection in India, or transfer of a capital asset situated in India
9(3)	Salary earned in India (services rendered in India, and rest or leave period between periods of service in India); salary paid by the Government to an Indian citizen for services outside India
9(4)	Dividend paid by an Indian company outside India
9(5)	Interest payable by the Government, a resident (with an exception) or a non-resident (for money used in its India business)
9(6)	Royalty payable by the Government, a resident (with an exception) or a non-resident (for India business or India income)
9(7)	Fees for technical services payable on the same pattern as royalty
9(8)	Sums of the kind referred to in section 2(49)(u) (read with section 92(2)(m)) arising outside India, paid by a resident to a non-resident who is not a company, to a foreign company, or to a person not ordinarily resident

What is a "business connection" in India?

Under section 9(9)(a), a business connection includes (i) any business carried out in India where all or part of the operations are carried out in India, and (ii) a significant economic presence in India. Section 9(9)(b) says a business is "carried out in India" when it is run through a person acting for the non-resident who:

• has and habitually exercises an authority in India to conclude contracts for the non-resident, or habitually concludes, or plays the principal role in concluding, contracts that are in the non-resident's name, or for transfer or right to use property it owns or has the right to use, or for provision of services by it (section 9(9)(b)(i)(A));
• has no such authority but habitually keeps a stock of goods in India and regularly delivers from it on the non-resident's behalf (section 9(9)(b)(i)(B));
• habitually secures orders in India mainly or wholly for the non-resident or its group (section 9(9)(b)(i)(C)); or
• is a broker, general commission agent or other agent working mainly or wholly for the non-resident (or non-residents under common control), who is then not treated as independent (section 9(9)(b)(ii)).

What does not create a business connection?

Section 9(9)(c) excludes business through an agent of independent status acting in the ordinary course of business, and operations confined to: buying goods in India for export; collecting news and views for transmission out of India by a news agency or publisher; displaying uncut and unassorted diamonds in a notified special zone (foreign mining company); and shooting a cinematographic film in India by a non-citizen individual, a firm with no Indian-citizen or resident partner, or a company with no Indian-citizen or resident shareholder.

What is significant economic presence (SEP)?

Section 9(9)(d) says a non-resident has a significant economic presence in India where there is either of the following, irrespective of whether the agreement is made in India, the non-resident has a residence or place of business here, or it renders any services here:

• Payments test: a transaction in goods, services or property with any person in India (including download of data or software) where aggregate payments in the tax year exceed the prescribed amount. Rule 13(1) prescribes Rs 2 crore.
• Users test: systematic and continuous soliciting of business activities, or engaging in interaction, with the prescribed number of users in India. Rule 13(2) prescribes 3,00,000 users (the rule text prints this as "Rs. 300000").

SEP does not apply to transactions or activities confined to the purchase of goods in India for export (section 9(9)(e)).

Point	What the Act or Rules say
Payments threshold	Aggregate payments during the tax year exceed Rs 2 crore (rule 13(1))
Users threshold	3,00,000 users (rule 13(2))
Taxable portion	Only income reasonably attributable to the transactions or activities in 9(9)(d) (section 9(9)(f)(ii))
Also counted as attributable	Income from advertisements targeting customers in India or reached via an India IP address; sale of data collected from persons in India or from India IP addresses; sale of goods or services using such data (section 9(9)(g))

Worked example 1: does a foreign software company have SEP?

Assumptions: Northwind Ltd, a company outside India with no office, agent or staff in India, sells software subscriptions online to customers in India. Tax year 2026-27.

Quarter	Payments received from India
April to June	Rs 58 lakh
July to September	Rs 62 lakh
October to December	Rs 55 lakh
January to March	Rs 30 lakh
Total	Rs 205 lakh = Rs 2.05 crore

1. Add the quarters: 58 + 62 + 55 + 30 = 205 lakh.
2. Compare with the Rs 2 crore (200 lakh) limit in rule 13(1): 205 lakh is more than 200 lakh.
3. Result: Northwind has a significant economic presence in India for 2026-27, so it has a business connection under section 9(9)(a)(ii).
4. Only the part of its income reasonably attributable to these India transactions is deemed to arise here (section 9(9)(f)(ii)). The Act does not give a fixed percentage; it has to be worked out on the facts.

Had total payments been Rs 1.2 crore, the payments test would not be met. Northwind would still need to check the 3,00,000 users test.

Is interest, royalty or fee for technical services paid to a non-resident taxable in India?

Sections 9(5), 9(6) and 9(7) share one pattern. The income is deemed to arise in India when it is payable by:

• the Government; or
• a resident, unless the borrowing, right, property, information or service is used for a business or profession the resident carries on outside India, or for earning income from a source outside India; or
• a non-resident, if the debt, right or service is used for a business or profession the non-resident carries on in India, or (royalty and fees for technical services) for earning income from a source in India.

Payer	Deemed to arise in India	Not deemed (exception)
Government	Interest, royalty, fees for technical services	None stated
Resident	Unless the item is used as in the next column	Used for a business or profession carried on outside India, or to earn income from a source outside India
Non-resident	Interest: debt used for its India business or profession. Royalty and fees: right or service used for its India business or profession, or to earn income from an Indian source	Otherwise not on this ground

For a non-resident bank, interest paid by its Indian permanent establishment to its head office or another branch abroad is also deemed to arise in India. The permanent establishment is treated as a separate person for this (section 9(5)(b)).

Under section 9(11), for these three, the income is included in the non-resident's total income whether or not the non-resident has a residence, place of business or business connection in India, and whether or not it rendered services in India.

What counts as royalty?

Section 9(6)(b) defines royalty as consideration (including lump sum, but excluding amounts that are capital gains of the recipient) for: transfer or grant of rights in a patent, invention, design, secret formula or process, or trade mark; imparting information about their working or use; their use; imparting industrial, commercial or scientific knowledge or experience; use or right to use industrial, commercial or scientific equipment (except amounts in section 61(2), Sl. No. 5); rights in copyright, literary, artistic or scientific work including films and tapes for TV or radio; and services connected with these.

Section 9(6)(c) adds that a right to use computer software, including a licence, is covered irrespective of the medium, and that royalty applies whether or not the payer has possession or control of the right, uses it directly, or whether it is located in India. "Process" includes transmission by satellite, cable or optic fibre.

What counts as fees for technical services?

Section 9(7)(b): consideration (including lump sum) for managerial, technical or consultancy services, including provision of technical or other personnel. Excluded: consideration for a construction, assembly, mining or like project undertaken by the recipient, and consideration that is the recipient's "Salaries" income.

Real-life example: Ravi borrows from a lender abroad

Ravi, a resident, runs a hardware shop in Pune. He borrows from a lender in Singapore and uses the money to buy stock for the shop. The interest he pays to the lender is deemed to arise in India under section 9(5)(a)(ii), because the money was not used for a business outside India or to earn income from a source outside India. The lender, a non-resident, has Indian-source income, and section 9(11) applies even though the lender has no office here. The practical question for Ravi is whether he must deduct tax before remitting; that is a TDS question outside this article, so check it with your CA.

If Ravi instead used the loan only for a restaurant he runs in Dubai, the exception in section 9(5)(a)(ii)(A) would apply and the interest would not be deemed to arise in India on that ground.

Is salary earned abroad deemed to arise in India?

Section 9(3) deems salary to arise in India if it is earned in India, which includes income payable for services rendered in India and for a rest or leave period that is both preceded and succeeded by services in India and forms part of the service contract. It also covers salary paid by the Government to an Indian citizen for services rendered outside India.

Example: Meena is an Indian citizen posted by the Government to its mission abroad. Her salary is paid by the Government for services outside India, yet it is deemed to arise in India under section 9(3)(b). Her colleague Karan, a non-resident engineer employed by a private firm, works two months in Chennai and then takes a week of contractual leave before returning to Chennai. His pay for the Chennai work and for that leave week is earned in India under section 9(3)(a).

When is a share transfer outside India taxable here (indirect transfer)?

Section 9(2)(d) taxes income from transfer of a capital asset situated in India. Section 9(10) extends this to shares or interests in a company or entity registered outside India if the share or interest derives its value substantially from assets located in India. That is so if, on the specified date:

• the value of the Indian assets exceeds Rs 10 crore; and
• those assets are at least 50% of the value of all the assets the company or entity owns.

Asset value is fair market value without reducing liabilities (section 9(10)(c)), computed under rule 11. The specified date is the end of the accounting period before the transfer, or the date of transfer if the book value of assets on that date is more than 15% higher than on the earlier date (section 9(10)(d)).

How is the India part of the gain worked out?

Rule 12(1) applies the formula A x B / C, where A is the income from the transfer computed under the Act as if the share were located in India, B is the fair market value of the Indian assets on the specified date, and C is the fair market value of all the assets on that date (both under rule 11). This applies where not all assets of the foreign entity are in India (section 9(10)(f)).

Worked example 2: indirect transfer of a foreign holding company

Assumptions: Orion Holdings, registered outside India, owns Indian subsidiaries and other assets. Ankit, a non-resident individual, sells his 12% stake to an unrelated buyer in 2026-27. He is not a foreign portfolio investor. Fair market values on the specified date: Indian assets Rs 400 crore; all assets Rs 700 crore. Ankit's gain, computed as if the shares were located in India, is Rs 50 crore.

1. Value test: Rs 400 crore is more than Rs 10 crore. Pass.
2. Proportion test: 400 / 700 = 57.14%, which is at least 50%. Pass. The shares derive their value substantially from India.
3. Exclusion check (9(10)(g)): Ankit holds 12%, above the 5% ceiling, and is not an FPI. The exclusion is not available.
4. Attribution (rule 12(1)): 50 crore x 400 / 700 = Rs 28.57 crore (rounded).
5. Rs 28.57 crore is deemed to arise in India under section 9(2)(d). The balance is not.

If Ankit had held only 3%, with no right of management or control in the previous 12 months, and Orion directly owned the Indian assets, section 9(10)(g)(ii) would have excluded the transfer.

What compliance follows an indirect transfer?

• The transferor must obtain and file with the return a report in Form No. 4, signed and verified by an accountant, certifying the apportionment (rule 12(3)).
• If the transferor fails to provide the information, the Assessing Officer may determine the income in a suitable manner (rule 12(2)).
• The Indian concern must furnish Form No. 163 electronically under digital signature within 90 days from the end of the financial year of the transfer, or within 90 days of the transaction if it transfers management or control of the Indian concern (rule 235(2)). Records are to be kept for eight years from the end of the relevant tax year (rule 235(7)).

Does a fund manager in India create a business connection for an offshore fund?

Section 9(12) says that fund management by an eligible fund manager in India for an eligible investment fund does not constitute a business connection of the fund in India, and the fund is not resident in India merely because of that manager. The conditions for both are in Schedule I. The Central Government may relax or modify them by notification for managers located in an International Financial Services Centre that commence operations on or before 31 March 2030 (section 9(12)(f)).

Does "deemed to arise in India" always mean tax is payable?

No. Section 9 only decides where income is treated as arising. Three further points apply:

• A non-resident's total income covers income received or deemed received in India, and income that accrues or arises, or is deemed to accrue or arise, in India (section 5(2)). Income earned abroad is not deemed received in India merely because it appears in a balance sheet prepared in India (section 5(3)).
• Income already included because it accrued or arose (or is deemed to) is not included again as received in India (section 5(4)). It is counted once.
• Where India has a double taxation agreement with the other country, the Act applies only to the extent it is more beneficial to the assessee (section 159(4)). Check the treaty before concluding.

Is a gift or sum of money from an Indian resident to a non-resident deemed to arise in India?

It can be. Section 9(8) covers income arising outside India in the nature of a sum referred to in section 2(49)(u), paid by a resident in India to a non-resident who is not a company, to a foreign company, or to a person not ordinarily resident. Section 2(49)(u) points to section 92(2)(m): money received without consideration whose total exceeds Rs 50,000 in the tax year. Section 92(3) switches this off for sums received from a relative, on marriage, under a will or by inheritance, and in a few other cases. "Relative" for an individual includes a spouse, brother or sister, and lineal ascendants and descendants (section 92, definition of relative).

Example (tax year 2026-27, illustration): A resident in Mumbai sends Rs 5,00,000 to his son living abroad. The son is a relative, so section 92(3)(a) excludes it. If he sends the same Rs 5,00,000 to a non-relative friend who is a non-resident, it is above Rs 50,000 and is deemed to arise in India. A gift of Rs 45,000 to that friend is below the limit.

Common mistakes

• Testing SEP only on invoices raised in India. Section 9(9)(d) applies irrespective of where the agreement is made or whether the non-resident has a place of business here.
• Taxing the whole India revenue. Only income reasonably attributable to Indian operations or SEP activity is deemed to arise here (section 9(9)(f)).
• Treating every agent as a business connection. An independent-status agent acting in the ordinary course is excluded (section 9(9)(c)(i)). A broker working mainly or wholly for the non-resident loses that status.
• Ignoring the "used outside India" exception. Interest, royalty and technical fees paid by a resident for a business or income source outside India are carved out of sections 9(5) to 9(7).
• Assuming offshore share sales are outside India's reach. Check the Rs 10 crore and 50% tests on the specified date, and the 5% and FPI exclusions.
• Treating "deemed" as "taxable". Check the double taxation agreement (section 159(4)) and apply the more beneficial position.
• Missing the paperwork. Form 4 and Form 163 apply to indirect transfers; both have fixed filing rules.

Quick reference

Item	Limit / form	Source
SEP, payments from India	More than Rs 2 crore in the tax year	Section 9(9)(d)(i); rule 13(1)
SEP, users	3,00,000 users	Section 9(9)(d)(ii); rule 13(2)
Indirect transfer: value test	Indian assets above Rs 10 crore and at least 50% of all assets	Section 9(10)(b)
Indirect transfer: small holder exclusion	5% or less, no management or control in prior 12 months	Section 9(10)(g)
Accountant's apportionment report	Form No. 4, filed with return	Rule 12(3)
Indian concern's information	Form No. 163 within 90 days	Rule 235(2)

Where this is in the Act

• Section 5(2) to 5(4): scope of a non-resident's total income; section 159(4): treaty relief; section 92(2)(m) and 92(3): gifts.
• Section 9(1) to 9(8): the heads of deemed income; 9(9): business connection and SEP; 9(10): indirect transfers; 9(11): non-resident income in 9(5) to 9(7); 9(12): eligible investment fund; 9(13): meaning of "through".
• Section 173(c): permanent establishment; section 162: associated enterprises (used in section 9(10)(g)).
• Schedule I: conditions for eligible investment fund and eligible fund manager.
• Rules 10 to 12: fair market value and attribution for indirect transfers; rule 13: SEP thresholds; rule 235: Form 163.

How do CA firms keep track of non-resident clients?

For a CA firm, the hard part is rarely the section. It is remembering which non-resident clients are near the Rs 2 crore line, which have a Form 4 or Form 163 pending, and which documents are still missing. Finexo's practice management software tracks tasks, deadlines and documents across your client book. It does not decide whether a client has a business connection; that stays a professional judgment.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific case with a qualified chartered accountant.