Transactions with Persons in Notified Jurisdictions: Section 176, Income Tax Act 2025
Section 176 of the Income-tax Act, 2025 lets the Central Government notify a country or territory as a notified jurisdictional area because it does not exchange information effectively. Once a jurisdiction is notified, any transaction you enter into with a person located there attracts five special measures: transfer pricing applies automatically, deductions can be denied, you must file Form 61 for payments to financial institutions there, unexplained receipts become income, and TDS goes up to at least 30%.
This guide explains each measure, the documents you must keep, and the traps. Every provision below is from section 176 of the Act (as amended by the Finance Act, 2026) and from rules 92 and 125 of the Income-tax Rules, 2026. The Act does not name any country. Whether a jurisdiction is currently notified depends on the notification, so check the latest notification before you apply any of this.
What is a notified jurisdictional area under section 176?
Under section 176(1), the Central Government may, by notification, specify any country or territory outside India as a notified jurisdictional area, "having regard to the lack of effective exchange of information with such jurisdiction". The notification applies to transactions entered into by any assessee.
Who is a "person located in a notified jurisdictional area"?
Section 176(6)(a) includes three kinds of person:
- a person who is resident of the notified area;
- a person that is not an individual and is established in the notified area (a company or firm incorporated there, for example);
- a permanent establishment in the notified area of a person who does not fall in the first two groups. Permanent establishment has the meaning in section 173(c).
"Transaction" has the meaning in section 173(e) (section 176(6)(c)). The word "person" is wide, so a bank branch, a trading partner or a group company can all be caught if they are located in the notified area.
What are the five special measures at a glance?
| Measure | Provision | What happens |
|---|---|---|
| 1. Deemed associated enterprises | Section 176(2)(a) | All parties to the transaction are treated as associated enterprises under section 162 |
| 2. Deemed international transaction | Section 176(2)(b) | Transfer pricing rules apply, without the tolerance-band benefit in section 165(3)(a)(ii) |
| 3. Deduction conditions | Section 176(3) | No deduction for payments to a financial institution without Form 61; no deduction for other expenses or depreciation without prescribed documents |
| 4. Unexplained receipts | Section 176(4) | A sum received or credited is deemed income if you do not explain its source, or the explanation is not satisfactory |
| 5. Higher TDS | Section 176(5) | Tax is deducted at the highest of three rates, one of which is 30% |
How does transfer pricing apply to a notified jurisdiction?
Normally, transfer pricing needs two enterprises that are associated, with one of them a non-resident (section 163(1)). Section 176(2) removes that test. If one party to your transaction is a person located in a notified area, all parties are deemed associated enterprises under section 162, and a transaction of the kind described in section 163(1) and (2) is deemed an international transaction.
Sections 161, 162, 163, 165, 166, 167, 171, 172 and 173 then apply. That brings in the arm's length price rules, the accountant's report under section 172 and the documentation duty under section 171. One benefit is switched off: the variation tolerance in section 165(3)(a)(ii). Ordinarily, if the actual price is within a notified percentage (not above 3%) of the arm's length price, the actual price is accepted. In a notified-area transaction you do not get that cushion. For the basics of arm's length price, see our guide on transfer pricing and arm's length price.
Rule 92 adds another consequence. The safe harbour rules (rules 86 to 91) do not apply to eligible international transactions with an associated enterprise located in a country or territory notified under section 176, or in a no tax or low tax country or territory.
When is a payment or expense disallowed?
Section 176(3) sets two conditions. No deduction is allowed:
- for any payment to a financial institution located in a notified area, unless you furnish an authorisation in the prescribed form allowing the Board or another income-tax authority to seek relevant information from that institution on your behalf (section 176(3)(a)); and
- for any other expenditure or allowance, including depreciation, arising from the transaction with a person located in a notified area, unless you maintain and furnish the prescribed documents and information (section 176(3)(b)).
What is Form 61 and how is it filed?
Rule 125 prescribes the process for the section 176(3)(a) authorisation:
- The authorisation is in Form No. 61 (rule 125(1)).
- You deposit with, or transmit to, the financial institution the first copy of the filled form (rule 125(2)).
- You submit the second copy, with evidence that the first copy reached the institution, to the Assessing Officer having jurisdiction over you (rule 125(3)).
- You take all steps required under any law in force in India or outside India so that the authorisation is legally enforceable (rule 125(4)).
What documents must you keep for notified-area transactions?
For section 176(3)(b), rule 125(5) says you must keep, in addition to the information and documents in rule 84(1):
- the ownership structure of the other party, with name and address of individuals or entities (inside or outside the notified area) holding more than 10% directly or indirectly;
- a profile of the multinational group it belongs to: name, address, legal status and tax residence of each group enterprise you have dealt with, and the ownership links among them;
- a broad description of its business and industry;
- any other information, data or document relevant to the transaction.
These cover the period up to the due date of filing the return under section 263(1) (rule 125(6)). Keep them for eight years from the end of the financial year succeeding the relevant tax year (rule 125(7)).
What happens to money received from a notified jurisdiction?
Under section 176(4), if in a tax year you received or were credited any sum from a person located in a notified area, and either:
- you give no explanation about the source of that sum in the hands of that person (or of the beneficial owner, if that person is not the beneficial owner); or
- the Assessing Officer finds your explanation not satisfactory,
then the sum is deemed to be your income for that tax year.
What is the TDS rate on payments to a person in a notified area?
Section 176(5) applies when a person located in a notified area is entitled to receive any sum on which tax is deductible under Chapter XIX-B. Tax is deducted at the highest of:
- the rate or rates in force;
- the rate specified in the relevant provision of the Act; and
- 30%.
So 30% is a floor. If another applicable rate is higher, that one applies. For the ordinary rules on non-resident payments, see TDS on payments to non-residents.
Worked examples with figures
The figures are illustrative, for tax year 2026-27. Assume the jurisdiction concerned is notified under section 176.
Example 1: TDS on a payment to a notified-area party
Assumptions: an Indian company pays Rs 12,00,000 to a person located in a notified area. The sum is subject to TDS under Chapter XIX-B. Assume the rate in force is 10% and the rate in the relevant provision is 20%.
| Step | Rate |
|---|---|
| (a) Rate in force | 10% |
| (b) Rate in the relevant provision | 20% |
| (c) Section 176(5)(c) | 30% |
| Highest of (a), (b), (c) | 30% |
| TDS = Rs 12,00,000 x 30% | Rs 3,60,000 |
Example 2: Unexplained receipt becomes income
Assumptions: an assessee has other taxable income of Rs 20,00,000 in 2026-27. During the year Rs 45,00,000 is credited to her from a person in a notified area. She cannot explain the source in that person's hands.
| Step | Amount (Rs) |
|---|---|
| Other income | 20,00,000 |
| Add: sum deemed income under section 176(4) | 45,00,000 |
| Income on which tax is computed | 65,00,000 |
Example 3: Expense disallowed for missing documents
Assumptions: a business has profit of Rs 30,00,000 before charging a Rs 8,00,000 service fee paid to a person in a notified area. It has not maintained the documents prescribed under section 176(3)(b).
| Step | With documents (Rs) | Without documents (Rs) |
|---|---|---|
| Profit before the fee | 30,00,000 | 30,00,000 |
| Less: fee allowed | 8,00,000 | 0 |
| Business income | 22,00,000 | 30,00,000 |
Example 4: No tolerance band
Assumptions: an Indian firm sells goods for Rs 98,00,000 to a trader in a notified area. The arm's length price is Rs 1,00,00,000. In an ordinary international transaction, if the notified tolerance were 3% of the actual price, the variation here (Rs 2,00,000 on Rs 98,00,000, about 2.04%) is within it, so the price actually charged could stand. Under section 176(2) the benefit in section 165(3)(a)(ii) is not available, so the arm's length price of Rs 1,00,00,000 applies and the firm's income is computed on that price. Its sale income goes up by Rs 2,00,000.
Real-life scenarios
Ravi, a garment exporter. Ravi has a buyer who is a trading company established in a notified area. He has never heard of any group link with the buyer. Under section 176(2) the buyer is still deemed an associated enterprise, so his sales are tested against an arm's length price and he needs an accountant's report under section 172. He also has to keep the buyer's ownership and group details under rule 125(5).
Meena, a software consultant. Meena receives Rs 18,00,000 in her account from a company located in a notified area for services she says she delivered. She keeps the contract and invoices but has nothing on who owns the payer or where its money came from. Section 176(4) lets the Assessing Officer treat the sum as her income if the explanation about the source in the payer's hands is not satisfactory. Collecting that information from the payer up front is the safer course.
Arjun, a finance head. His company pays interest on a loan to a bank branch in a notified area. If the company has not filed Form 61 as per rule 125, the payment is not deductible under section 176(3)(a).
Common mistakes
- Assuming a relationship is needed. Section 176(2) deems the parties associated even if they have no ownership or control link.
- Relying on the tolerance band or safe harbour. The section 165(3)(a)(ii) benefit is excluded, and rule 92 switches off safe harbour for notified jurisdictions.
- Treating the 30% as a flat rate. It is the floor of a "highest of three" test (section 176(5)).
- Skipping the second copy of Form 61. Rule 125(3) requires the second copy and proof of delivery to go to the Assessing Officer.
- Forgetting depreciation. Section 176(3)(b) covers depreciation arising from the transaction too, not just revenue expenses.
- Not tracking the notification. The list of notified areas can change, so a jurisdiction that was outside the net last year may be inside it now.
Quick reference
| Item | Requirement | Source |
|---|---|---|
| Authorisation for a financial institution | Form 61; first copy to the institution, second copy to the Assessing Officer | Section 176(3)(a), rule 125(1) to (3) |
| Ownership threshold to report | More than 10% direct or indirect | Rule 125(5)(a) |
| Record period | Up to the return due date under section 263(1) | Rule 125(6) |
| Record retention | 8 years from the end of the financial year succeeding the tax year | Rule 125(7) |
| TDS rate | Highest of rate in force, rate in the relevant provision, and 30% | Section 176(5) |
| Safe harbour | Not available | Rule 92 |
Where this is in the Act
- Section 176: special measures for transactions with persons located in a notified jurisdictional area
- Sections 161 to 173: transfer pricing, including associated enterprise (162), international transaction (163), arm's length price (165), documentation (171) and accountant's report (172)
- Rule 125: Form 61 and documents for section 176
- Rule 92: safe harbour not applicable
- Rule 82(5)(f): the multi-year option under section 166(9)(a) is not available if an associated enterprise is resident in a notified jurisdiction
If you handle a client book with cross-border payments, the hard part is knowing which clients have a transaction with a notified area and whether Form 61 and the documentation are done before the return is filed. Finexo's practice management software can hold these as tracked tasks per client with reminders. It does not decide whether a jurisdiction is notified or prepare the forms for you.
This article is general information on the Act and Rules, not tax advice. Confirm the current notification and your facts with a qualified professional.
Frequently Asked Questions
Which countries are notified jurisdictional areas?
The Act names none. Section 176(1) leaves it to a Central Government notification, so check the latest notification before treating a country or territory as covered.
What is a notified jurisdictional area under the Income-tax Act, 2025?
Under section 176(1), it is a country or territory outside India that the Central Government specifies by notification because of the lack of effective exchange of information with that jurisdiction.
What is the TDS rate on payments to a person in a notified jurisdictional area?
Under section 176(5), tax is deducted at the highest of the rate or rates in force, the rate in the relevant provision of the Act, and 30%.
Do transfer pricing rules apply even if the parties are not related?
Yes. Under section 176(2), all parties to a transaction with a person located in a notified area are deemed associated enterprises, and the transaction is deemed an international transaction. The tolerance benefit in section 165(3)(a)(ii) does not apply.
What is Form 61 under section 176?
It is the authorisation under rule 125(1) that lets the Board or another income-tax authority seek information from a financial institution in a notified area on your behalf. Without it, payments to that institution are not deductible (section 176(3)(a)).
What happens if I cannot explain money received from a notified jurisdiction?
Under section 176(4), if you give no explanation about the source, or the Assessing Officer finds it unsatisfactory, the sum is deemed to be your income for that tax year.
How long must documents for notified-area transactions be kept?
Under rule 125(7), for eight years from the end of the financial year succeeding the relevant tax year. The documents cover the period up to the return due date under section 263(1).