The section deems two sums to be income received for the purposes of computing the income of an assessee: sums deducted under the Chapter, and income-tax paid outside India by way of deduction in respect of which the assessee is allowed a credit against tax payable under the Act. Two amounts are excepted from that deeming — tax paid under section 392(2)(a), and tax deducted as per section 393(3) (Table: Sl. No. 5).
Why it is there
Tax deducted at source never reaches the payee's hands, and without this rule the income assessed would be the net amount while credit was claimed for the gross. The section makes the deducted sum part of income received so that the assessee is taxed on the gross figure and takes credit for the deduction, and it does the same for foreign tax deducted where a credit is allowed against Indian tax.
Who it applies to
An assessee from whose income tax has been deducted under the Chapter
An assessee allowed a credit for income-tax paid outside India by way of deduction
The Assessing Officer computing income where tax has been deducted
What this means in practice
The practical rule is grossing up: income is computed on the amount before deduction, not on the amount credited to the assessee's bank account, and the deducted tax is then taken as credit. The same treatment extends to foreign withholding tax, but only where a credit against Indian tax is allowed for it. The two exceptions have to be checked rather than assumed.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
A company is paid Rs. 90 lakh by a customer who has deducted Rs. 10 lakh of tax at source. Its income from the transaction is computed on Rs. 1 crore, because the Rs. 10 lakh is deemed to be income received under clause (a), and that Rs. 10 lakh is then available as credit. Returning only the Rs. 90 lakh while claiming credit for the full Rs. 10 lakh would misstate the income.
Where you meet this section
It is the rule behind the mismatch a taxpayer sees between the receipts shown in the annual tax statement and the money actually banked, and it governs the gross figure that has to be offered in the return against which the deduction credit is claimed.
The words themselves
The following sums shall be deemed as income received for the purposes of computing the income of an assessee
Section 396, Income-tax Act, 2025.
except tax paid under section 392(2)(a) and tax deducted as per section 393(3) (Table: Sl. No. 5)
Section 396, Income-tax Act, 2025.
What people get wrong
Offering the net amount received. Clause (a) deems the sum deducted under the Chapter to be income received, so the gross amount is what is computed on.
Ignoring foreign withholding tax in computing income. Clause (b) deems income-tax paid outside India by way of deduction to be income received where a credit is allowed for it against tax payable under the Act.
Grossing up every deduction. The section excepts tax paid under section 392(2)(a) and tax deducted as per section 393(3) (Table: Sl. No. 5).
What this replaced
The correspondence is the Income Tax Department’s own, from its comparison utility for the 1961 and 2025 Acts. A renumbering is the easy half; whether the words changed is the half that decides cases.
A circular binds the department, not you and not a court. Every one below was written under the 1961 Act; it reaches this section because the department’s own concordance carries the provision it names to this one.
Circular No. 785 — Section 195A l Certificate for Payment Made "NET of TAX" 1999-11-24
Read this before you rely on it. Every decision below was decided under the Income-tax Act, 1961. It appears here because it is tagged to a 1961 provision that the department’s own mapping carries to section 396. That is an inference we have drawn, not a holding on the new section: where the words changed in the move, the reasoning may not survive. Treat this as the place to start looking, not as authority on the 2025 Act.
DCIT v Rajeev G KalathilITATHelps taxpayertagged s.198 The only thing against my supplier is that the indirect-tax authorities have put him on a list. Is that enough to make my purchase bogus?
What this page does not tell you. It does not reproduce the section. Everything above was written from the section’s own text as the Income Tax Department publishes it — the text is here, and nothing here is advice on your facts. Where a figure matters, read the sub-section it comes from.