Sub-section (1) deals with a resident. Total income includes all income from whatever source derived which is received or deemed to be received in India in that year by or on behalf of the person (clause (a)); which accrues or arises, or is deemed to accrue or arise, to him in India in that year (clause (b)); or which accrues or arises to him outside India in that year (clause (c)). Clause (c) carries a carve-out: for a resident who is "not ordinarily resident" in India under section 6(13), foreign-accruing income is included only when derived from a business controlled in India or a profession set up in India.
Sub-section (2) deals with a non-resident and drops the third limb: only income received or deemed to be received in India, and income accruing or arising or deemed to accrue or arise in India, come in.
Sub-sections (3) and (4) prevent double counting. Sub-section (3) says income accruing outside India is not deemed received in India by reason only that it is taken into account in a balance sheet prepared in India. Sub-section (4) says income once included on the accrual or deemed-accrual basis shall not again be included on the basis that it is received or deemed to be received in India.
Why it is there
Every computation provision presupposes an answer to one question: which income of this person is within the Indian net at all. This section supplies it, and makes residence the switch. Sub-sections (3) and (4) exist because the receipt and accrual limbs overlap, and without them the same rupee could be taxed twice.
Who it applies to
A person who is a resident in India for the tax year
A resident who is "not ordinarily resident" under section 6(13)
A non-resident
A person receiving income in India on behalf of another
What this means in practice
Residence here is a scope question, not a rate question, and the three status buckets give three different maps. The word "deemed" carries real weight in both sub-sections: income deemed to accrue or arise in India comes in even for a non-resident, and the deeming provisions live elsewhere in the Act. Sub-section (4) is the limb most often forgotten — once an amount is taxed on accrual it cannot be taxed again when it is remitted or received.
An example
Illustrative only, and invented for this page. The figures are chosen to show the rule biting, not taken from any real matter.
An individual who is resident but not ordinarily resident earns Rs. 40 lakh of fees from an Indian client, Rs. 15 lakh of rent from a flat abroad, and Rs. 25 lakh of profit from a trading business run from India through a foreign branch. The fees come in under clause (b); the foreign rent stays out; the Rs. 25 lakh comes in under clause (c) because the business is controlled in India. Had he been ordinarily resident, all three would have been included.
Where you meet this section
This section decides the shape of the return itself — whether foreign income schedules have to be completed at all — and it is what an Assessing Officer invokes in a notice proposing to bring an overseas receipt into total income.
The words themselves
accrues or arises to such person outside India in that year, but when such person is "not ordinarily resident" in India under section 6(13), such income shall be included only when it is derived from a business controlled in or a profession set up in India
Section 5(1)(c), Income-tax Act, 2025.
What people get wrong
Treating "not ordinarily resident" as a status outside sub-section (1). It sits inside the resident limb; the section merely narrows clause (c) for him.
Reading that carve-out as covering all foreign business income. Clause (c) requires the business to be controlled in India or the profession set up in India.
Assuming a non-resident escapes tax on anything not received in India. Sub-section (2)(b) brings in income deemed to accrue or arise in India, whatever the place of receipt.
Taxing a remittance of foreign income already assessed on accrual. Sub-section (4) bars that.
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. 22/2022 — Condonation of delay under section 119 2 b of the income tax act 1961 in filing of form no.10a 2022-11-01
Circular No. 3/2021 — Circular under section 10 of the direct tax vivad se vishwas act 2020 2021-03-04
Circular No. 21/2020 — Clarifications on provisions of the direct tax vivad se vishwas act 2020 2020-12-04
Circular No. 18/2020 — Clarifications in respect of the Direct Tax Vivad se Vishwas Act, 2020 2020-10-28
Circular No. 13/2017 — Clarification regarding liability to income tax in INDIA for a non resident seafarer receiving remuneration in NRE non resident ex 2017-04-11
Circular No. 673 — 99. Clarification regarding exemption under section 10(15)(iic) of the Income-tax Act, etc., of 9% Relief Bonds, 1987 (Now 8.5 per 1993-12-21
Circular No. 658 — Section 5 l Chargeable Expenditure 1993-09-02
Circular No. 637 — Section 5 l Chargeable Expenditure 1992-09-02
Circular No. 627 — 1366. Exemption to equity shares under section 5(1)(xxa) - Clarification in view of omission of Ninth Schedule to the Income-tax 1992-02-27
Circular No. 511 — 1373. Whether exemption of the deposits made under the National Savings Scheme, 1987, from wealth-tax, as per clause (xxvb) of sub 1988-05-10
Circular No. 490 — Procedure for obtaining certificate of exemption under clause (xxa) of sub-section (1) in respect of 1987-06-22
Circular No. 470 — Section 5A l Application of Amending Acts to Estate Duty on Agricultural Lands 1986-09-25
Circular No. 411 — 1374. Whether deposits held by a person of Indian origin or citizen in NRE Account during his residence in the foreign country wi 1985-02-25
Circular No. 401 — 1372. Exemption of deposits under National Deposit Scheme under clause (xxva) of sub-section (1) - Condition regarding six months’ 1984-10-27
Circular No. 382 — 45. Taxation of shares of Indian companies allotted to non-residents in consideration for the purchase of machinery and plant deli 1984-05-04
Circular No. 323 — 1370. Exemption of units under section 32(1)(ba) of Unit Trust of India Act - Whether over and above and independent of exemption 1982-01-22
Circular No. 304 — Whether gifts in kind are eligible for exemption under clause (v) of sub-section (1) 1981-06-02
Circular No. 284 — Whether gifts in kind are eligible for exemption under clause (v) of sub-section (1) 1980-10-13
Circular No. 75 — 1353. Pettifogging enquiries into details of articles covered under the proviso to clause (viii) of sub-section (1) are not to be 1972-01-22
Circular No. 74 — 1364. Interpretation of expression "Initial issue of equity share capital" used in clause (xx) of sub-section (1) 1972-01-15
Circular No. 69 — 1363. Equity shares issued by company in respect of which exemption is available under clause (xx) of sub-section (1) - Company c 1971-11-18
Circular No. 63 — 884. Assessment of existing banks and their shareholders and corresponding new banks in the context of nationalisation and payment 1971-08-16
Circular No. 17 — 1341. Whether annuity receivable under annuity deposit scheme is covered within the meaning of clauses (e)(iv) 1969-06-10
Circular No. 1 — 1350. Ownership flats of members of tenant co-partnership societies - Whether exempt under clause (iv) of sub-section (1) 1969-01-27
A notification is made under a power the Act gives and, within that power, is law. These too were made under the 1961 Act and are placed here by the department’s concordance.
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 5. 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.
CIT v Excel Industries LtdSupreme CourtHelps taxpayertagged s.5 The AO has taxed my advance licence and depb benefits in the year I exported. Is that the right year?
CIT v Vasisth Chay Vyapar LtdSupreme CourtHelps taxpayertagged s.5 We are an nbfc. The AO wants interest on a non-performing loan taxed on accrual even though we have not recognised it. Can he do that?
Ishikawajima-Harima Heavy Industries Ltd v DITSupreme CourtHelps taxpayertagged s.5 Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
CIT v Nokia Network OYHigh CourtHelps taxpayertagged s.5 We supply telecom equipment with embedded software to Indian operators through our Indian subsidiary. Is the subsidiary our permanent establishment…
Sanjay Baweja v Dy CITHigh CourtHelps taxpayertagged s.5 My employer paid me for the fall in value of options I never exercised. Is that a perquisite?
Sesa Goa Ltd v JCITHigh CourtHelps taxpayertagged s.5(2)(b) The Tribunal disallowed my education cess. Does s.40(a)(ii) actually cover cess?
Sumana Bandyopadhyay v DDITHigh CourtHelps taxpayertagged s.5(2) The AO taxed my foreign salary because it landed in my Indian nre account. Can he do that if I am a non-resident?
ACIT v Nishant KanodiaITATHelps taxpayertagged s.5 I left India to run my own business abroad, not for a job. Do I get the 182-day test?
Ashok Kumar Pandey v ACITITATHelps departmenttagged s.5 I am resident in both India and the US. Which country wins under the treaty tie-breaker?
CBDT Circular 13/2017 on seafarer salary in an NRE accountCBDTHelps taxpayertagged s.5(2) My client is a non-resident seafarer and his foreign employer credits his salary straight into his Indian nre account. Is that receipt in India?
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.
