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Section 5 of the Income-tax Act, 2025: Is Foreign Income Taxable in India?

Section 5 determines which income enters the total income of a resident, a resident but not ordinarily resident (RNOR), or a non-resident. The answer depends on residential status, where income is received and where it accrues or arises.

Current law: The Income-tax Act, 2025 applies from 1 April 2026. This guide explains Section 5 in the context of the Act as amended by the Finance Act, 2026. Earlier tax years may require examination under the Income-tax Act, 1961 and applicable transitional provisions.

What does Section 5 provide?

Section 5, in Chapter II (Basis of Charge), defines the scope of total income for a tax year. It operates subject to other provisions of the Act, including exclusions, exemptions, reliefs and applicable treaty provisions. Residential status under Section 6 is central to its application.

Section 5(1): Which income of a resident is taxable?

Subject to the Act, the total income of a resident includes income from any source that is received or deemed received in India, accrues or arises (or is deemed to accrue or arise) in India, or accrues or arises outside India.

Resident and ordinarily resident (ROR)

A resident who is ordinarily resident is generally within the scope of taxation on worldwide income, subject to applicable exclusions and reliefs. Foreign salary, overseas rent and foreign investment income may therefore be relevant even if paid abroad.

Resident but not ordinarily resident (RNOR)

For a person who is not ordinarily resident under Section 6(13), income accruing or arising outside India is included under Section 5(1)(c) only if it is derived from a business controlled in India or a profession set up in India. Income received in India or accruing or deemed to accrue in India remains within the statutory scope.

Section 5(2): What income of a non-resident is taxable?

A non-resident's total income includes income received or deemed received in India, and income accruing or arising or deemed to accrue or arise in India. Foreign income that is both received and accrued outside India generally falls outside Section 5(2), subject to the actual facts and applicable deeming provisions.

Important: Income earned for services performed in India may have an Indian accrual or deemed-accrual connection even if the payment is deposited in a foreign bank account. Consider Section 9 and any applicable tax treaty.

Sections 5(3) and 5(4): Two safeguards

Section 5(3): Entry in an Indian balance sheet

Income accruing or arising outside India is not deemed received in India merely because it is recorded in a balance sheet prepared in India. Accounting presentation alone does not establish Indian receipt.

Section 5(4): Income cannot be included twice on accrual and receipt

Where income has already been included in total income because it accrued or arose, or was deemed to accrue or arise, it cannot be included again merely because it is subsequently received or deemed received in India by the same person.

Relevant statutory definitions and concepts

Tax year (Section 3): Generally, the 12-month financial-year period beginning on 1 April; special commencement rules apply to a newly established business, profession or source of income.

Resident and non-resident (Section 6): Residential status is determined under the statutory tests for the relevant person and tax year, not merely by citizenship or nationality.

Not ordinarily resident (Section 6(13)): A special residential-status category with a narrower scope for foreign-accruing income under Section 5(1)(c).

Received or deemed received: Actual receipt must be distinguished from amounts treated as received by law. Section 7 contains relevant deemed-receipt provisions.

Accrues or arises: Broadly concerns the point at which a legally enforceable right to income comes into existence; timing and source depend on the facts and applicable provisions.

Deemed to accrue or arise in India: Certain income is treated as arising in India by statutory rule, including provisions addressed in Section 9.

Practical illustrations of Section 5

Situation	General Section 5 treatment
ROR earns rent from property outside India	Generally included as foreign-accruing income, subject to other provisions and treaty relief.
RNOR earns foreign bank interest accruing and first received abroad	Generally excluded unless the relevant Indian-controlled-business or India-set-up-profession condition applies.
Non-resident receives Indian-source rental income	Generally included within Indian total income.
Non-resident earns foreign-source income accruing and first received abroad	Generally outside the scope of Section 5(2).
Income taxed on accrual is paid in a later year	Not included again solely because of subsequent receipt, under Section 5(4).

These illustrations assume no special deeming rule, exemption or treaty provision changes the outcome.

Frequently asked questions

Does an Indian citizen automatically pay tax on worldwide income?

No. Citizenship by itself does not determine the scope of income under Section 5. The person's residential status under Section 6 and the location of receipt and accrual are material.

Is income credited to a foreign bank account exempt from Indian tax?

Not necessarily. An ordinarily resident person's foreign income can be within the Indian tax base even when received abroad. Indian-source income can also remain taxable for a non-resident.

Does an Indian balance sheet make foreign income taxable in India?

No. Section 5(3) specifically prevents deemed Indian receipt based solely on inclusion in a balance sheet prepared in India.

Can the same income be taxed again when received?

Section 5(4) prevents inclusion a second time on receipt where the same income has already been included on an accrual or deemed-accrual basis.

Official statutory sources

Official Section 5 Income-tax Act 2025 (amended 2026)

For individual cases, verify the operative statutory text, residential status, income source, timing of receipt, and any applicable double-taxation agreement.

Last reviewed: 11 November 2026