Accrual of Income in India of Foreign Entities: Income Tax Act 2025

Introduction

Marking a significant milestone in the ongoing tax reform journey of India, the Income Tax Act, 2025 aims to simplify the existing framework, improve transparency, and encourage voluntary compliance. The Act will be effective from 1^st April 2026 creating a new era of taxpayer-friendly legislation and contributing as an important step in government’s push towards a simplified tax system.

Important Takeaways from the Act:

• Applicable from April 01, 2026 onwards
• Simplified structure and text to improve the clarity and coherence
• No major tax policy changes to ensure continuity and certainty
• No modification of tax rates
• Introduces concept of Tax year, replacing ‘Assessment Year’ and ‘Previous Year’. It has been defined as the twelve-month period of the financial year commencing on the 1st day of April.
• Multiple provisions have been brought together for more clarity, for example: The provisions related to Tax Deducted at Source (TDS), which were earlier distributed across multiple sections, have now been streamlined and grouped under single section- Section 393.
• Streamlined tax structure briefly outlined as follows:

 

Particulars	Remarks
Total Section	Reduced from 819 to 536 chapters
Chapters	Reduced from 47 to 23 chapters
Schedules	16 schedules added
New tools	Tables and formulas added

 

Accrual of Income in India

Section 9 of the Income-tax Act, 2025, lays down the fundamental principles for determining the scope of total income in the hands of a non-resident or a resident taxpayer. Although income earned or received in India is ordinarily taxable, however, Section 9 specifically provides for certain categories of income which while accruing or arising outside India, are deemed to accrue or arise in India due to their nexus with Indian sources or activities. For ex; Royalty, fees for technical services, transfer of capital assets situated in India etc. In short, Section 9 determines when income is considered to be earned in India for tax purposes, even is received outside India by non-residents.

Let’s understand taxation of dividends, royalty and fees for technical services as follows:

Dividend 

Simple rule: Any dividend paid by an Indian company is deemed to accrue or arise in India, regardless of where it is paid.

When taxable in India:

• Dividend paid by an Indian company anywhere in the world.
• Recipient's residential status determines final tax liability.

Royalty

WHAT IS ROYALTY: Payment for rights related to patents, trademarks, designs, copyrights, technical knowledge, use of equipment, computer software, or services connected to these.

When taxable in India:

• Paid by Government: Always taxable in India.
• Paid by resident: Taxable except when used for business outside India.
• Paid by non-resident: Taxable when used for business/earning income in India.

Fees for Technical Service (FTS)

What is FTS: Payment for technical or consultancy services, including provision of technical or other personnel.

When taxable in India:

• Paid by Government: Always taxable in India.
• Paid by resident: Taxable except when used for business outside India.
• Paid by non-resident: Taxable when used for business/earning income in India.

 

Concept of Permanent Establishment and Business Connections in India 

The terms permanent establishment and business connections in India gains importance from the fact that a foreign entity having a business connection or permanent establishment in India shall be deemed to be accrued or arisen in India and therefore taxable in India. Under the Income Tax Act 2025, the meaning of the said terms is given in section 9(9)(a) and section 177(3)(c). Briefly the said terms are described below:

a)      Business connection (Section 9(9)(a))

A business connection may refer to any relationship through which a non-resident earns income from India. Income arising directly or indirectly through such connection is taxable in India to the extent attributable to operations carried out in India.

Business connections include:

• Any part of a business whose operations are carried out in India; or
• A Significant Economic Presence (SEP) of a non-resident in India through digital or other means.
• A non-resident is considered to have a business connection in India if a person in India:
• Habitually concludes contracts or plays the key role in concluding them on behalf of the non-resident.
• Maintains stock of goods for regular delivery; or
• Habitually secures orders mainly for the non-resident or its group entities.

Exceptions to business connections:

• Independent brokers or agents acting in their ordinary course.
• Purchase of goods in India for export.
• Collection of news for transmission outside India.
• Display of uncut diamonds in notified zones; or
• Shooting of films in India by foreign individuals, firms, or companies.

A non-resident shall have a significant economic presence in India if:

• Transaction including provision of download of data or software in India exceeds prescribed limits,
• Engaging with such number of users as prescribed
• Advertisement which targets a customer in India
• Sale of data collected from a person in India
• Sale of goods or services using data collected from a person in India.

b)     Permanent establishment (Section 177(3)(c))

It means a fixed place of business through which the business of the enterprise is wholly or partly carried by an entity or person. A Permanent Establishment (‘PE’) is a key concept under Double Taxation Avoidance Agreements (‘DTAA’) that determines when a foreign enterprise becomes liable to pay tax in India on income arising from its business activities. The foreign enterprise would be considered as a PE if the foreign enterprise has a fixed place of business in India or doing a business in India through:

• Place of management, branch, office, factory, workshop, warehouse etc. or
• Building sites or construction, installation or assembly project or supervisory activities in connection therewith.
• Engaged in continuous services exceeding specified periods.
• An agent (other than independent agent) who has authority to conclude contracts or regularly deliver goods or merchandise or habitually secure orders on behalf of the foreign entity.

In case an entity is treated as a permanent establishment in India, it would require complying with all the provisions of the Income tax Act, 2025 as if it is an India entity (like payment of advance tax, withholding of taxes, filing of returns etc.).

The following are the broad categories under which a foreign entity may be considered as a Permanent Establishment (PE) in India:

• Fixed PE
• Agency PE
• Service PE

Conclusion

Section 9 of the Income-tax Act, 2025 ensures that income having a real or deemed link with India is taxable here, even if received abroad. It covers income such as dividends, royalties, and fees for technical services arising from Indian sources or activities.

The concepts of Business Connection and Permanent Establishment (PE) determine when a foreign enterprise becomes taxable in India. A business connection signifies any nexus—physical or digital—through which income is earned from India, while a PE under tax treaties marks a sustained business presence. Together, they ensure that profits attributable to Indian operations are fairly taxed while avoiding double taxation.