CHAPTER II — BASIS OF CHARGE

Section 4 — Charge of Income-tax

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Charge of Income-tax.

4. (1) Where any Central Act enacts that income-tax shall be charged for any tax year at any rate or rates, income-tax for such tax year shall be charged at that rate or those rates in accordance with and subject to the provisions of this Act.

(2) The charge of income-tax under sub-section (1) shall be on the total income of the tax year of every person as per the provisions of this Act.

(3) Income-tax shall also include any additional income-tax, by whatever name called, levied under this Act.

(4) If this Act provides that income-tax is to be charged in respect of income of a period other than the tax year, it shall be charged accordingly.

(5) For the income chargeable under this section, income-tax shall be deducted or collected at source or paid in advance as provided under this Act.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Charge of income-tax. [Section 4 of the 1961 Act]

4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:

Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.

BLOCK 3 : COMMENTARY

Section 4 is the charging section — without it the Income-tax Act has no operative bite. The Supreme Court has repeatedly held that the charge of income-tax has four ingredients which must each be satisfied: (i) a person, (ii) a sum chargeable under the head "income", (iii) a tax year (formerly "previous year") in respect of which the income is to be brought to charge, and (iv) a rate fixed by the annual Finance Act. (See Kesoram Industries & Cotton Mills Ltd. v. CWT (1966) 59 ITR 767 (SC); CIT v. B.C. Srinivasa Setty (1981) 128 ITR 294 (SC).) Section 4 of the 2025 Act faithfully preserves all four ingredients while modernising the language and breaking the single section 4 of the 1961 Act into five short sub-sections.

Sub-section (1) — the chief charging clause. The structure is identical to old s. 4(1): the rate is supplied by an annual Central Act (the Finance Act), and the substantive law is supplied by the Income-tax Act. The rate-setting role of the Finance Act is constitutional in nature — Article 265 of the Constitution requires that no tax may be levied or collected except by authority of law, and Article 270 channels income-tax revenue between the Centre and the States. The 2025 Act preserves this constitutional architecture without disturbance. The drafting innovation lies in unifying "assessment year" and "previous year" — both vanish, replaced by "tax year". For the practitioner, this means the Finance Act, 2026 prescribes rates for tax year 2026-27, not for assessment year 2027-28. Software-driven returns and challans must adopt this terminology.

Sub-section (2) — the new free-standing rule. Old s. 4(1) clubbed together the rate-fixing rule and the rule that income-tax is charged on "total income". The 2025 Act splits these out: sub-section (2) is now an independent declarative statement that the charge is on the total income of every person. The principle is unchanged but the architecture is cleaner.

Sub-section (3) — additional income-tax. The 2025 Act expressly includes "any additional income-tax, by whatever name called, levied under this Act" within the meaning of income-tax. This codifies the ratio of CIT v. K. Srinivasan (1972) 83 ITR 346 (SC), which held that surcharge is an enhancement of income-tax and is therefore part of income-tax for all statutory purposes. The phrase "by whatever name called" is wide enough to subsume surcharge, health-and-education cess, additional income-tax under sections 195/196 (TDS-related), section 218 (MAT/AMT) and any other future levy. Practitioners should therefore not be misled into treating cess or surcharge as a separate tax for limitation, refund or appeal purposes — they are income-tax for all those purposes.

Sub-section (4) — period other than the tax year. This sub-section preserves the proviso to old s. 4(1). Specific charging rules apply to incomes that are charged before the close of the tax year, e.g., income of a discontinued business assessed under section 191 (corresponding to old s. 176), or shipping income of a non-resident under section 207 (old s. 172). In such cases, the tax year rule yields to the specific provision. The 2025 Act elevates the proviso to a free-standing sub-section, which is in keeping with its modern drafting style.

Sub-section (5) — TDS, TCS and advance tax. This sub-section preserves old s. 4(2) and adds a reference to TCS (which had been buried in Chapter XVII-BB of the old Act). The legislative architecture of "pay as you earn" via withholding plus advance tax is therefore declared as part of the charging mechanism itself, reinforcing the well-established proposition that interest and penalty for failure to deduct/collect or to pay advance tax are not separate sanctions but features of the charge. (See CIT v. Anjum M.H. Ghaswala (2001) 252 ITR 1 (SC) — interest under s. 234B is mandatory and compensatory, not penal.)

Continuity of jurisprudence. Every line of authority developed under old s. 4 — the four-ingredient test, the Bhagat Construction Co. (P) Ltd. v. CIT (2015) 60 taxmann.com 88 (SC) line on demand notice, the Karimtharuvi line on the law applicable on the first day of the tax year — applies in identical terms to the new s. 4. The drafting change is cosmetic at the core; the substantive charging mechanism has not been disturbed.

Practical takeaway. (i) For tax year 2026-27 onwards, all rate references will read "tax year 2026-27" — adapt all client correspondence accordingly. (ii) The express inclusion of "additional income-tax, by whatever name called" puts to rest any lingering argument that surcharge or cess can be excluded from the rigour of TDS, advance tax, interest and limitation provisions. (iii) Where a specific charging provision overrides s. 4 — for example, presumptive taxation under sections 58 to 62 of the new Act (corresponding to old ss. 44AD, 44ADA, 44AE etc.) — the override is anchored in s. 4(4) and must be respected.

Section 5 — Scope of Total Income

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Scope of total income.

5. (1) Subject to the provisions of this Act, the total income of any tax year of a person, who is a resident, includes all income from whatever source derived, which—

(a) is received or deemed to be received in India in that year by or on behalf of such person;

(b) accrues or arises, or is deemed to accrue or arise, to such person in India in that year; or

(c) 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.

(2) Subject to the provisions of this Act, the total income of a tax year of a person, who is a non-resident, includes all income from whatever source derived, which—

(a) is received or deemed to be received in India in that year by or on behalf of such person; or

(b) accrues or arises, or is deemed to accrue or arise, to such person in India in that year.

(3) Income accruing or arising outside India shall not be deemed to be received in India under this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Scope of total income. [Section 5 of the 1961 Act]

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

BLOCK 3 : COMMENTARY

Section 5 is the territorial scope provision. It tells us how much of the world a person must reveal to the Indian Income-tax Department: the global income for residents (subject to NOR carve-out), and only India-source income for non-residents. Without it, the charging section (s. 4) would lack a geographical anchor.

Sub-section (1) — residents (excluding non-ordinary residents). The scope is identical to old s. 5(1). A resident is liable to tax in India on income (a) received or deemed to be received in India, (b) accrued or arising in India, or (c) accrued or arising outside India. The deeming receipts in clause (a) are governed by section 7; the deeming accruals in clause (b) are governed by section 9. The 2025 Act's clause (c) integrates the proviso of the old sub-section, neatly: a not-ordinarily-resident pays tax on foreign-source income only if it derives from a business controlled in or a profession set up in India. The substantive rule is thus preserved without resort to a proviso.

Sub-section (2) — non-residents. A non-resident is liable to tax on Indian-source income only — clauses (a) and (b) of sub-section (1) apply, but not clause (c). Foreign-source income of a non-resident is altogether outside the Indian Income-tax Act. This rule has been the cornerstone of cross-border taxation in India and has not been disturbed: PE Aluminum Co. v. CIT (2010) 327 ITR 81 (SC) and Vodafone International Holdings BV v. UOI (2012) 341 ITR 1 (SC) continue to apply.

Sub-section (3) — the balance-sheet rule. This re-states Explanation 1 to old s. 5 and clarifies that the mere reflection of foreign-accrual income in an Indian balance sheet (typically of a foreign branch / subsidiary) does not amount to receipt in India. The rule prevents duplication and was inserted in the 1961 Act to overcome a contrary line of authority before s. 5 was redrafted.

Disappearance of Explanation 2 — "no double inclusion". Old s. 5 contained Explanation 2 which expressly forbade including the same income twice — once on accrual and once on receipt. The 2025 Act drops this Explanation. The omission is, however, not damaging: the concept of "total income" is built on the foundation of "includes" rather than "means", and there is no statutory warrant for double inclusion. The Supreme Court in CIT v. Tata Locomotive (1966) 60 ITR 405 and a long line of authority have consistently held that the same item of income cannot be brought to charge twice. The principle therefore survives the drafting change.

Receipt vs accrual — the conceptual distinction preserved. "Received" connotes the first occasion when funds, goods or other valuable things are within the reach of the assessee for unfettered disposal. "Accrual" arises when the right to receive the sum becomes legally enforceable. Where a person is a resident, both receipt-in-India and accrual-in-India are taxable, in addition to foreign accrual. The commentary on "received" given by the Bombay High Court in Sutlej Cotton Mills v. CIT (1971) 81 ITR 316 (Bom., affirmed (1979) 116 ITR 1 (SC)) — that receipt connotes "receipt by the person who is to be assessed" — applies in identical terms to the new section.

Practical implications for the practitioner. (i) For NRIs and OCIs: section 5(1)(c) read with section 6(13) — foreign-source income is taxable in India only if derived from a business controlled in or profession set up in India. (ii) For HNI clients with overseas business or rental property: keep careful records of where the income "arises" — if abroad and not from an Indian-controlled business, it is in the resident's total income (unless NOR), but for non-residents it is wholly outside the Indian charge. (iii) The accrual-vs-receipt distinction can determine the tax year of inclusion and may, in cross-border cases, affect treaty benefits — work with the corresponding DTAA Article 1 (resident) and Article 7 (business profits).

Section 6 — Residence in India

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Residence in India.

6. (1) For the purposes of this Act, residential status in India in a tax year of a person shall be determined as per the provisions of this section.

(2) An individual shall be resident in India in a tax year, if he— (a) is in India for a total period of one hundred and eighty-two days or more in that tax year; or (b) is in India cumulatively for sixty days or more during that year and has been in India cumulatively for three hundred and sixty-five days or more in the four years preceding such tax year.

(3) The provisions of sub-section (2)(b) shall not apply in the case of an individual who is a citizen of India and leaves India in any tax year— (a) as a member of the crew of an Indian ship, as defined in section 3(18) of the Merchant Shipping Act, 1958; or (b) for the purposes of employment outside India.

(4) The provisions of sub-section (2)(b) shall not apply, subject to sub-section (5), in the case of an individual— (a) who is a citizen of India or a person of Indian origin; and (b) who being outside India, comes on a visit to India in any tax year.

(5) Where the person referred to in sub-section (4) has a total income exceeding fifteen lakh rupees during the tax year (other than income from foreign sources), sub-section (2)(b) shall apply as if the words "sixty days" had been substituted with "one hundred and twenty days".

(6) For the purposes of sub-section (2), if the individual is— (a) a citizen of India; and (b) a member of the crew of a foreign-bound ship leaving India, the total number of days in India, in respect of that voyage, shall be determined in such manner and subject to such conditions, as may be prescribed.

(7) Irrespective of the provisions of sub-sections (2) to (6), an individual shall be deemed to be resident in India for a tax year, if he— (a) is a citizen of India; (b) is not liable to tax in any other country or territory due to his domicile, residence, or similar criteria; and (c) has total income exceeding fifteen lakh rupees during such tax year (other than income from foreign sources).

(8) Sub-section (7) shall not apply to an individual, who is resident in India for a tax year under sub-sections (2) to (6).

(9) A Hindu undivided family, firm or other association of persons shall be resident in India in any tax year unless the control and management of its affairs is situated wholly outside India during such tax year.

(10)(a) A company is said to be a resident in India in any tax year, if— (i) it is an Indian company; or (ii) its place of effective management is in India in that tax year. (b) for the purposes of this sub-section, "place of effective management" means a place where key management and commercial decisions necessary for the conduct of business of the company as a whole are, in substance, made.

(11) Every other person is resident in India in any tax year unless during that tax year the control and management of the affairs of such person is situated wholly outside India.

(12) If a person is resident in India in a tax year for any source of income, he shall be deemed to be resident in India in that tax year for each of his other sources of income.

(13) A person is not ordinarily resident in India in any tax year, if that person is— (a) an individual who has been, or a Hindu undivided family, whose manager has been— (i) a non-resident in India in nine out of the ten tax years preceding that year; or (ii) in India cumulatively for seven hundred and twenty-nine days or less in seven tax years preceding that year; or (b) a citizen of India or a person of Indian origin,— (i) whose total income excluding income from foreign sources exceeds fifteen lakh rupees during the tax year; and (ii) who has been in India cumulatively for one hundred and twenty days or more but less than one hundred and eighty-two days during the tax year; or (c) a citizen of India who is deemed to be resident under sub-section (7).

(14) For the purposes of this section, "income from foreign sources" means the income, which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Residence in India. [Section 6 of the 1961 Act]

Section 6 of the 1961 Act sets out the same architecture in clauses (1) to (6A): (1) tests for individual residence — 182 days, OR 60 days + 365 days in 4 preceding years (with carve-outs for Indian citizens leaving as crew/employment, and for visits by Indian citizens / PIO); (1A) deemed residence for citizens not liable to tax elsewhere with > Rs 15 lakh Indian-source income; (2) HUF / firm / AOP residence based on control & management not wholly outside India; (3) company residence — Indian company OR POEM in India; (4) other persons; (5) once-resident-for-one-source rule; (6) NOR — 9-of-10 / 729-days tests, plus the 120-day carve-in for high-income citizens / PIO and a deemed-resident-NOR sub-clause; Explanations and provisos containing the carve-outs, definitions of "income from foreign sources", and rule-making for crew-day-count.

Substantively, the architecture of new s. 6 maps to the architecture of old s. 6 with high precision. The 60-day-becomes-120-day rule for high-income visiting NRIs (introduced by FA 2020), the deemed-resident rule for stateless Indian citizens (also FA 2020), and the POEM concept for companies (introduced by FA 2015 and operative from AY 2017-18) are all preserved word-for-word in substance.

BLOCK 3 : COMMENTARY

Section 6 is the most consequential definitional section in cross-border tax practice. Whether a person is resident, non-resident, or not-ordinarily-resident determines the global reach of the Indian charge. The 2025 Act preserves every operative test of old s. 6 in identical terms but recasts the architecture into clearly numbered sub-sections, eliminating the Roman-numbered "Explanations" that had multiplied through Finance Acts of 2003, 2015, 2020 and 2021.

Sub-section (2) — the basic individual test. The two limbs are (a) 182 days or more in the tax year, or (b) 60 days or more in the tax year coupled with 365 days or more in the four preceding tax years. This is unchanged. The day-count is on a strict literal basis: a fraction of a day spent in India counts as a day (CIT v. Suresh Nanda (2015) 375 ITR 172 (Del); see also Mrs. Smita Anand v. CIT (2014) 366 ITR 256 (AAR)).

Sub-section (3) — relief for Indian seafarers and Indian citizens leaving for employment. The 2025 Act preserves the 182-day-only test for these two classes — so a citizen who leaves for foreign employment during the tax year cannot be caught by the 60-day limb. (See CIT v. M. Krishnan (2015) 376 ITR 21 (Mad).)

Sub-section (4) and (5) — visits to India by Indian citizens and persons of Indian origin (PIO). For visiting NRIs whose Indian-source income is up to Rs 15 lakh, only the 182-day test applies (the 60-day limb is disapplied). For visiting NRIs whose Indian-source income exceeds Rs 15 lakh, the 60-day limb of sub-section (2)(b) is replaced by a 120-day limb. This was inserted by Finance Act, 2020 to plug the perceived loophole of HNIs spending the whole calendar year split between two tax-friendly jurisdictions. The 2025 Act preserves this regime intact. Practitioners advising HNIs with overseas residence (UAE, Singapore, Mauritius) should plan day-counts with this 120-day cap in mind, especially when Indian-source income (say from listed shares, mutual funds, immovable property, or director fees) is large.

Sub-section (7) — deemed residence for stateless citizens. The deemed-resident rule (introduced by Finance Act, 2020) is preserved — Indian citizens with > Rs 15 lakh Indian-source income who are not liable to tax in any other country or territory are deemed resident in India. The phrase "not liable to tax" has generated litigation: it does not mean a person who pays no tax abroad in fact, but a person who is not subject to the jurisdictional sweep of any foreign income-tax law. Persons resident in jurisdictions such as the UAE (which does not impose personal income-tax) are not automatically caught — what matters is whether any tax-imposing law of the foreign country reaches them. This was the subject of CBDT Circular 11/2020 (clarifying that residents of jurisdictions with no personal income-tax are not automatically subject to s. 6(1A)), and the Circular continues to provide useful guidance.

Sub-section (8) — overlap rule. If a person is in any case resident under sub-sections (2)-(6), the deemed-resident rule under sub-section (7) does not also apply. This avoids double-classification.

Sub-section (9) — HUF / firm / AOP residence. Control and management of affairs is the test. The phrase "wholly outside India" continues to apply — even partial control in India makes the entity resident. Subbayya Chettiar v. CIT (1951) 19 ITR 168 (SC) and CIT v. Erin Estate (1958) 34 ITR 1 (SC) continue to be the leading authorities on what "control and management" means: it refers to the controlling and directing power, the head and brain, and not to day-to-day administration.

Sub-section (10) — company residence. The POEM regime (Finance Act, 2015) is preserved. A company is resident in India if (i) it is an Indian company (always resident, irrespective of POEM), or (ii) its place of effective management is in India in that tax year. POEM is defined as the place where key management and commercial decisions necessary for the conduct of business as a whole are, in substance, made. The CBDT's POEM Guidelines (Circular 6/2017 — Active vs Passive business test, ABOI test, board-resolution-style decisions) are issued under the old Act and will need re-issuance under the new Act, but the substantive criteria remain unchanged. Multinationals with regional headquarters or shared services in India should continue to scrutinise their POEM exposure with the same rigour as before.

Sub-section (12) — once resident, always resident (for that year, for all sources). The lex specialis is preserved without disturbance.

Sub-section (13) — Not-Ordinarily-Resident (NOR) status. The NOR concept survives. Three branches: (a) a NOR who has been a non-resident in 9 of the 10 preceding tax years, OR has been in India for 729 days or less in 7 preceding tax years; (b) a citizen / PIO whose Indian-source income exceeds Rs 15 lakh and who has been in India for 120-181 days during the tax year (introduced by FA 2020); and (c) a citizen who is deemed resident under sub-section (7). NOR matters because foreign-source income is not includible in the total income unless derived from a business controlled in or profession set up in India (see s. 5(1)(c)). It is a particularly favourable status for returning NRIs in their first two years post-return.

Sub-section (14) — "income from foreign sources". The definition preserves the old Explanation: foreign-accrual income that is not deemed to accrue in India and is not from an India-controlled business. This is the gating concept for both s. 5(1)(c) and the carve-outs in s. 6.

Practical takeaways. (i) For HNIs and NRIs: build a day-count tracker that correctly handles arrival/departure dates and aircraft transit. (ii) For corporate clients: revisit POEM compliance every year — even an Indian-resident director's involvement in board decisions can shift POEM. (iii) For first-year-return assessees: actively claim NOR status — it is one of the most underused legitimate tax planning tools. (iv) For dual-citizenship clients: the deemed-resident regime under sub-section (7) does not catch persons subject to a foreign income-tax law, even if their effective foreign tax is zero — document the foreign tax law's reach to your client. (v) Continue to apply existing case law (Suresh Nanda; Erin Estate; Subbayya Chettiar; circulars 11/2020 and 6/2017) — the substantive concepts are unchanged.

Section 7 — Income deemed to be received and dividend deemed to be income in a tax year

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Income deemed to be received and dividend deemed to be income in a tax year.

7. (1) The following incomes shall be deemed to be received in the tax year:—

(a) the annual accretion in that year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in paragraph 6 of Part A of Schedule XI;

(b) the transferred balance in a recognised provident fund, to the extent provided in paragraph 11(4) and (5) of Part A of Schedule XI;

(c) the contribution made by the Central Government or any other employer in that year to the account of an employee under a pension scheme mentioned in section 124.

(2) For inclusion in the total income of an assessee,—

(a) any dividend declared by a company or distributed or paid by it within the meaning of section 2(40)(a) to (e) shall be deemed to be the income of the tax year in which it is so declared, distributed or paid, as the case may be;

(b) any interim dividend shall be deemed to be the income of the tax year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Sections 7 (income deemed to be received) and 8 (dividend income) of the 1961 Act

7. The following incomes shall be deemed to be received in the previous year:— (i) the annual accretion in the previous year to the balance at the credit of an employee participating in a recognised provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule; (ii) the transferred balance in a recognised provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule; (iii) the contribution made, by the Central Government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in section 80CCD.

8. For the purposes of inclusion in the total income of an assessee,— (a) any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (d) or sub-clause (e) of clause (22) of section 2 shall be deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be; (b) any interim dividend shall be deemed to be the income of the previous year in which the amount of such dividend is unconditionally made available by the company to the member who is entitled to it.

BLOCK 3 : COMMENTARY

Section 7 of the 2025 Act consolidates two sections of the 1961 Act — old s. 7 (employer-side deemed receipts) and old s. 8 (deemed dividend income) — into a single, more compact section. The substantive content is preserved precisely; the changes are wholly architectural.

Sub-section (1) — deemed receipts on the employee side. Three items are deemed to be received in the tax year, even though the employee may not yet have actual physical receipt: (a) annual accretion to a recognised provident fund (RPF) above the prescribed threshold; (b) transferred RPF balance (where the fund changes from unrecognised to recognised); and (c) employer contribution under the National Pension System (NPS) and analogous schemes referred to in section 124 (corresponding to old s. 80CCD). The deeming receipts are necessary because, without them, the employer-paid amounts would never enter the employee's tax base.

The cross-references to Schedule XI Part A paragraphs 6 and 11(4)/(5) preserve the long-standing PF rules. Paragraph 6 provides for the threshold of accretion (interest credited above the rate notified by the Central Government); paragraph 11(4)/(5) deals with the transferred balance when an unrecognised fund is converted into a recognised fund. The internal cross-reference structure (within Schedules) is the principal drafting innovation of the 2025 Act — Rules from the 1961 regime that were administrative rule-making in form but legislative rule-making in substance have been re-classified as Schedule paragraphs and elevated to statutory text. This eliminates the eternal Bureau-of-Direct-Taxes-vs-Parliament debate over what should be in the Act vs in the Rules.

Sub-section (2) — dividend timing rules. Old s. 8 has been merged into sub-section (2). The two limbs are unchanged: (a) for dividend declared, distributed or paid within s. 2(40) sub-clauses (a)-(e) (which now correspond to old s. 2(22)(a)-(e)), the income year of the recipient is the year of declaration / distribution / payment; (b) for interim dividend, the income year is when the amount is unconditionally made available to the member. The Finance Act, 2026 omitted the reference to sub-clause (f) of s. 2(40) — see footnote in the bare text — bringing the new Act in line with the omission of the old s. 2(22)(f) reference made some years ago.

The dividend timing rules have been a fertile source of litigation. CIT v. J. Dalmia (1964) 53 ITR 83 (SC) — interim dividend accrues on declaration, not on payment, where it is unconditionally made available; CIT v. Madhuri H. Mehta (2002) 254 ITR 706 (Bom.) — payment of dividend by way of book entry is sufficient. These authorities continue to apply.

Substantive change watch — none. Practitioners should not assume any substantive change in withholding obligations or in the year of taxability merely because section 8 of the old Act has been folded into section 7 of the new Act. The TDS regime under section 393 (corresponding to old s. 194/194A series) responds to the same triggering events, and the timing of taxability for the recipient is governed by the same rules.

Practical takeaways. (i) For payroll administrators: the section 7(1) thresholds — interest accretion above the notified rate, transferred RPF balance, NPS contribution — are taxed on a deemed-receipt basis. Form 16 disclosures must continue. (ii) For company secretaries: dividend declared, distributed or paid is income of the recipient in the same tax year. Interim dividend is taxed when unconditionally made available — which usually means on the date of the board resolution, unless the board has imposed a holding-pending-conditions term. The board's resolution wording matters. (iii) Cross-reference: section 7(2)(a) requires you to read s. 2(40) sub-clauses (a)-(e) — especially the deemed dividend under (e) which corresponds to old s. 2(22)(e). This rule remains a frequent flashpoint in closely-held private company assessments and continues to demand careful documentation.

Section 8 — Income on receipt of capital asset or stock-in-trade by specified person from specified entity

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Income on receipt of capital asset or stock-in-trade by specified person from specified entity.

8. (1) Where a specified person receives during the tax year any capital asset or stock-in-trade, or both, from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock-in-trade, or both, to the specified person in the year in which such capital asset or stock-in-trade, or both, are received by the specified person.

(2) Any profits and gains arising from the deemed transfer mentioned in sub-section (1) by the specified entity shall be— (i) deemed to be the income of such specified entity of the tax year in which such capital asset or stock-in-trade, or both, were received by the specified person; and (ii) chargeable to income-tax as income of such specified entity under the head "Profits and gains of business or profession" or under the head "Capital gains".

(3) For the purposes of this section, fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the specified person shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer mentioned in sub-section (1).

(4) If any difficulty arises in giving effect to the provisions of this section and section 67(10), the Board may, with the previous approval of the Central Government, issue guidelines for removing the difficulty.

(5) Every guideline issued by the Board under sub-section (4) shall be laid before each House of Parliament … [the standard parliamentary-laying clause]

(6) Definitions: (a) "specified entity" means a firm or other association of persons or body of individuals (not being a company or a co-operative society); (b) "specified person" means a person, who is a partner of a firm or member of other AOP/BOI (not being a company or a co-operative society) in any tax year; (c) "reconstitution of the specified entity" — three limbs: (i) one or more partners cease, (ii) one or more new partners admitted with continuity of one or more existing, (iii) all partners continue with a change in their respective shares.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 9B of the 1961 Act — "Income on receipt of capital asset or stock in trade by specified person from specified entity"

Section 9B was inserted into the 1961 Act by the Finance Act, 2021 (with effect from 1 April 2021) along with companion changes to s. 45(4) and s. 48. The text of old s. 9B reads: (1) Where a specified person receives during the previous year any capital asset or stock in trade or both from a specified entity in connection with the dissolution or reconstitution of such specified entity, then the specified entity shall be deemed to have transferred such capital asset or stock in trade or both, as the case may be, to the specified person in the year in which such capital asset or stock in trade or both are received by the specified person …

Sub-sections (2) to (5) and the definitions in sub-section (5)(a)-(c) of "specified entity", "specified person" and "reconstitution of the specified entity" are in pari materia with the 2025 Act. The CBDT issued Guidelines on 2 July 2021 (Circular 14/2021) and prescribed Rule 8AA to operationalise the section.

BLOCK 3 : COMMENTARY

Section 8 of the 2025 Act re-states section 9B of the 1961 Act, which was a relatively recent insertion (FA 2021) addressing a long-standing controversy on the taxability of distribution of capital assets and stock-in-trade by a partnership firm or AOP/BOI to its partners/members on dissolution or reconstitution. Before FA 2021, the law was riddled with conflicting Supreme Court and High Court rulings on whether the distribution of an asset on dissolution constituted a "transfer" for the purposes of capital gains. Section 9B (now section 8) settles the question prospectively: any such distribution is a deemed transfer at the level of the firm; the firm pays tax on the resultant gain.

Sub-section (1) — the deeming rule. The trigger is the receipt by a specified person (partner / member) of a capital asset or stock-in-trade or both, in connection with the dissolution or reconstitution of the specified entity (firm / AOP / BOI, but not a company or co-operative society). On such receipt, the firm is deemed to have transferred the asset to the partner. The deeming applies whether the partner is taking the asset in lieu of his share of capital, or in lieu of his share of profits, or in any other capacity, so long as the underlying cause is dissolution or reconstitution.

Sub-section (2) — the taxable head. The deemed transfer's profits and gains are taxed in the firm's hands under either "PGBP" (where the asset was stock-in-trade) or "Capital gains" (where the asset was a capital asset). Both heads can apply if the firm distributed both stock-in-trade and a capital asset.

Sub-section (3) — the consideration. The fair market value of the asset on the date of receipt by the specified person is treated as the full value of the consideration. This avoids the previous controversy under old s. 45(4) on what amounted to consideration in a non-cash transfer.

Sub-section (4) and (5) — guidelines. The CBDT is empowered, with previous approval of the Central Government, to issue guidelines and lay them before Parliament. Circular 14/2021 (issued under old s. 9B) is the operative guideline; it explains the interaction with old s. 45(4) (new s. 67(10) of the 2025 Act, which addresses the partner-side capital gain on dissolution/reconstitution where money or other asset is received), and it lays down the formula for attribution of gain. The circular continues to apply mutatis mutandis under the new Act until re-issued.

Sub-section (6) — definitions. (a) "specified entity" — a firm or AOP/BOI but not a company or a co-operative society. Companies are governed by the deemed-transfer rules in capital gains chapter (now s. 67) and by the dividend regime; co-operative societies have a separate regime. (b) "specified person" — partner or member. (c) "reconstitution" — three limbs: cessation of partner(s), admission of new partner(s) with continuity of existing, or change in respective shares. The third limb is the most expansive — even a mere shift in profit-sharing ratios constitutes reconstitution and triggers section 8 if any asset is distributed in the year.

Companion provision — section 67(10) of the new Act (corresponding to old s. 45(4)). When a specified person receives any money or other asset in addition to or in lieu of the asset under section 8, the partner-side capital gain is computed under section 67(10). The two sections must be read together: section 8 captures the firm-side gain on the deemed transfer, while section 67(10) captures the partner-side gain attributable to revaluation of partnership assets in connection with the same event.

Litigation watch. The Supreme Court's decision in CIT v. R. Lingmallu Raghukumar (2001) 247 ITR 801 (SC) and the Karnataka High Court's decision in CIT v. A.N. Naik Associates (2004) 265 ITR 346 (Kar) had created earlier confusion. FA 2021 settled the law prospectively. The 2025 Act continues this settled position. Practitioners advising on retirement deeds, partnership reconstitution agreements, and family-firm restructurings should specifically draft clauses to address the section 8 / section 67(10) interaction and ensure that revaluation of assets is documented before distribution.

Practical takeaways. (i) Whenever a partner retires or is admitted to a firm, ascertain whether any "capital asset or stock-in-trade" has been received by a partner — even informally. (ii) If yes, document the FMV on the date of receipt — this is the section 8(3) consideration. (iii) Compute the firm-side gain under PGBP (if stock) or capital gains (if capital asset) — pay tax in the firm's hands. (iv) Read with section 67(10) for any partner-side gain on revaluation. (v) Update standard partnership deed templates to include a section 8 / section 67(10) tax-cost allocation clause.

Section 9 — Income deemed to accrue or arise in India

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Income deemed to accrue or arise in India.

9. (1) The income referred to in sub-sections (2) to (8) shall be deemed to accrue or arise in India.

(2) Income from a business connection in India [old s. 9(1)(i)] — covering all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. Significant economic presence (SEP) provisions for non-residents are preserved within this sub-section, with monetary thresholds prescribed by Rules.

(3) Indirect transfer rules — share or interest in a foreign entity that derives its value substantially from assets situate in India [old s. 9(1)(i) Explanations 5 to 7]. The 5% / Rs 10 crore thresholds and the de minimis carve-outs are preserved.

(4) Income from a transfer of capital asset situate in India — where the transfer takes place outside India.

(5) Salary income — where it is earned in India, or where it is paid by the Government to a citizen of India for services rendered outside India [old s. 9(1)(ii) and (iii)].

(6) Interest payable by — (a) Government; (b) a person who is a resident, except where the interest is payable in respect of any debt incurred or moneys borrowed and used for a business or profession carried on outside India or for earning any income from any source outside India; (c) a non-resident, where the interest is payable in respect of any debt incurred or moneys borrowed and used for a business or profession carried on in India.

(7) Royalty payable by — same three-fold structure as interest — Government / resident / non-resident with carve-outs for use outside India [old s. 9(1)(vi)].

(8) Fees for technical services payable by — same three-fold structure [old s. 9(1)(vii)].

(9) Sum referred to in s. 2(49)(xviii) [gift / receipt without consideration] — payable by a resident to a non-resident, deemed to accrue in India [old s. 9(1)(viii) — gifts to non-residents introduced by FA 2019].

(10) Where business operations are not carried on entirely in India, only such part of the income as is reasonably attributable to operations carried on in India shall be deemed to accrue in India.

(11) For sub-sections (5), (6) and (7) — non-resident-paid royalty, FTS and interest are deemed not to accrue in India where used for business / earning income outside India [carve-outs from old s. 9(1)(v), (vi), (vii)].

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 9 of the 1961 Act — Income deemed to accrue or arise in India

9. (1) The following incomes shall be deemed to accrue or arise in India:— (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India;

[Sub-clause (i) is supplemented by Explanations 1 to 7 covering: attribution of income to operations in India, business of buying goods for export, news collection, profit-attribution rules, indirect-transfer rules, SEP for digital business, and others.]

(ii) salary earned in India; (iii) salary by Government to a citizen for services outside India; (iv) dividend by Indian company outside India [omitted by FA 2020 since dividend income now taxable in shareholder's hands]; (v) interest by — Government / resident with carve-out / non-resident with carve-in; (vi) royalty by — Government / resident with carve-out / non-resident with carve-in [Explanations 1 to 6 elaborate the meaning of royalty]; (vii) fees for technical services by — same three-fold structure [Explanations 1 and 2 elaborate "FTS"]; (viii) sums under s. 56(2)(x) [gift] payable by resident to non-resident — inserted by FA 2019.

BLOCK 3 : COMMENTARY

Section 9 of the 2025 Act re-states section 9 of the 1961 Act — the Bible of source-rule taxation in India — but in a fundamentally re-organised architecture. Where old s. 9(1) had nine clauses with multiple Explanations woven through them, the new s. 9 is broken into nine sub-sections with the substantive content of the Explanations re-cast as their own sub-sections. This is the most ambitious drafting overhaul of Chapter II.

Sub-section (2) — business connection. The bedrock concept is preserved: any income accruing or arising, directly or indirectly, through a business connection in India, through Indian property or assets, or through transfer of an Indian capital asset, is deemed to accrue in India. The expansive concept of "business connection" — reaching beyond a permanent establishment to cover dependent agency PE-equivalent activity, exclusive procurement arrangements, and exclusive sourcing offices — is preserved. The decisions of the Supreme Court in CIT v. R.D. Aggarwal (1965) 56 ITR 20 (SC), CIT v. Eli Lilly & Co. (India) (P) Ltd. (2009) 312 ITR 225 (SC) and Formula One World Championship Ltd. v. CIT (2017) 394 ITR 80 (SC) continue to apply.

Significant Economic Presence (SEP) — the digital nexus rule. Inserted by FA 2018 and operative from AY 2022-23, the SEP concept extends Indian source-taxation to non-residents who, although without physical presence, have a digital footprint in India that exceeds prescribed thresholds (e.g., Rs 2 crore aggregate revenue from supply of goods, services or property OR systematic/continuous solicitation of business with 3 lakh users). The 2025 Act preserves SEP within sub-section (2). The thresholds are prescribed by Rules. Practitioners advising digital-business clients (SaaS, OTT, e-commerce platforms, search engines) must continue to monitor SEP exposure year by year. The interaction of SEP with India's DTAA partners (especially France-style "PE" Article 5) remains a live debate — most DTAAs do not yet recognise SEP as a basis for taxation, so SEP applies effectively against non-treaty residents and against treaty residents where the treaty's PE definition is broad enough to absorb SEP.

Sub-section (3) — indirect transfer rules. Inserted by FA 2012 (Explanations 4 to 7 to old s. 9(1)(i)) in response to the Supreme Court ruling in Vodafone International Holdings BV v. UOI (2012) 341 ITR 1, this regime taxes the transfer of shares in a foreign company that derive their value substantially (i.e., 50% or more) from Indian assets, subject to materiality thresholds (5% of holding or Rs 10 crore of underlying value). The 2025 Act preserves the regime intact. Practitioners advising on cross-border M&A involving Indian assets must continue to perform a Vodafone-style "value derivation" analysis at the time of any disposition.

Sub-section (4) — transfer of capital asset situate in India. Where the asset is situate in India, the gain on transfer is deemed to accrue in India even if the transfer takes place abroad and the consideration is paid abroad. The location of the asset is determinative — see s. 9 jurisprudence on "situs" of immovable property (always India if the property is in India), shares (situs is the place of incorporation of the company), and intangible rights (typically the situs of the contract, but with statutory deeming for some categories).

Sub-section (5) — salary. The two limbs are unchanged: salary earned in India (regardless of where paid) is taxed; and Government salary to a citizen for services rendered outside India is taxed (this is the so-called "salary of officials posted abroad" rule). The corollary is that a foreign-government salary paid to an Indian citizen for service abroad is not deemed to accrue in India.

Sub-sections (6), (7), (8) — interest, royalty and FTS. The classical three-fold structure is preserved: payment by Government always sourced in India; payment by a resident is sourced in India unless the borrowing/use was for a foreign business; payment by a non-resident is sourced in India only when used in India. The Explanations defining "royalty" (covering use or right to use of patents, trademarks, copyright, scientific work, plant, equipment, etc., including certain transmission and process royalties) and "FTS" (managerial, technical or consultancy services, but not construction/assembly/mining/professional services) have been substantially preserved within sub-sections (7) and (8) but re-cast in numbered form. The litigation around "make available" (under DTAA) and "royalty for software" (e.g., Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) 432 ITR 471 (SC)) continues to be relevant.

Sub-section (9) — gifts to non-residents. Inserted by FA 2019 as old s. 9(1)(viii). When a resident gives money or property without consideration (within s. 2(49)(xviii) of the new Act, i.e., old s. 56(2)(x)) to a non-resident, the income is deemed to accrue in India. The provision was a response to perceived avoidance through gifting structures.

Sub-section (10) — apportionment. When part of the operations are outside India, only the reasonably attributable portion is deemed to accrue in India. This is a survival from the foundational decision in Annamalais Timber Trust & Co. v. CIT (1961) 41 ITR 781 (Mad.) and is preserved in the new sub-section.

Sub-section (11) — non-resident-paid royalty/FTS/interest carve-out. The traditional source-rule carve-out for non-resident-paid royalty/FTS/interest used for foreign-business is preserved. This is essential for back-to-back financing and licensing structures.

Continuity of jurisprudence. The pyramid of Supreme Court and High Court decisions on s. 9 — Anglo-French Textile Co. (1953) 23 ITR 101 (SC), Vodafone (2012), GE India Technology Centre (P) Ltd. (2010) 327 ITR 456 (SC), Engineering Analysis (2021) 432 ITR 471 (SC), Formula One (2017) — continues to apply with full force. The 2025 Act has carefully preserved the operative concepts. References in old judgments to "clause (i) of sub-section (1) of s. 9" should be read as "sub-section (2) of s. 9" of the new Act, and similarly for other cross-references.

Practical takeaways for cross-border practice. (i) Source rule diligence remains a structural element of every cross-border engagement letter. (ii) For digital-economy clients, SEP risk should be flagged at the time of revenue planning, not at the time of return-filing. (iii) Indirect transfer compliance — including pre-transaction valuation reports, post-transaction reporting under Rules — must continue. (iv) For Indian resident-payer / non-resident-payee structures, sub-sections (6), (7), (8) drive the TDS analysis under Chapter XIX (corresponding to old Chapter XVII-B), so the same source-rule analysis flows into the withholding rate (with treaty override available). (v) The 2025 Act preserves treaty supremacy under s. 158 (corresponding to old s. 90) — in case of conflict, the more favourable of Act and treaty applies.

Section 10 — Apportionment of income between spouses governed by the Portuguese Civil Code

BLOCK 1 : SECTION TEXT (NEW ACT, 2025)

Apportionment of income between spouses governed by the Portuguese Civil Code.

10. If a husband and wife are governed by the community of property system as per the Portuguese Civil Code of 1860, as in force in the State of Goa and the Union territories of Dadra and Nagar Haveli and Daman and Diu, then for the purposes of this Act and irrespective of any provisions of this Act,—

(a) the income of the husband and of the wife under any head of income (other than under the head "Salaries") shall be apportioned equally between them, and the income so apportioned shall be included separately in the total income of each spouse;

(b) the remaining provisions of this Act shall apply accordingly to such apportioned income; and

(c) where the income is under the head "Salaries", the income of either spouse shall be included in the total income of that spouse alone.

BLOCK 2 : CORRESPONDING SECTION IN OLD ACT (1961)

Section 5A of the 1961 Act — Apportionment of income between spouses governed by Portuguese Civil Code

5A. (1) Where the husband and wife are governed by the system of community of property (known under the Portuguese Civil Code of 1860 as "COMMUNIAO DOS BENS") in force in the State of Goa and in the Union territories of Dadra and Nagar Haveli and Daman and Diu, the income of the husband and of the wife under any head of income (other than under the head "Salaries") shall not be assessed as that of such community of property (whether treated as an association of persons or a body of individuals or otherwise), but such income of the husband and of the wife under each head of income (other than under the head "Salaries") shall be apportioned equally between the husband and the wife and the income so apportioned shall be included separately in the total income of the husband and of the wife respectively, and the remaining provisions of this Act shall apply accordingly. (2) Where the husband or, as the case may be, the wife governed by the aforesaid system of community of property has any income under the head "Salaries", such income shall be included in the total income of the spouse who has actually earned it.

BLOCK 3 : COMMENTARY

Section 10 of the 2025 Act re-states section 5A of the 1961 Act — a special provision for the Goan / Dadra-Nagar Haveli / Daman-Diu community of property regime governed by the Portuguese Civil Code, 1860. The architecture is identical, but the section is a single operative paragraph with three lettered clauses, free of the parenthetical Latin ("COMMUNIAO DOS BENS") that disfigured the 1961 text.

Background. The Portuguese Civil Code regime, applicable in Goa and the two Union territories that were under Portuguese rule until 1961, treats a married couple as a community of property — every asset and every income earned during the marriage automatically vests jointly. The community is sui generis and is not the same as a Hindu Undivided Family or an AOP. Section 5A was inserted by Finance Act, 1994 to clarify the income-tax treatment of such income.

The rule. (i) Income under any head other than "Salaries" — apportioned equally between husband and wife and included in their separate total incomes. (ii) Income under the head "Salaries" — taxed only in the hands of the spouse who actually earned it. (iii) Once apportioned, the rest of the Act applies as if the income were the spouse's own.

Why "Salaries" is excluded. Salary is the personal earnings of the individual; it does not partake of the community of property regime even under the Portuguese Civil Code. (See K. Gomes v. CIT (2008) 304 ITR 126 (Bom.) and the underlying provisions of the Goa Succession, Special Notaries and Inventory Proceeding Act, 2012 read with the Code.)

Continuity of jurisprudence. The principal authorities on s. 5A — Custodio Pinto Marques v. CIT (2007) 295 ITR 122 (Bom.), and the line of jurisdictional Bombay (Goa Bench) ITAT decisions — continue to govern.

Practical takeaway. The provision is narrow and applies only to assessees governed by the Portuguese Civil Code — chiefly those domiciled or resident in Goa, Dadra-Nagar Haveli and Daman-Diu. Practitioners operating in those jurisdictions must continue to apportion non-salary income equally between spouses and file two separate returns. Documentary proof of marriage governance under the Portuguese Civil Code (typically a marriage certificate and absence of a pre-nuptial separation deed) should be retained.

Chapter II — At a Glance

Mapping table for Chapter II:

Practitioner notes

• For all client correspondence post-1 April 2026 — "tax year" replaces "previous year" / "assessment year".
• Update day-count tools for individual residence — the 60/120/182 architecture survives unchanged.
• POEM scrutiny continues — the new Act preserves the "key management and commercial decisions" test verbatim. CBDT Circular 6/2017 will continue to guide assessment.
• For partnership reconstitution / dissolution — section 8 (firm-side) and section 67(10) (partner-side) operate together. CBDT Circular 14/2021 is the live guideline.
• Source-rule analysis under section 9 must be paired with treaty analysis under section 158 (treaty supremacy) for every cross-border engagement.
• Vodafone-style indirect transfer due diligence remains an indispensable element of cross-border M&A on Indian asset bases.