Section 5 of the Income-tax Act, 2025 includes in a resident's total income all income received, accruing or deemed to accrue in India and income accruing outside India. A not ordinarily resident includes foreign income only from a business controlled in or profession set up in India.
What section 5 does
Section 5 answers the question that follows the charge in section 4: which income is taxable in India. It works entirely off the residential status determined under section 6.
For a resident, the net is worldwide: income received or deemed received in India, income accruing or deemed to accrue in India, and income accruing outside India. For a non-resident, only the first two limbs apply — foreign income is outside the net entirely.
The middle category does the interesting work. A person who is not ordinarily resident under section 6(13) includes foreign income only when it is derived from a business controlled in or a profession set up in India. This is what makes the not-ordinarily-resident status valuable to returning Indians and inbound expatriates.
The Income-tax Act, 2025 takes effect from 1 April 2026 and applies from tax year 2026-27. The Income-tax Act, 1961 continues to govern every year up to 31 March 2026, including assessments, appeals and penalties for those years, because of the repeal and savings provision in section 536. Figures quoted here are the amounts written into the Act as enacted (with the Gazette corrigenda of 3 September 2025); the annual Finance Act can change rates and thresholds.
Old Act and new Act, side by side
The table below shows what the Income-tax Act, 1961 did and where the same ground is covered in the Income-tax Act, 2025.
| Income-tax Act, 1961 | What it did | Income-tax Act, 2025 |
|---|---|---|
| 5(1) | Scope for residents | 5(1) |
| 5(1), proviso | Not ordinarily resident carve-out | 5(1)(c) |
| 5(2) | Scope for non-residents | 5(2) |
| 5, Explanation 1 | Balance sheet in India does not create receipt | 5(3) |
| 5, Explanation 2 | No double inclusion on accrual and receipt | 5(4) |
| 6 | Residential status | 6 |
| 9 | Income deemed to accrue in India | 9 |
Section 5 sub-section by sub-section
Read this alongside the bare text — each heading below is a sub-section of the section as enacted.
Sub-section (1) — residents are taxed on worldwide income
The total income of 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 the person; (b) accrues or arises, or is deemed to accrue or arise, in India; or (c) accrues or arises outside India — with the important qualification that where the person is not ordinarily resident under section 6(13), foreign income is included only when derived from a business controlled in or a profession set up in India.
Sub-section (2) — non-residents are taxed on Indian income only
The total income of a non-resident includes income which (a) is received or deemed to be received in India, or (b) accrues or arises, or is deemed to accrue or arise, in India. Foreign income of a non-resident is not chargeable at all. Note that section 9 decides what is deemed to accrue in India, and that section does much of the heavy lifting for cross-border taxation.
Sub-section (3) — a balance sheet in India is not a receipt
Income accruing or arising outside India shall not be deemed to be received in India by reason only of the fact that it is taken into account in a balance sheet prepared in India. Consolidating foreign results into Indian accounts does not, by itself, bring that income into the Indian net.
Sub-section (4) — no double inclusion
Where income has been included on the basis that it accrued or arose, or is deemed to have accrued or arisen, it shall not again be included on the basis that it is received or deemed to be received in India. Accrual and receipt are alternative bases, not cumulative ones.
How the three statuses compare
Resident and ordinarily resident — worldwide income. Not ordinarily resident — Indian income plus foreign income only from a business controlled in or profession set up in India. Non-resident — Indian income only. Everything therefore turns on section 6.
Worked example
Three individuals with identical income in tax year 2026-27, differing only in residential status.
| Income | Resident and ordinarily resident | Not ordinarily resident | Non-resident |
|---|---|---|---|
| Salary earned and received in India — ₹20,00,000 | Taxable | Taxable | Taxable |
| Rent from a Dubai property — ₹8,00,000 | Taxable | Not taxable | Not taxable |
| Profit of a UK business controlled from India — ₹15,00,000 | Taxable | Taxable — controlled in India | Not taxable |
| Interest from a US bank account — ₹2,00,000 | Taxable | Not taxable | Not taxable |
| Capital gain on shares of an Indian company | Taxable | Taxable | Taxable — deemed to accrue in India under section 9 |
The not-ordinarily-resident column is the reason section 6(13) matters so much. Of ₹25,00,000 of foreign income, only the ₹15,00,000 from the India-controlled business is taxed. And note the last row: a non-resident is still taxed on gains from Indian company shares, because section 9 deems that income to accrue in India.
Compliance checklist and due dates
- Determine residential status under section 6 first — section 5 does nothing until that is fixed.
- For a not ordinarily resident, test each item of foreign income against the business controlled in or profession set up in India condition.
- For non-residents, check section 9 carefully; deemed accrual is where most non-resident tax arises.
- Do not treat consolidation of foreign results in Indian accounts as receipt in India — sub-section (3).
- Ensure the same income is not offered twice on accrual and again on receipt — sub-section (4).
- Where income is taxed in both countries, claim treaty relief under section 159 or unilateral relief under section 160.
Common mistakes
- Applying the resident scope to a not ordinarily resident and taxing all foreign income.
- Assuming a non-resident has no Indian tax exposure without checking the deeming rules in section 9.
- Treating remittance of foreign income into India as creating a fresh charge; the charge depends on accrual or receipt as defined, and sub-section (4) prevents double inclusion.
- Overlooking that a resident's foreign income is taxable even if never brought into India.
This is an explanatory guide, not tax advice, and it does not reproduce the section in full. Read the bare text of the section before you rely on it, and check for later amendments, the Income-tax Rules made under the new Act, and CBDT circulars and notifications.