July 2026 - CSM & CO LLP

Transfer Pricing under the Income-tax Act, 2025: Arm’s Length Price, Documentation, Form 48 Report and Fee (Tax Year 2026-27)

Posted on July 31, 2026 by CA Meet Dhrangadhariya

Last updated: 31 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Transfer pricing rules (sections 161 to 173 of the Income-tax Act, 2025, old sections 92 to 92F) require income, expense and interest from an international transaction or a specified domestic transaction to be worked out at the arm’s length price.
Associated enterprises are linked by shareholding of 26% or more of the voting power, a loan of 51% or more of total assets, guarantees of 10% or more of borrowings, control of the board, dependence on intangibles or raw materials, and similar tests (section 162).
The method is chosen from comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin or a prescribed method (section 165); a variation of up to 3% (as notified) from the arm’s length price is tolerated when one price is determined.
The accountant’s report goes in Form 48 at least one month before the return due date (Rule 85); late filing now attracts a fee of ₹50,000 (up to one month) or ₹1,00,000 (section 428(d)), since the penalty in section 447 was omitted by Finance Act 2026, and a penalty of 2% of the transaction value applies for failing to keep documents (section 442).

When two related businesses deal with each other, the price they charge may not be the price independent parties would have agreed. Transfer pricing rules make sure the profit is not shifted out of India by such pricing. In the Income-tax Act, 2025 (from 01/04/2026) they are in Chapter X, sections 161 to 173 (old sections 92 to 92F), and the Rules in Rules 84 and 85.

Section map

Old	New	Subject
92	161	Income and expense at arm’s length price
92A	162	Associated enterprise
92B	163	International transaction
92BA	164	Specified domestic transaction
92C	165	Determination of arm’s length price
92CA	166	Reference to Transfer Pricing Officer
92CB	167	Safe harbour
92CC, 92CD	168, 169	Advance pricing agreement
92CE	170	Secondary adjustment
92D	171	Information and documents
92E	172	Accountant’s report
92F	173	Definitions
3CEB	Form 48	Accountant’s report

Who is an associated enterprise (section 162)

Two enterprises are associated if, for example:

the same persons take part in the management, control or capital of both;
one holds 26% or more of the voting power of the other, or a person holds 26% or more in each;
one has lent a loan that is 51% or more of the book value of the other’s total assets, or guarantees 10% or more of its total borrowings;
one appoints more than half of the other’s board or an executive director;
one depends wholly on intangibles owned by the other, or 90% or more of its raw materials come from the other on influenced terms, or its goods are sold to the other on influenced terms;
common control by an individual or relatives, or a HUF and a member;
one is a firm, association or body of individuals and the other holds 10% or more interest in it; or
they have a prescribed relationship of mutual interest.

International and specified domestic transactions

An international transaction (section 163) is a transaction between associated enterprises, one of which is necessarily a non-resident, covering tangible and intangible property, capital financing (borrowing, lending, guarantee, marketable securities, advances), services (market research, management, technical, legal, accounting and others), business restructuring, cost-sharing arrangements and any other transaction having a bearing on profits, income, losses or assets. A transaction with an outsider is deemed an international transaction if a prior agreement exists with an associated enterprise, or its terms are determined in substance between the outsider and the associated enterprise (section 163(2)).

A specified domestic transaction (section 164) includes certain transactions between the assessee and related persons (for example those covered by sections 122, 140(9), 140(13) and 205(4)) and prescribed ones, where the aggregate of such transactions in the tax year exceeds ₹20 crore.

Determining the arm’s length price (section 165)

Choose the most appropriate method from: comparable uncontrolled price, resale price, cost plus, profit split, transactional net margin, or another method the Board prescribes (section 165(1) and (2)).
If one price results, it is the arm’s length price; but the price actually charged is accepted if it differs by no more than a notified percentage, not exceeding 3% (section 165(3)(a)). If more than one price results, the price is determined as prescribed (section 165(3)(b)).
The Assessing Officer can determine the arm’s length price if the price was not determined correctly, documents were not kept, the data used is unreliable or information was not furnished in time, after giving a show-cause notice (section 165(4) and (5)). No deduction under Chapter VIII is allowed on the income that is increased (section 165(7)).
Where the AO makes the adjustment on a payment from which tax was deducted, the other associated enterprise’s income is not recomputed (section 165(8)).
The Assessing Officer can refer the case to the Transfer Pricing Officer (section 166), and a secondary adjustment can be required to align the books with the transfer price (section 170).

Safe harbour rules (section 167) and advance pricing agreements (sections 168 and 169) can give certainty in advance.

Documentation (section 171, Rule 84)

Every person who has entered into an international or specified domestic transaction, and every constituent entity of an international group, must keep and maintain information and documents as prescribed. Rule 84(1) lists them: ownership structure, group profile, business description, terms of each transaction, functional analysis (functions, risks, assets), forecasts, comparability analysis, methods considered, the reasons for the method chosen, and the computation of the arm’s length price.

Exemption: the list does not apply to international transactions whose aggregate value in the books for the year does not exceed ₹1 crore, but the assessee must substantiate that the income from them was computed at arm’s length (Rule 84(2) and (3)).
Retention: nine years from the end of the relevant tax year (Rule 84(8)).
On request: documents must be furnished within ten days of a notice, extendable by up to thirty days on application (section 171(2) and (3)).

The accountant’s report: Form 48 (section 172, Rule 85)

Every person who entered into an international or specified domestic transaction in the tax year must obtain a report from an accountant and furnish it in Form 48, at least one month before the due date of the return (Rule 85). “Specified date” is one month before the due date for the return under section 263(1) (section 173(d)). For a company or an audited assessee with a return due date of 31 October, that is 30 September (and one month before 30 November where the return is due on 30 November).

Consequences of default

Default	Consequence	Section
Report not furnished by the specified date	Fee of ₹50,000 (up to one month) or ₹1,00,000 thereafter	428(d)
Failure to keep documents, to report a transaction or incorrect information	Penalty of 2% of the value of each transaction	442(1)
Failure to furnish information required for an international group	Penalty of ₹5,00,000	442(2)
Adjustment of income	Assessed after notice and the AO’s determination	165(4) to (6)

The old penalty of ₹1,00,000 for not furnishing the report (section 447) was omitted by Finance Act 2026 from 01/04/2026 and replaced by the fee under section 428(d).

Practical points

Build the transfer pricing file during the year, not at filing time.
Check whether the 26%, 51% or 10% tests apply to every group company, since a small shareholding can still make two companies associated.
Treat management fees, royalties, loans to subsidiaries and guarantees as international transactions.
Keep the Form 48 date in the compliance calendar, one month before the return.

How CSM & Co LLP can help

We prepare transfer pricing documentation, benchmarking studies and the accountant’s report in Form 48 for businesses with related party dealings. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act deal with transfer pricing?

Sections 161 to 173 in Chapter X: section 161 (income at arm’s length price), 162 (associated enterprise), 163 (international transaction), 164 (specified domestic transaction), 165 (determination of arm’s length price), 166 (reference to the Transfer Pricing Officer), 167 (safe harbour), 168 and 169 (advance pricing agreements), 170 (secondary adjustment), 171 (information and documents), 172 (accountant’s report) and 173 (definitions).

Who is an associated enterprise?

An enterprise that participates in the management, control or capital of the other, or in which the same persons do; or one holding 26% or more of the voting power of the other (or a person holding 26% in both); or one that has lent 51% or more of the other’s total assets (book value); or guarantees 10% or more of its borrowings; or appoints more than half its board; or the business of which depends wholly on the other’s intangibles or on 90% or more of raw materials supplied by the other; and certain cases of common control by an individual or HUF (section 162).

What is an international transaction?

A transaction between two or more associated enterprises, one of which is necessarily a non-resident, covering the purchase, sale or use of tangible or intangible property, lending and borrowing, provision of services, business restructuring, cost sharing and any other transaction affecting profits, income, losses or assets (section 163). A transaction with an outsider can be deemed an international transaction if there is a prior agreement with an associated enterprise, or its terms are in substance determined with it (section 163(2)).

Is there a minimum value for documentation?

Rule 84(2) says the detailed documentation list does not apply to an international transaction where the aggregate value recorded in the books for the tax year does not exceed ₹1 crore, but the assessee must substantiate that income from them was computed at arm’s length. Specified domestic transactions count only where the aggregate in the year exceeds ₹20 crore (section 164). Documents are kept for nine years from the end of the tax year (Rule 84(8)).

What is the tolerance for the arm’s length price?

Where one price is determined by the most appropriate method, the price actually charged is accepted if the difference from that price is not more than a percentage, not exceeding 3%, notified by the Central Government (section 165(3)(a)(ii)).

What if the accountant’s report is late?

A fee of ₹50,000 for a delay up to one month and ₹1,00,000 thereafter (section 428(d)). The separate penalty of ₹1,00,000 in section 447 was omitted by Finance Act 2026 from 01/04/2026. A penalty of 2% of the value of each transaction applies for failure to keep and maintain documents, to report a transaction, or for incorrect information (section 442(1)).

Official sources

Disclaimer

This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.

DTAA and Foreign Tax Credit under the Income-tax Act, 2025: Sections 159 and 160, Forms 41 to 44 and Rule 76 (Tax Year 2026-27)

Posted on July 30, 2026 by CA Meet Dhrangadhariya

Last updated: 15 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

A tax treaty (DTAA) under section 159 of the Income-tax Act, 2025 applies to an assessee only to the extent it is more beneficial than the Act (section 159(4)); a non-resident must hold a residence certificate from the other country and provide the documents in Form 41 (the old Form 10F) to claim it (section 159(8), Rule 75).
A resident of India who pays tax abroad claims foreign tax credit under Rule 76: the lower of the Indian tax on that income and the foreign tax paid, country by country and source by source, with the statement in Form 44 (the old Form 67) furnished within twelve months from the end of the tax year.
For countries with no agreement, section 160 gives a deduction at the lower of the Indian rate or the foreign rate.
An Indian resident who needs a residence certificate for a treaty applies in Form 42 to the Assessing Officer, who issues it in Form 43.

Income earned across borders can be taxed twice, once by the country where it arises and again by the country where the earner lives. India avoids this through Double Taxation Avoidance Agreements (DTAA) and through foreign tax credit rules. In the Income-tax Act, 2025 (from 01/04/2026) these are sections 159 and 160, supported by Rules 75 and 76 of the Income-tax Rules, 2026.

Old and new references

Old	New
Section 90 and 90A (agreements)	Section 159
Section 91 (no agreement)	Section 160
Form 10F (information for treaty claim by a non-resident)	Form 41 (Rule 75(1))
Tax Residency Certificate application and certificate	Form 42 (application) and Form 43 (certificate) (Rule 75(3) and (4))
Rule 128 and Form 67 (foreign tax credit)	Rule 76 and Form 44

Section 159: treaties

The Central Government may enter into an agreement with another country or a specified territory to give relief for income taxed in both, to avoid double taxation without creating chances of non-taxation or reduced taxation through evasion or treaty-shopping, to exchange information and to help recover tax (section 159(1) and (3)).
Where an agreement applies to an assessee, the Act applies to the extent it is more beneficial to the assessee (section 159(4)).
The special rules in Chapter XI (anti-avoidance) apply even if they are not beneficial (section 159(6)).
A term defined in the agreement has that meaning; if not, the Act’s meaning is used (section 159(7)).
A non-resident can claim relief under an agreement only when it obtains a certificate of residence from the government of its country and provides the other documents and information prescribed (section 159(8)). Rule 75 prescribes Form 41, and the assessee must keep the documents to support it.

A resident who wants a treaty benefit abroad

A resident of India who needs a certificate of residence applies in Form 42 to the Assessing Officer, who on being satisfied issues it in Form 43 (Rule 75(3) and (4)).

Foreign tax credit for a resident (Rule 76)

A resident is allowed credit for foreign tax paid, by deduction or otherwise, in a country or specified territory outside India, in the tax year in which the corresponding income is offered or assessed to tax in India (Rule 76(1)). If the income is offered in more than one year, credit is spread in the same proportion (Rule 76(2)).

Foreign tax means the tax covered by the agreement, where there is one, and otherwise the tax in the nature of income-tax (including excess profits or business profits tax) under the law of that country (Rule 76(3) and section 160(3)(a)).
Credit is against tax, surcharge and cess, and not interest, fee or penalty (Rule 76(4)).
Calculation, source by source and country by country: the lower of the Indian tax on that income and the foreign tax paid on it. Foreign tax above the amount payable under the agreement is ignored (Rule 76(7)(a)).
Currency: the telegraphic transfer buying rate on the last day of the month before the month in which the tax was paid or deducted (Rule 76(7)(b)).
Minimum alternate tax: credit is allowed against the tax under section 206 in the same way, with the excess ignored for the credit under section 206(1)(m) to (p) and 206(2)(e) to (h) (Rule 76(8) and (9)).
Disputed foreign tax: no credit while disputed (Rule 76(5)); allowed later within six months from the end of the month the dispute is settled, with proof of payment and an undertaking that no refund has been or will be claimed (Rule 76(6)).

Documents and time limit

Form 44: statement of income from outside India offered for tax, the foreign tax on it, the treaty article and rate, and the credit claimed.
A certificate or statement of the nature of income and the tax, from the foreign tax authority, the person who deducted the tax, or signed by the assessee, with an acknowledgement of payment, bank counterfoil or challan, or proof of deduction.
Both within twelve months from the end of the tax year in which the income is offered to tax or assessed in India, and the return for that year must have been furnished within the time in section 263(1) or (4) (Rule 76(10) to (12)).

Example. A resident individual earns ₹10,00,000 of foreign income from one country, on which ₹1,50,000 tax was paid there. The Indian tax on that income (at the average rate on total income) is ₹2,00,000, and the treaty allows a maximum of ₹1,20,000. The foreign tax above the treaty limit, ₹30,000, is ignored, so the foreign tax counted is ₹1,20,000, which is lower than ₹2,00,000. The credit is ₹1,20,000 and the Indian tax payable on that income is ₹80,000.

Section 160: no agreement

A resident who has paid income-tax in a country with which there is no agreement under section 159, on income that accrued or arose outside India and is not deemed to accrue or arise in India, is entitled to a deduction from the Indian tax of a sum on the doubly taxed income at the Indian rate or the foreign rate, whichever is lower (the Indian rate if both are equal) (section 160(1)). The same applies to a non-resident taxed on a share in a registered firm that is resident in India (section 160(2)). The foreign credit rules of Rule 76 apply to credit under section 160 as well.

Practical points

Check the treaty for the particular country and article. The treaty rate for dividend, interest, royalty and fees for technical services differs by country and can change by protocol, so verify it in the notified text.
Get the foreign paperwork early. Form 44 needs the foreign tax certificate or statement, and the twelve month limit runs from the end of the tax year.
Residents with foreign assets also have reporting duties under section 263(1)(a)(ix).

How CSM & Co LLP can help

We prepare Form 44 and the foreign tax documents, advise on treaty rates, residence certificates and Form 41, and file returns with foreign income. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Does a tax treaty always reduce Indian tax?

The Act applies to an assessee to whom an agreement applies only to the extent it is more beneficial (section 159(4)). The provisions of Chapter XI (the general anti-avoidance rules) apply even if they are not beneficial (section 159(6)). A non-resident can claim treaty relief only if it holds a certificate of residence from the government of its country and provides the other prescribed documents and information (section 159(8)).

What replaces Form 10F?

Form 41, under Rule 75(1): the documents and information to be provided by a non-resident assessee claiming double taxation relief under an agreement. The assessee must keep the supporting documents, and the tax authority can call for them to verify the claim (Rule 75(2)).

How does a resident in India get a tax residency certificate?

By applying to the Assessing Officer in Form 42, who issues the certificate of residence in Form 43 (Rule 75(3) and (4)).

How is foreign tax credit calculated?

For each source of income in each country, the credit is the lower of the Indian tax payable on that income and the foreign tax paid on it, and any foreign tax above what the treaty allows is ignored. The foreign tax is converted at the telegraphic transfer buying rate on the last day of the month before the month in which it was paid or deducted. Credit is against tax, surcharge and cess but not interest, fee or penalty (Rule 76(4) and (7)).

What documents are needed to claim the credit, and by when?

A statement in Form 44 (income from outside India offered to tax and the foreign tax on it, verified as the Form says) and a certificate or statement of the nature of the income and the tax, from the foreign tax authority, the deductor or signed by the assessee, with proof of payment or deduction. Both are to be furnished within twelve months from the end of the tax year in which the income is offered to tax or assessed in India, and the return for the year must be furnished within the time in section 263(1) or (4) (Rule 76(10) to (12)).

What if foreign tax is disputed?

No credit is given for the disputed part (Rule 76(5)). If the dispute is settled and tax is paid, the credit is allowed for the year the income was offered to tax, if evidence and an undertaking that no refund has been or will be claimed are furnished within six months from the end of the month in which the dispute is finally settled (Rule 76(6)).

Official sources

Disclaimer

Board Meetings under Sections 173 to 175 of the Companies Act, 2013: Number, Notice, Quorum and Resolution by Circulation

Posted on July 30, 2026October 9, 2026 by CA Meet Dhrangadhariya

Last updated: 09 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Every company holds its first Board meeting within 30 days of incorporation and at least four Board meetings every year, with a gap of not more than 120 days between two meetings.
A One Person Company, small company and dormant company are treated as compliant with one meeting in each half of the calendar year, at least 90 days apart.
Notice is at least seven days in writing to every director (shorter notice is allowed for urgent business if an independent director is present). Quorum is one-third of the total strength or two directors, whichever is higher.
A resolution by circulation needs approval by a majority of the directors entitled to vote, and must be decided at a meeting if one-third of the directors ask for that.

The Board of Directors is where a company’s day-to-day governance happens, so the Companies Act, 2013 sets a minimum rhythm of meetings, a notice period, a quorum and a way to pass urgent resolutions without meeting. These are sections 173 to 175 in Chapter XII.

How often (section 173(1))

The first Board meeting within 30 days of the date of incorporation.
After that, a minimum of four meetings every year, with not more than 120 days between two consecutive meetings.
The Central Government can by notification exempt a class of companies or apply the rule with modifications.

One Person Company, small company and dormant company (section 173(5))

These are treated as having complied if at least one meeting is held in each half of a calendar year and the gap between the two meetings is not less than 90 days. Sections 173 and 174 do not apply at all to a One Person Company that has only one director.

Attending by video conferencing (section 173(2))

Directors may participate in person or through video conferencing or other audio visual means, as prescribed, which can record and recognise their participation and record and store the proceedings with date and time. The Central Government can specify matters that cannot be dealt with this way; even for those matters, if there is a quorum through physical presence, another director may join by video conferencing.

Notice (section 173(3) and (4))

At least seven days’ written notice to every director at the address registered with the company, sent by hand delivery, post or electronic means.
Shorter notice is allowed to transact urgent business, provided at least one independent director (if the company has one) is present. If no independent director attends, the decisions are circulated to all directors and become final only when ratified by at least one independent director.
An officer whose duty it is to give notice and who fails to do so is liable to a penalty of Rs 25,000.

Quorum (section 174)

One-third of the total strength of the Board or two directors, whichever is higher. A director attending by video conferencing counts. A fraction is rounded up to one, and vacant seats are not part of the “total strength”.
Vacancies: continuing directors can act, but if their number falls below the quorum they can act only to increase the number of directors to the quorum, or to call a general meeting.
Interested directors: if the number of interested directors is two-thirds or more of the total strength, the directors who are not interested and present, being not less than two, form the quorum.
No quorum: unless the articles provide otherwise, the meeting automatically stands adjourned to the same day, time and place in the next week, or, if that day is a national holiday, to the next day that is not a national holiday.

Resolution by circulation (section 175)

The resolution is circulated in draft, with the necessary papers, to all directors (or committee members) at their addresses registered with the company in India, by hand, post, courier or the prescribed electronic means.
It is passed if approved by a majority of the directors or members entitled to vote.
If not less than one-third of the total number of directors require that the resolution be decided at a meeting, the chairperson must put it to a meeting of the Board.
The resolution is noted at the next Board meeting and made part of its minutes.

Defects in appointment (section 176)

An act done by a person as a director is not invalid merely because it is later noticed that his appointment was defective, disqualified or had terminated. This protection does not cover acts done after the company has noticed the defect.

What if a company does not hold the meetings?

Section 173 itself provides a specific penalty only for failing to give notice (Rs 25,000). For other contraventions of the Act for which no penalty is provided elsewhere, section 450 provides a penalty of Rs 10,000 and a further Rs 1,000 for each day of continuing contravention, up to Rs 2 lakh for a company and Rs 50,000 for an officer in default. Confirm with your professional adviser which provision applies to your case.

A simple annual plan

Task	Suggested timing
First meeting after incorporation	within 30 days
Meetings through the year	four or more, never more than 120 days apart
Notice	at least seven days before, with agenda and papers
Circular resolution	when a meeting is not practical; keep the signed approvals and note it at the next meeting
Minutes	recorded and signed as the Act and the secretarial standards require

Points to check

This post follows the Companies Act as published on India Code, including its amendments up to the footnotes in that edition. The Secretarial Standard on Board Meetings (SS-1) adds procedural rules on notice, agenda, minutes and attendance that this post does not reproduce.
Listed companies and certain classes must also have committees and independent directors under sections 177, 178 and 149 and SEBI’s listing rules.

Frequently asked questions

How many Board meetings must a company hold in a year?

At least four, and not more than 120 days can pass between two consecutive meetings. The first meeting must be held within 30 days of incorporation.

Are there relaxations for small companies?

A One Person Company, small company and dormant company are deemed to comply if at least one Board meeting is held in each half of a calendar year with a gap of not less than 90 days between the two. Sections 173 and 174 do not apply to a One Person Company with only one director.

What notice is needed for a Board meeting?

Not less than seven days in writing to every director at the address registered with the company, by hand, post or electronic means. Shorter notice is allowed for urgent business if at least one independent director (if any) is present; if no independent director attends, the decisions are final only on ratification by at least one independent director.

Can directors attend by video conferencing?

Yes. Participation in person or by video conferencing or other audio visual means as prescribed is allowed, and such participation counts for quorum. The Central Government can specify matters that cannot be dealt with by video conferencing.

What is the quorum?

One-third of the total strength of the Board, or two directors, whichever is higher. Any fraction is rounded up to one, and vacant seats are not counted in total strength.

What if there is no quorum?

Unless the articles provide otherwise, the meeting stands adjourned to the same day, time and place in the next week, or if that is a national holiday, to the next day that is not a national holiday.

How does a resolution by circulation work?

The draft, with the necessary papers, is circulated to all directors at their registered addresses in India. It is passed if approved by a majority of the directors entitled to vote. If one-third or more of the directors require that it be decided at a meeting, the chairperson must put it to a meeting. It is noted at the next Board meeting and made part of the minutes.

Official sources

Disclaimer

NRI Taxation in India under the Income-tax Act, 2025: Residential Status, Taxable Income, NRE and NRO Interest and TDS (Tax Year 2026-27)

Posted on July 29, 2026 by CA Meet Dhrangadhariya

Last updated: 29 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Under section 6 of the Income-tax Act, 2025 an individual is resident if in India for 182 days or more in the tax year, or for 60 days or more in it and 365 days or more in the four preceding years (120 days instead of 60 for a citizen or person of Indian origin visiting India with Indian income above ₹15 lakh); otherwise the person is a non-resident.
A non-resident is taxed only on income received, deemed received, accrued or arisen in India (section 5(2)); a resident other than not ordinarily resident is taxed on world income.
Interest on a Non-Resident (External) account is exempt (Schedule IV, Sl. No. 1); NRO and fixed deposit interest is taxable, and the bank deducts tax at the rates in force (section 393(2), Table Sl. No. 17).
The rebate for low income (section 156) is only for resident individuals, and the duty to report foreign assets in the return (section 263(1)(a)(ix)) falls on a resident other than not ordinarily resident, so a non-resident is outside it.

Whether an Indian citizen who lives abroad pays tax in India depends first on residential status, and then on what kind of income is involved. This post follows the Income-tax Act, 2025 (from 01/04/2026), which replaces sections 5, 6 and 9 of the 1961 Act with sections 5 and 6, among others. “NRI” is not a defined term for residence: the Act speaks of resident, not ordinarily resident, and non-resident.

Step 1: Residential status of an individual (section 6)

An individual is resident in India in a tax year if:

(a) in India for a total period of 182 days or more in that tax year; or
(b) in India for 60 days or more in that year and for 365 days or more in the four preceding tax years (section 6(2)).

Exceptions and changes:

Case	Effect	Section
Indian citizen who leaves India as a crew member of an Indian ship, or for employment outside India	Test (b) does not apply, so 182 days is the test	6(3)
Indian citizen or person of Indian origin who is outside India and visits India	Test (b) does not apply	6(4)
The same person, with total income other than income from foreign sources above ₹15 lakh	Test (b) applies with 120 days instead of 60	6(5)
Indian citizen not liable to tax in any other country by reason of domicile, residence or similar criteria, with total income above ₹15 lakh (other than foreign source income)	Deemed resident (but not ordinarily resident)	6(7), 6(13)(c)

A person who is not resident is a non-resident.

Not ordinarily resident (section 6(13))

A resident individual is not ordinarily resident if:

non-resident in nine out of the ten preceding tax years, or in India for 729 days or less in the seven preceding tax years; or
a citizen of India or person of Indian origin whose total income other than foreign source income exceeds ₹15 lakh and who was in India for 120 days or more but less than 182 days in the year; or
an Indian citizen who is deemed resident under section 6(7).

“Income from foreign sources” means income that accrues or arises outside India (except income from a business controlled in or a profession set up in India) and is not deemed to accrue or arise in India (section 6(14)). For a company, residence turns on being an Indian company or having its place of effective management in India (section 6(10)); for a HUF, firm and others, on control and management being wholly outside India or not (section 6(9) and (11)).

Step 2: What income is taxed (section 5)

Status	Taxable in India
Resident (ordinarily resident)	Income from all sources: received or deemed received in India, accruing or arising in India, or accruing outside India (section 5(1))
Not ordinarily resident	Income received in India, accruing or arising in India, and income from outside India only if derived from a business controlled in or a profession set up in India (section 5(1)(c))
Non-resident	Only income received or deemed received in India, or accruing, arising or deemed to accrue or arise in India (section 5(2))

Foreign income that is merely taken into account in a balance sheet prepared in India is not deemed received in India (section 5(3)).

Step 3: Rates and relief

The slab rates in section 202(1) apply to an individual’s total income, and the new regime is the default unless the person opts otherwise. The rebate under section 156 (up to ₹12 lakh of income in the new regime, and the smaller rebate in the old regime) is available only to a resident individual, so a non-resident does not get it. The ₹4 lakh nil slab still applies as part of the rate table.
Capital gains are computed under the capital gains sections; those rules and rates are covered in our posts on capital gains.
Tax treaty relief and foreign tax credit for income taxed in both countries is given under sections 159 and 160.

Bank accounts: NRE, NRO and FCNR

Account	Tax position
NRE (Non-Resident (External))	Interest is not included in the total income of an individual who is a person resident outside India under FEMA (or is permitted by the RBI to keep the account) (Schedule IV, Sl. No. 1)
NRO (Non-Resident Ordinary)	Interest is taxable income; the bank deducts tax at the rates in force (section 393(2), Table Sl. No. 17)
FCNR	The exemption for FCNR(B) deposits under the 2025 Act depends on the residential status rules and was not verified in the Schedules for this post

An individual who becomes resident should tell the bank, because the NRE exemption is for persons resident outside India.

TDS on payments to a non-resident (section 393(2))

For payments to a non-resident, section 393(2) lists the cases. The general rule in Table Sl. No. 17 covers any interest or other sum chargeable under the Act, other than salary, paid to a non-resident (not being a company) or a foreign company, at the rates in force, which are fixed each year by the Finance Act. Special rates exist for items such as non-resident sportsmen and entertainers (20%), interest on certain foreign currency loans and bonds (4%, 5% or 9%) and income of a specified fund (10%). Where a tax treaty applies and the payee furnishes the certificate in section 159(8), the treaty rate is used if it is lower than 20% in the cases for which Note 2 to the Table applies (units of specified mutual funds and income of Foreign Institutional Investors).

Sale of property or assets by an NRI. The buyer, or the authorised dealer paying out a sum to a non-resident Indian for the transfer of a foreign exchange asset that is not short-term, is responsible for deduction (section 393(1), the persons responsible for deduction, clause (c)). The rate is “rates in force” for the type of gain (for example, the 12.5% rate on long-term gains in section 197). Whether the deduction is on the whole price or only the gain, and how a lower deduction certificate is obtained, depends on the Rules and the certificate procedure, which were not examined for this post.

Reporting foreign assets

Section 263(1)(a)(ix) requires a return of income from a person who is resident, other than not ordinarily resident, who held any asset (including a financial interest in an entity) located outside India or has signing authority in a foreign account at any time in the tax year. A non-resident or a not ordinarily resident individual is outside this clause. Other reasons for filing a return, such as taxable Indian income above the basic exemption limit or a loss to carry forward, still apply.

Practical points

Count days carefully each year; the 182-day, 60-day, 120-day and ₹15 lakh tests depend on exact days in India and on income figures.
Do not assume that “NRI under FEMA” means “non-resident under the Income-tax Act”. The two tests are different.
Keep a Tax Residency Certificate and the other treaty documents ready if you want treaty benefit.
File a return if tax was deducted and you want a refund of the excess.

How CSM & Co LLP can help

We determine residential status, file returns for non-residents, advise on treaty relief and handle lower-deduction applications and refund claims. Please reach out to our team and we will be happy to assist.

Frequently asked questions

How is an NRI’s residential status decided?

An individual is resident in India in a tax year if (a) in India for 182 days or more in that year, or (b) in India for 60 days or more in that year and for 365 days or more in the four preceding years (section 6(2)). A citizen of India who leaves India for employment outside India, or as a crew member of an Indian ship, is outside test (b) (section 6(3)). A citizen of India or a person of Indian origin who visits India is outside test (b) as well (section 6(4)), but if the person’s total income other than income from foreign sources exceeds ₹15 lakh, the 60 days becomes 120 days (section 6(5)).

What is “not ordinarily resident”?

A resident is not ordinarily resident if the individual was non-resident in nine of the ten preceding tax years, or was in India for 729 days or less in the seven preceding tax years (section 6(13)(a)); or is a citizen of India or person of Indian origin with Indian income above ₹15 lakh who was in India for 120 days or more but less than 182 days in the year (section 6(13)(b)); or is a citizen deemed resident under section 6(7) (section 6(13)(c)).

Who is deemed resident?

An Indian citizen who is not liable to tax in any other country or territory by reason of domicile, residence or similar criteria, and has total income above ₹15 lakh excluding income from foreign sources, is deemed resident in India (section 6(7)), but is treated as not ordinarily resident (section 6(13)(c)). Section 6(7) does not apply to a person who is resident under the ordinary tests (section 6(8)).

What income of an NRI is taxable in India?

Income received or deemed to be received in India, and income that accrues or arises, or is deemed to accrue or arise, in India (section 5(2)). Income that arises outside India and is not received in India is not taxed, and income is not taxed twice on the received basis once it is taxed on the accrual basis (section 5(4)).

Is NRE account interest taxable?

No. Interest on money in a Non-Resident (External) Account is not included in the total income of an individual resident outside India under FEMA, or one permitted by the RBI to maintain the account (Schedule IV, Sl. No. 1, read with section 11). NRO account interest is taxable.

Does an NRI need to report foreign assets in the Indian return?

The requirement to furnish a return because of foreign assets, or signing authority in a foreign account, applies to a resident who is not “not ordinarily resident” (section 263(1)(a)(ix)). A non-resident is outside that clause, though a return may still be needed for other reasons, such as income above the basic exemption limit.

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 5, 6, 11, 156, 202, 263, 393, Schedule IV)

Disclaimer

Interest for Late Return and Advance Tax Default under the Income-tax Act, 2025: Sections 423, 424, 425 and 411 (Tax Year 2026-27)

Posted on July 28, 2026 by CA Meet Dhrangadhariya

Last updated: 28 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

The old sections 234A, 234B, 234C and 220(2) are sections 423, 424, 425 and 411(3) of the Income-tax Act, 2025: 1% a month on tax unpaid for a late or missing return, 1% a month or part of a month when advance tax paid is below 90% of the assessed tax, and a deferment interest of 3% (1% for the March instalment) on instalment shortfalls.
No deferment interest is charged if at least 12% of the tax due on the returned income is paid by 15 June and 36% by 15 September; capital gains, winnings, first-time business income and ordinary dividend that were not estimated are excused if the tax is paid in the remaining instalments or by 31 March.
A person paying under section 58(2) presumptive taxation pays 1% on a shortfall against the whole tax due by 15 March.
Tax demanded by notice and not paid in thirty days carries 1% a month or part of a month under section 411(3), and a Commissioner can reduce or waive it in genuine hardship.

Interest on tax is charged when a return is late, when advance tax is short or late, and when a demand is not paid on time. In the Income-tax Act, 2025, which applies from 01/04/2026, these sections replace the old 234A, 234B, 234C and 220(2).

Old section	New section	When it applies	Rate
234A	423	Return furnished late or not furnished	1% a month
234B	424	No advance tax, or advance tax below 90% of assessed tax	1% a month or part of a month
234C	425	Instalment shortfall on 15 June, 15 September, 15 December or 15 March	3% (1% for March) on the shortfall
220(2)	411(3)	Demand not paid within thirty days of notice	1% a month or part of a month

Section 423: late or missing return (old 234A)

Simple interest is 1% x A x T, where A is the tax on which interest is payable and T is the number of months from the starting date to the ending date in the table below (section 423(1)).

Case	Interest runs from	Interest runs to	Tax on which interest is charged
Return furnished late (under section 263(1), (4) or (6), or on a notice under section 268(1))	The due date under section 263(1)	The date the return is furnished	Tax on the income determined (or on regular assessment) less tax paid
No return furnished	The due date	Completion of the assessment under section 271	Tax on the income in regular assessment less tax paid
Return required on a reassessment notice (section 280) furnished late	End of the time allowed in the notice	Date of furnishing	Extra tax on the reassessed income
Return required on a reassessment notice, none furnished	End of the time allowed in the notice	Completion of the reassessment	Extra tax on the reassessed income

“Tax paid” means advance tax, TDS and TCS, tax relief and foreign tax credit (section 423(4)(d)). Additional tax under section 267 is left out of the base.

Example. The tax left after TDS and advance tax is ₹40,000 and the return is filed three months after the due date. Interest is 1% x ₹40,000 x 3 = ₹1,200. The section multiplies by “the number of months” and does not say in terms how a part of a month is counted, so for a filing date that is not a whole number of months after the due date, check how the portal counts it before paying.

Section 424: advance tax default (old 234B)

An assessee liable to pay advance tax who paid none, or paid less than 90% of the assessed tax, pays simple interest at 1% for every month or part of a month, from 1 April after the tax year up to the date the total income is determined under section 270(1) (processing of the return) or the regular assessment is completed (section 424(1)).

If no advance tax was paid, interest is on the whole assessed tax.
If some was paid but less than 90%, interest is on the shortfall between the assessed tax and the advance tax paid.
“Assessed tax” is the tax on the total income determined, less TDS and TCS on income included, tax relief and foreign tax credit (section 424(2)).
If tax is paid (as self-assessment tax or otherwise) before the date of processing or assessment, interest is worked to that date on the full amount, and after that on the remaining shortfall (section 424(4)).

Example. Assessed tax is ₹1,50,000 and advance tax paid is ₹1,00,000. This is below 90% (₹1,35,000), so interest runs on the shortfall of ₹50,000 at 1% for each month or part from 1 April. If the return is processed after four months, the interest is ₹50,000 x 1% x 4 = ₹2,000, less any part paid earlier with the return.

Section 425: deferment of advance tax (old 234C)

The Table in section 425(1) compares advance tax paid by each due date with the tax due on the returned income (the tax on the income declared in the return less TDS, TCS and reliefs, section 425(5)):

Due date	Required (of tax due on returned income)	Interest on the shortfall
15 June	15%	3%
15 September	45%	3%
15 December	75%	3%
15 March	100%	1%

No interest is charged for the first two instalments if the advance tax paid is 12% or more by 15 June and 36% or more by 15 September (section 425(2)).

Presumptive taxpayers declaring profit under section 58(2) (Table Sl. No. 1 or 3) are checked only against the tax due by 15 March, and pay simple interest at 1% on that shortfall (section 425(3)).

Excused shortfall (section 425(4)). No interest is charged on a shortfall that arises because of under-estimating, or not estimating, capital gains, winnings from lotteries and games (section 2(49)(n)), business income arising or accruing for the first time, or dividend (other than deemed dividend under section 2(40)(e)), provided the tax on that income is paid in full in the remaining instalments or by 31 March.

Example. Tax due on the returned income is ₹1,50,000. By 15 June the person has paid ₹10,000, which is less than 12% (₹18,000). The required amount by 15 June is 15% = ₹22,500 and the shortfall is ₹12,500, so interest is 3% x ₹12,500 = ₹375. If ₹18,000 had been paid, no interest would arise for that instalment.

Section 411(3): unpaid demand (old 220(2))

A demand notice under section 289 must be paid within thirty days of service, or a shorter period set with the approval of the Joint Commissioner. If not, simple interest at 1% for every month or part of a month runs from the day after that period until payment (section 411(3)). Finance Act 2026 reworded the sub-section and said no interest accrues on a demand arising from penalty under section 439 up to the date of the appellate order. A reduction or waiver on an application for genuine hardship is possible (section 411(7)), and the order is to be passed within twelve months from the end of the month of the application (section 411(8)). The Assessing Officer can extend the time or allow instalments on an application made before the due date (section 411(5)).

Paying interest with the return (section 266)

Interest and any fee must be paid before the return is furnished, with proof of payment. A short payment is adjusted against fee first, then interest, then tax (section 266(3)). Interest under section 423 for this purpose is computed on the tax on the total income declared in the return less advance tax, TDS, TCS and reliefs (section 266(4)).

How CSM & Co LLP can help

We compute interest, check portal calculations and file waiver applications for hardship cases. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act replace 234A, 234B and 234C?

Section 423 (default in furnishing the return, old 234A), section 424 (default in payment of advance tax, old 234B), section 425 (deferment of advance tax, old 234C). Interest on tax demanded by notice and not paid in time (old 220(2)) is in section 411(3).

How is interest for a late return calculated?

Simple interest of 1% of the unpaid tax for each month, from the day after the due date of the return under section 263(1) to the date the return is furnished (to the completion of assessment if no return is furnished). The amount is the tax on the income as determined (or in regular assessment) less tax already paid, which includes advance tax, TDS and TCS and tax relief (section 423). The text multiplies by the number of months; it does not say in terms how a part of a month is treated.

When is interest for advance tax default charged?

If you were liable to pay advance tax and paid none, or paid less than 90% of the assessed tax, simple interest of 1% for each month or part of a month runs from 1 April after the tax year until the income is determined or regular assessment is completed. It is charged on the whole assessed tax if nothing was paid, or on the shortfall otherwise (section 424).

When is no interest charged for instalment deferment?

If the advance tax paid is at least 12% of the tax due on the returned income by 15 June and at least 36% by 15 September (section 425(2)). Interest is also not charged for a shortfall caused by under-estimating or not estimating capital gains, winnings, business income arising for the first time or dividend (other than deemed dividend) if the tax on that income is paid in the remaining instalments or by 31 March (section 425(4)).

Do I pay the interest with the return?

Yes. Interest and fee for delay in filing or advance tax default must be paid before furnishing the return, with proof of payment, and any short payment is adjusted first to fee, then interest, then tax (section 266).

Can interest on a demand be waived?

The Principal Chief Commissioner, Chief Commissioner, Principal Commissioner or Commissioner can reduce or waive interest under section 411(3) on an application if payment would cause genuine hardship, the default was due to circumstances beyond the assessee’s control, and the assessee has co-operated in the inquiry and recovery proceedings (section 411(7)).

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 266, 411, 423 to 425)

Disclaimer

Advance Tax under the Income-tax Act, 2025: Who Pays, Due Dates, Calculation and Self-Assessment Tax (Tax Year 2026-27)

Posted on July 27, 2026 by CA Meet Dhrangadhariya

Last updated: 09 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Advance tax is payable in a financial year when the tax payable on the current income, after TDS and TCS, is ₹10,000 or more (sections 403 to 405); a resident individual aged 60 or more with no business or professional income is exempt (section 403(3)).
Instalments are 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March; a person who declares presumptive income under section 58(2) (business or specified profession) pays the whole amount by 15 March (section 408).
Anything paid by 31 March counts as advance tax of that year; tax still due when the return is filed is self-assessment tax and must be paid, with interest and fee, before the return is furnished (section 266).
Missing the schedule attracts interest under sections 424 and 425.

Income tax is meant to be paid as income is earned. TDS does this for salary, interest and similar income. For the rest, the law asks the taxpayer to pay advance tax during the financial year. In the Income-tax Act, 2025 (from 01/04/2026) these rules are in sections 403 to 410, and self-assessment tax is in section 266.

Who must pay (sections 403 and 404)

Advance tax is payable on the current income, which is the total income that will be chargeable to tax for the year (section 403(2)).
It is payable only if the tax payable for the year, worked out as in section 405, is ₹10,000 or more (section 404).
Exempt: a resident individual who is 60 years or more at any time in the tax year and has no income chargeable under the head “Profits and gains of business or profession” (section 403(3)).

How the amount is worked out (sections 405 and 406)

Advance tax = tax on your estimated current income at the rates in force minus the tax that will be deducted or collected at source during the year on income included in that estimate (section 405). You estimate the income yourself and pay on your own accord (section 406). After any instalment you can raise or lower the remaining instalments to match a revised estimate.

Due dates (section 408)

Instalment	Due on or before	Cumulative advance tax payable
1	15 June	Not less than 15%
2	15 September	Not less than 45%
3	15 December	Not less than 75%
4	15 March	100%

Presumptive taxpayers. A person who declares profits under section 58(2) (Table Sl. No. 1 or 3), that is, the business scheme or the specified profession scheme, pays the whole advance tax by 15 March (section 408(2)). Goods carriage operators under Table Sl. No. 2 follow the four-instalment table.

Any sum paid on or before 31 March counts as advance tax of that financial year for all purposes (section 408(3)).

Example. Tax on estimated income is ₹1,80,000 and TDS of ₹30,000 will be deducted during the year, so advance tax is ₹1,50,000. The instalments are: ₹22,500 by 15 June; a cumulative ₹67,500 by 15 September (so ₹45,000 more); a cumulative ₹1,12,500 by 15 December (₹45,000 more); and the balance, ₹37,500, by 15 March.

When the Assessing Officer asks (sections 407 and 409)

An Assessing Officer can order advance tax from a person already assessed, on the higher of the income in the latest regular assessment or the income in any later return. The order must be passed by the last day of February and is followed by a demand notice (section 407(1) to (3)). If a later return or assessment follows, the order can be amended before 1 March (section 407(4) and (5)). You can reply with your own lower estimate, but if your estimate is higher, you must pay on the higher figure by the last instalment (section 407(8) and (9)). Failure to follow the order, or to send the intimation in time, makes you an assessee in default (section 409). Advance tax is credited in the regular assessment for the tax year in which it was payable (section 410).

Self-assessment tax (section 266)

After taking into account advance tax, TDS and TCS, tax relief and foreign tax credit, any tax that remains payable on the basis of your return is self-assessment tax. You must pay it, with the interest and fee payable for a delay in filing or a default in advance tax, before you furnish the return, and the return must carry proof of payment (section 266(1)). If you pay less than the total, the payment is applied first to the fee, then to the interest, then to the tax (section 266(3)).

What happens if advance tax is short or late

Interest is charged at 1% a month on shortfalls and delays under sections 424 and 425, explained in the post on interest for delay and default in the Income-tax Act, 2025. Presumptive taxpayers who miss 15 March are charged 1% on the shortfall (section 425(3)).

Practical points

Re-estimate income before each instalment, especially after capital gains, a bonus or a large business receipt.
Include all TDS in your estimate, but only on income that is part of your estimate (section 405).
Keep proof of every payment, and check that it appears in your tax statement before you file the return.
A senior citizen with pension and interest income only is exempt, but one with business income pays advance tax like anyone else.

How CSM & Co LLP can help

We estimate advance tax each quarter for businesses, professionals and investors, and handle interest and notices when a payment was missed. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Who has to pay advance tax?

Any assessee whose tax payable for the year, after TDS and TCS on income that is taxed, is ₹10,000 or more (sections 404 and 405). A resident individual who is 60 years or more at any time in the tax year and has no income from business or profession does not have to pay advance tax (section 403(3)).

What are the advance tax due dates for 2026-27?

15% by 15 June 2026, 45% by 15 September 2026, 75% by 15 December 2026 and 100% by 15 March 2027, each as reduced by the amounts already paid (section 408(1)).

I use presumptive taxation. When do I pay advance tax?

If you declare profits under section 58(2) for a business or a specified profession (Table Sl. No. 1 or 3), the whole advance tax is due on or before 15 March (section 408(2)).

Can I pay the advance tax after 15 March?

An amount paid on or before 31 March is treated as advance tax paid in that financial year (section 408(3)), but interest for the shortfall at the earlier instalment dates is still charged under section 425.

What is self-assessment tax?

Tax still payable on the basis of the return after crediting advance tax, TDS, TCS, tax relief and foreign tax credit. It must be paid, along with interest and fee for any delay in filing or default in advance tax, before the return is furnished, and the return must carry proof of payment (section 266). If the payment is short, it is applied first to the fee, then interest, then tax.

Can the Assessing Officer ask me to pay advance tax?

Yes. If you have already been assessed, the Assessing Officer can require advance tax on the higher of your last regularly assessed income or the income in a later return, by an order passed no later than the last day of February (an amended order before 1 March), followed by a demand notice. You can send an intimation if you estimate a lower figure, and you must pay more if your own estimate is higher (section 407).

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 266, 403 to 410, 424, 425)

Disclaimer

Dividend and Deemed Dividend under the Income-tax Act, 2025: Meaning, Tax, TDS and Section 2(40) (Tax Year 2026-27)

Posted on July 26, 2026October 7, 2026 by CA Meet Dhrangadhariya

Last updated: 11 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Dividend is taxed in the shareholder’s hands as income from other sources (section 92(2)(a)) at the normal rates, and no expense, including interest, can be deducted against it from 01/04/2026 (section 93(2) as substituted by Finance Act 2026).
The Act’s meaning of dividend (section 2(40)) is wider than the cash dividend a company declares: it includes distribution of accumulated profits, debentures, payments on liquidation or capital reduction, and loans or advances by a closely held company to a shareholder with 10% or more voting power, or to a concern in which that shareholder has a substantial interest (deemed dividend).
From 01/04/2026 a payment by a company on buy-back of its own shares is no longer within the dividend definition; it is dealt with under the capital gains provisions.
A domestic company deducts TDS of 10% on dividend (section 393(1), Table Sl. No. 7); there is no deduction from an individual’s dividend paid by a mode other than cash if the total in the year does not exceed ₹10,000 (section 393(4)).

A dividend is a share of a company’s profits paid to its shareholders. For tax, the Income-tax Act, 2025 (in force from 01/04/2026) uses a wider meaning in section 2(40) and then taxes it as income from other sources under section 92(2)(a). The old Dividend Distribution Tax was abolished long ago, so the tax is on the shareholder.

What counts as dividend (section 2(40))

Dividend includes:

Any distribution by a company of accumulated profits, whether capitalised or not, that releases assets of the company to its shareholders.
A distribution of debentures, debenture-stock or deposit certificates to shareholders, and a distribution of bonus shares to preference shareholders, to the extent of accumulated profits.
A distribution on liquidation, to the extent attributable to accumulated profits just before liquidation.
A distribution on reduction of capital, to the extent of accumulated profits.
Deemed dividend (section 2(40)(e)), described next.

“Accumulated profits” includes all profits of the company up to the date of the distribution or payment (up to liquidation in case 3). For an amalgamated company, the accumulated profits of the amalgamating company on the date of amalgamation are added.

Buy-back is no longer dividend

Before 01/04/2026, sub-clause (f) treated a payment by a company on the purchase of its own shares as dividend. Finance Act 2026 omitted it. A buy-back is now taxed as a transfer under the capital gains provisions (section 69 of the 2025 Act as amended, which also has a higher tax for promoters).

Deemed dividend: loans to shareholders

If a company in which the public is not substantially interested (a closely held company) pays any sum, to the extent it has accumulated profits, as:

an advance or loan to a shareholder who is the beneficial owner of shares carrying at least 10% of the voting power (not shares with a fixed rate of dividend); or
an advance or loan to a concern (a HUF, firm, association of persons, body of individuals or company) in which that shareholder is a member or partner and has a substantial interest; or
a payment on behalf of, or for the individual benefit of, such a shareholder,

the amount is treated as dividend. A person has a substantial interest in a concern other than a company if beneficially entitled to 20% or more of its income at any time in the tax year (section 2(40), explanation (D)).

Example. X Pvt Ltd (closely held) has accumulated profits of ₹40 lakh. It lends ₹25 lakh to Mr S, who holds 12% of the voting power. The ₹25 lakh is treated as dividend in Mr S’s hands because the loan is within the accumulated profits. Had the loan been ₹60 lakh, only ₹40 lakh would be deemed dividend.

What is not dividend

A loan or advance in the ordinary course of business, where lending money is a substantial part of the company’s business.
A dividend paid by the company that is set off against an earlier amount already treated as deemed dividend, to that extent.
A distribution of shares by the resulting company in a demerger.
Certain advances or loans between two group entities, where one is an IFSC finance company or finance unit, the other is located outside India, and the parent is listed outside India in a country notified by the Central Government.
A distribution on liquidation or capital reduction in respect of shares issued for full cash consideration where the holder cannot take part in surplus assets on liquidation.

How dividend is taxed

Head: income from other sources (section 92(2)(a)).
Rate: the normal rates on the shareholder’s total income. There is no separate flat rate for a resident.
When: a dividend is the income of the tax year in which it is declared, distributed or paid; an interim dividend is the income of the year in which it is unconditionally made available to the shareholder entitled to it (section 7(2)).
Deductions: none. Section 93(2), as substituted by Finance Act 2026, says no deduction is allowed against dividend income or income from units of specified mutual funds and UTI units. Earlier, interest expense up to 20% of the dividend was allowed. Section 93(1)(a), which allows commission paid for realising interest on securities, no longer mentions dividend either.

TDS on dividend

A domestic company deducts 10% of any dividend (including on preference shares) before paying it, and the table shows no threshold (section 393(1), Table Sl. No. 7). No tax is deducted in these cases (section 393(4), Table Sl. No. 10):

dividend paid to LIC, GIC and the other specified insurance bodies, and to other notified persons; and
dividend to an individual shareholder paid by a mode other than cash, if the total dividend paid or likely to be paid in the tax year does not exceed ₹10,000.

A shareholder who qualifies can give the declaration allowed under section 393(6) in the cases listed there. The TDS is credited against your tax, so claim it in the return using your tax statement.

Practical points

Loans from your own company. A shareholder-director who borrows from a closely held company should check the 10% voting power test and accumulated profits before drawing the money, because the loan can become taxable dividend.
Review buy-back plans. Since 01/04/2026 they are taxed as capital gains.
Financing shares by borrowing. The interest is no longer deductible against dividend income. Whether it can be claimed anywhere else was not examined for this post.
Foreign and non-resident dividends have separate rates and treaty rules and are not covered here.

How CSM & Co LLP can help

We advise closely held companies on loans to shareholders and directors, reporting of dividend income and TDS compliance on dividend. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What is deemed dividend?

Deemed dividend arises when a company in which the public is not substantially interested pays money, to the extent of its accumulated profits, as a loan or advance to a shareholder who is the beneficial owner of shares carrying 10% or more of the voting power, or to a concern in which that shareholder is a member or partner and has a substantial interest, or pays on behalf of or for the individual benefit of such a shareholder (section 2(40)(e)). The amount is taxed as the shareholder’s dividend income.

What does “substantial interest” mean for a concern that is not a company?

A person has a substantial interest in a concern, other than a company, if at any time in the tax year the person is beneficially entitled to not less than 20% of the income of the concern (section 2(40), explanation (D)).

Which loans are not deemed dividend?

An advance or loan made to a shareholder or the concern by a company in the ordinary course of its business, where lending money is a substantial part of the company’s business; a dividend that is set off against an amount earlier treated as deemed dividend; a distribution of shares by the resulting company in a demerger; and certain loans between group entities involving an IFSC finance company or finance unit and a foreign-listed group (section 2(40), exclusions (i) to (v)).

Is the company’s buy-back payment still a dividend?

No, from 01/04/2026. The sub-clause that treated a payment by a company on purchase of its own shares as dividend was omitted by Finance Act 2026. Buy-back proceeds are taxed under the capital gains provisions (see section 69).

Can I deduct interest paid on a loan used to buy shares?

No. Section 93(2), as substituted by Finance Act 2026, allows no deduction against dividend income or income from units of specified mutual funds and UTI units. Earlier, interest up to 20% of the dividend could be deducted.

Is there TDS on dividend?

Yes. A domestic company deducts 10% before paying any dividend (section 393(1), Table Sl. No. 7), with no threshold in the table. The deduction is not made on an individual shareholder’s dividend if it is paid by a mode other than cash and the total during the tax year does not exceed ₹10,000, and for certain shareholders such as LIC, GIC and other specified institutions (section 393(4), Table Sl. No. 10).

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 2(40), 92, 93, 393)

Disclaimer

Income from Other Sources under the Income-tax Act, 2025: Section 92 Gifts, Interest, Lottery Winnings and Compensation (Tax Year 2026-27)

Posted on July 25, 2026 by CA Meet Dhrangadhariya

Last updated: 07 August 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Section 92 of the Income-tax Act, 2025 (old section 56) taxes every kind of income that does not fit another head, and lists specific items: dividend, lottery and game winnings, interest on securities, forfeited advance, employment termination compensation, insurance maturity above premiums, interest on enhanced compensation, and gifts above ₹50,000 in a year.
Gifts of money, land, building, shares, jewellery and other listed property above ₹50,000 are taxed unless they come from a relative, at marriage, by will or inheritance, in contemplation of death, or fall in the other exceptions of section 92(3); a property bought below stamp duty value is taxed only if the gap exceeds the higher of ₹50,000 or 10% of the price.
Lottery, game show, card game, gambling and race winnings are taxed at a flat 30% with no deduction (sections 194(1) and 94(4)); net online game winnings are also at 30%.
Interest on enhanced compensation is taxed in the year of receipt, with 50% deducted (sections 278(1) and 93(1)(f)); family pension gets the lower of one-third or ₹25,000 (₹15,000 in the old regime) (section 93(1)(d)).

“Income from other sources” is the last of the five heads of income. Under the Income-tax Act, 2025, which applies from 01/04/2026, section 92 says income of every kind that is not exempt and does not fall under salary, house property, business or profession, or capital gains is taxed here (section 92(1)). Section 92(2) then lists specific items. Section 93 allows deductions, section 94 bars some deductions, and section 95 applies the business-profits rules in section 38(1) to (4) to computations under section 92.

This replaces sections 56 to 59 of the 1961 Act. One item in the old section 56 is gone: the tax on a closely held company’s share issue above fair value (56(2)(viib), “angel tax”) does not appear in the 2025 Act’s list.

What section 92(2) lists

Item	Clause	Notes
Dividend	(a)	Taxed here; no deduction against it (section 93(2))
Winnings from lottery, crossword puzzle, races, card games, other games, gambling, betting	(b)	30% flat (section 194(1))
Employees’ contributions to PF, superannuation, ESI or other welfare funds received by the employer	(c)	If not taxed as business income (late deposit)
Keyman insurance receipts, including bonus	(d)	If not taxed as business income or salary
Interest on securities	(e)	If not taxed as business income
Income from hiring out machinery, plant or furniture	(f), (g)	Also buildings if letting is inseparable
Advance received in negotiations for transfer of a capital asset, forfeited when the deal fails	(h)
Interest on compensation or enhanced compensation (section 278(1))	(i)	50% deduction
Compensation on termination of employment or change in its terms	(j)
Specified sum received by a unit holder from a business trust	(k)	Formula A less B less C
Life insurance receipts above premiums not claimed as deduction (not ULIP, not keyman)	(l)	If not exempt under Schedule II, Sl. No. 2
Sums or property received without or for inadequate consideration	(m)	Gifts, see below

Interest on savings accounts, fixed deposits, recurring deposits and bonds and rent that is not business or property income are taxed under section 92(1) or (2)(e), as before.

Gifts above ₹50,000 (section 92(2)(m))

A person who receives, from any person or persons in the tax year:

Money without consideration totalling more than ₹50,000: the whole sum is taxed.
Immovable property without consideration whose stamp duty value exceeds ₹50,000: the stamp duty value is taxed.
Immovable property for a consideration: the stamp duty value that exceeds the consideration is taxed if that excess is more than the higher of ₹50,000 and 10% of the consideration.
Other property without consideration (shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, works of art, bullion, virtual digital assets) whose aggregate fair market value exceeds ₹50,000: the whole fair market value is taxed.
Other property for a consideration that is less than its fair market value by more than ₹50,000: the excess of fair market value over the consideration is taxed.

Example. A buys a flat for ₹50,00,000. If the stamp duty value is ₹54,00,000, the excess of ₹4,00,000 is less than 10% of the price (₹5,00,000), so nothing is taxed. If the stamp duty value is ₹60,00,000, the excess of ₹10,00,000 is more than ₹5,00,000, so ₹10,00,000 is taxed as income from other sources.

If the agreement date and the registration date differ, the stamp duty value on the date of the agreement can be used, provided the consideration was paid in whole or in part by a specified banking or online mode on or before the date of the agreement (section 92(4)(a)). If the stamp duty value is disputed, the Assessing Officer can refer it to a Valuation Officer (section 92(4)(b)).

When a gift is not taxed (section 92(3))

From any relative (definition above and in section 92(5)(g)).
On the occasion of the marriage of the individual.
Under a will or by inheritance.
In contemplation of death of the payer or donor.
From a local authority.
From or by a registered non-profit organisation, except when received by a “related person” of it (section 355(h)).
In a transaction that is not regarded as a transfer under section 70(1) (the exact clauses of section 70(1) are listed in section 92(3)(g)).
From an individual by a trust created solely for the benefit of the individual’s relative.
From a class of persons prescribed by the Rules.

Remember clubbing: income that later arises from a gift to a spouse or a daughter-in-law is taxed in the donor’s hands (section 99), even though the gift itself is exempt as a gift from a relative.

Winnings from lotteries, games and betting

Tax rate: 30% flat on winnings from a lottery, crossword puzzle, race (including horse races, but not the business of owning and maintaining race horses), card game or any other game, gambling or betting (section 194(1), Table Sl. No. 1). Net winnings from an online game (computed as prescribed) are also at 30% (Table Sl. No. 5).
No deduction: no expenditure or allowance can be set against these winnings (section 94(4)). The exception is a race horse owner’s own business income (section 94(5)).
Meaning: “lottery” includes prizes by draw of lots, by chance or otherwise under any scheme; “card game and other game of any sort” includes a game show or entertainment programme on television or electronic mode where people compete to win prizes (section 92(5)(b) and (e)).
TDS: the payer deducts tax at the rates in force when the winnings in a single transaction exceed ₹10,000 (section 393(1), Table Sl. Nos. 1 and 3). A person who stocks, sells or distributes lottery tickets suffers 2% TDS on commission or prize above ₹20,000 (Table Sl. No. 4).
Computation: the 30% is charged on the winnings alone, and the tax on the rest of the income is worked out as if the winnings were not part of the total income (section 194(1)(a) and (b)).

Interest on compensation (section 92(2)(i) and 278(1))

Interest on compensation or enhanced compensation (for example, on land acquisition) is taxed in the tax year in which it is received, whatever the year to which it relates (section 278(1)). Half of it is deducted and no other deduction is allowed (section 93(1)(f)). The enhanced compensation itself is dealt with under the capital gains provisions (section 67).

Deductions allowed (section 93) and not allowed (section 94)

Commission or remuneration to a banker or other person for collecting interest on securities (section 93(1)(a), as substituted by Finance Act 2026, which dropped the reference to dividend).
For employees’ contributions: the deduction allowed for them under the business rules (section 93(1)(b)).
For hire of machinery, plant, furniture (and buildings): depreciation and expenses as for business (section 93(1)(c)).
Family pension: one-third of the pension or ₹25,000, whichever is less, where the tax is computed under section 202(1) (the new regime); one-third or ₹15,000, whichever is less, otherwise (section 93(1)(d)).
Interest on enhanced compensation: 50% of the income (section 93(1)(f)).
Commutation of pension from a specified fund, and gratuity on the death of an employee: the whole amount (section 93(1)(g) and (h)).
Any other expense that is not capital and is laid out wholly and exclusively for making the income (section 93(1)(e)).
Not allowed: personal expenses, interest payable outside India on which tax has not been paid or deducted, and salary payable outside India unless tax was paid or deducted (section 94(1)). No deduction at all is allowed against dividend income or against income from units of specified mutual funds and UTI units (section 93(2)).

How CSM & Co LLP can help

We help with gift documentation, valuation questions on property purchases, reporting winnings and compensation interest, and replies to notices about unexplained receipts. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section of the 2025 Act replaces section 56?

Section 92 (what is taxed), section 93 (deductions), section 94 (amounts not deductible) and section 95 (profits chargeable) of the Income-tax Act, 2025.

Is a gift of more than ₹50,000 taxable?

Yes, if it is money (total above ₹50,000 in the tax year, then the whole sum), or immovable or other property given free of cost, whose stamp duty value or fair market value exceeds ₹50,000 (section 92(2)(m)). It is not taxed if it comes from a relative, on the occasion of the individual’s marriage, under a will or inheritance, in contemplation of death, from a local authority, from a registered non-profit organisation in the cases listed, in a transaction that is not a transfer under section 70(1), or from an individual to a trust for the benefit of the individual’s relative (section 92(3)).

Who is a relative for the gift rules?

For an individual: spouse; brother or sister; brother or sister of the spouse; brother or sister of either parent; any lineal ascendant or descendant; any lineal ascendant or descendant of the spouse; and the spouse of any of those persons listed from brother or sister onwards. For a HUF, any member (section 92(5)(g)).

How is lottery or game show income taxed?

At a flat 30% on the winnings (section 194(1), Table Sl. No. 1), with no deduction for expenditure or allowance (section 94(4)). A game show or an entertainment programme where people compete to win prizes counts as a card game or other game (section 92(5)(b)). TDS applies where a single payment exceeds ₹10,000 (section 393(1), Table Sl. No. 1).

Is interest on enhanced compensation taxable in the year it is awarded?

No. It is taxed in the tax year in which it is received (section 278(1)), under section 92(2)(i), after a deduction of 50% of the income (section 93(1)(f)), and no other deduction is allowed against it.

Can I deduct expenses against dividend income?

No. From 01/04/2026 section 93(2), as substituted by Finance Act 2026, allows no deduction against dividend income or income from specified mutual fund and UTI units. The earlier limit of interest expense up to 20% of the dividend no longer applies.

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 92 to 94, 194, 278, 393(1))

Disclaimer

Clubbing of Income under the Income-tax Act, 2025: Sections 96 to 100 for Spouse, Minor Child and Family Transfers (Tax Year 2026-27)

Posted on July 24, 2026 by CA Meet Dhrangadhariya

Last updated: 25 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

Clubbing means adding another person’s income to yours. In the Income-tax Act, 2025 the old sections 60, 61 and 64 are sections 96 to 100 (Chapter V).
Income from an asset you give to your spouse or daughter-in-law without adequate consideration, and your spouse’s pay from a concern in which you hold 20% or more of the shares or profits (unless it is for her or his own professional skill), are added to your income (section 99(1)).
A minor child’s income goes to the parent with the higher total income if the marriage subsists, or to the parent who maintains the child otherwise; income from the child’s own work, skill or talent, or a disability, is not clubbed.
If the spouse invests the gifted money in a business or a firm, the clubbed income is a share of that income worked out by a formula (section 99(2)); in the new tax regime the ₹1,500 per child exclusion is not available.

Moving an investment into the name of a spouse, a child or a relative to reduce tax does not always work. The law adds (“clubs”) that income back to the person who made the transfer. In the Income-tax Act, 2025, which applies from 01/04/2026, the clubbing rules are in Chapter V, sections 96 to 100. They replace the old sections 60, 61, 64 and 65.

Old and new sections

Old section	New section	Subject
60	96	Transfer of income without transfer of the asset
61, 62	97	Revocable transfer of assets
63	98	Meaning of “transfer” and “revocable transfer”
64(1)(ii)	99(1)(a)(i)	Spouse’s remuneration from a concern in which you have a substantial interest
64(1)(iv)	99(1)(a)(ii)	Assets transferred to the spouse for inadequate consideration
64(1)(vi)	99(1)(b)	Assets transferred to the son’s wife
64(1A)	99(1)(c)	Income of a minor child
64(1)(vii), (viii)	99(1)(d)	Assets transferred to another person for the benefit of the spouse or son’s wife
64(2)	99(3)	Individual’s property converted into HUF property
65	100	Liability of the other person for the tax on clubbed income

The main cases

1. Transfer of income without the asset (section 96)

All income arising to any person by virtue of a transfer, where there is no transfer of the asset from which it arises, is taxed as the transferor’s income. A transfer includes any settlement, trust, covenant, agreement or arrangement (section 98(a)).

Example. Mr P owns a shop that earns rent of ₹12,000 a month. He agrees that the rent will be paid to his friend Mr Q but keeps the shop. The rent is still Mr P’s income.

2. Revocable transfer of assets (section 97)

Income arising from assets transferred under a revocable transfer is taxed as the transferor’s income. A transfer is revocable if it provides for the direct or indirect re-transfer of the income or assets to the transferor, or lets the transferor re-assume power over them (section 98(b)). A transfer is outside section 97 if it is not revocable during the lifetime of the beneficiary or transferee and the transferor gets no direct or indirect benefit from the income. Once the power to revoke arises, the income is taxed as the transferor’s from then on (section 97(3)).

3. Income of the spouse (section 99(1)(a))

Remuneration from your concern, section 99(1)(a)(i). Salary, commission, fees or any other remuneration paid to your spouse by a concern in which you have a substantial interest is included. It is not included if it is solely attributable to the spouse’s application of technical or professional knowledge, experience and qualification.
Assets transferred, section 99(1)(a)(ii). Income from assets that you transferred directly or indirectly to the spouse otherwise than for adequate consideration, or in connection with an agreement to live apart, is included. Where the asset is a house property, section 25(a) deems you the owner.

Substantial interest means shares carrying at least 20% of the voting power (not shares with a fixed dividend) owned by you, alone or jointly with relatives, or, in any other concern, entitlement to at least 20% of the profits, at any time in the tax year (section 99(5)(a)(iii)). The remuneration is included in the hands of the spouse whose total income, before the inclusion, is greater; once included for a year it is not included for the other spouse in later years unless the Assessing Officer is satisfied after hearing that spouse (section 99(5)(a)).

4. Reinvestment by the spouse or son’s wife (section 99(2))

If the transferred asset is invested in a business or contributed as capital to a firm, the amount clubbed is not the whole income but a proportion:

A = B x (C / D), where B is the income and interest from the business or firm for the year, C is the value of the transferred assets invested as on the first day of the tax year, and D is the total investment or capital as on that day.

Example. Mrs L receives ₹10,00,000 from her husband and puts it in her own business, in which she has invested a total of ₹25,00,000. The business earns ₹3,00,000 in the year. The clubbed amount is ₹3,00,000 x 10,00,000 / 25,00,000 = ₹1,20,000. If instead she puts the gift in a fixed deposit and earns ₹70,000 of interest, the whole ₹70,000 is clubbed.

5. Daughter-in-law and indirect transfers (section 99(1)(b) and (d))

Income from assets transferred by you to your son’s wife (on or after 01/06/1973) for inadequate consideration is clubbed, and so is income of any person or association of persons from assets you transferred for inadequate consideration, to the extent the income is for the immediate or deferred benefit of your spouse or son’s wife.

6. Minor child (section 99(1)(c) and (5)(b))

The income of a minor child is included in the income of the parent whose total income (before the inclusion) is greater, if the parents’ marriage subsists. If it does not subsist, it is included in the income of the parent who maintains the child during the tax year. Income earned because of work done by the child, or from activities where the child’s skill, talent, specialised knowledge or experience is used, and income of a child with a disability specified in section 154, is not included.

An exclusion of ₹1,500 per minor child is allowed under Schedule III, Table Sl. No. 17. Section 202(2)(a)(i) lists serial number 17 among the exemptions that are not available in the new tax regime, so the ₹1,500 is available only in the old regime.

7. Property converted into HUF property (section 99(3) and (4))

If you convert your separate property into HUF property (by treating it as family property, throwing it into the common stock or transferring it to the family without adequate consideration), income from that property is treated as yours. If it is later partitioned and your spouse receives a share, that share’s income is clubbed under section 99(1)(a). This does not apply to property converted on or before 31/12/1969.

Who pays the tax on clubbed income (section 100)

The person in whose name the asset stands, or who is a member of the firm, is liable for the part of the tax levied on you that is attributable to the clubbed income, on a notice of demand from the Assessing Officer. Joint holders are jointly and severally liable.

Planning points

Gifts to parents and other relatives (other than the spouse, son’s wife and minor child) do not trigger these sections by themselves, so income earned by a parent on gifted money is taxed in the parent’s hands. Check whether another section, such as the gift rules, applies to the gift itself.
Gifts to an adult child are outside section 99(1) but should be recorded properly.
Fair-value transactions with a spouse (a loan with interest, a sale at market value) are outside the “inadequate consideration” test, but they need to be genuine and documented.
Losses: the definition of “income” for this section includes loss (section 99(5)(d)), so a loss from clubbed assets can also be clubbed.

Whether income earned after a divorce, or on assets transferred before the marriage, is clubbed is a question of case law that was not reviewed for this post.

How CSM & Co LLP can help

We review family investment structures, advise on gifts, HUF and trust arrangements and handle clubbing issues in returns and assessments. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which sections of the 2025 Act deal with clubbing of income?

Chapter V, sections 96 to 100. Section 96 covers transfer of income without the asset, section 97 revocable transfers, section 98 defines “transfer” and “revocable”, section 99 covers income of the spouse, daughter-in-law, minor child and HUF conversions, and section 100 makes the other person liable for the tax on the clubbed income.

If I gift money to my wife and she earns interest on it, who pays tax?

You do. Income arising to the spouse from assets you transferred directly or indirectly without adequate consideration is included in your total income (section 99(1)(a)(ii)). The exceptions are a transfer in connection with an agreement to live apart, and cases where the asset is a house property covered by section 25(a), which taxes you as deemed owner.

Whose income is the minor child’s income added to?

To the parent with the higher total income before the inclusion, if the parents’ marriage subsists. If it does not, to the parent who maintains the child during the tax year (section 99(5)(b)). Income from work done by the child, from skill, talent or specialised knowledge, or where the child has a disability specified in section 154, is not included.

How much exclusion is there for a minor child’s income?

₹1,500 per minor child under Schedule III, Table Sl. No. 17. Section 202(2)(a)(i) lists that serial number among the exemptions that are not available in the new tax regime, so the exclusion applies only if you are in the old regime.

Is my wife’s salary from my company clubbed with mine?

Only if you hold shares carrying 20% or more of the voting power, or are entitled to 20% or more of the profits, in the concern (alone or with relatives), and her pay is not solely attributable to the application of her own technical or professional knowledge, experience and qualification (section 99(1)(a)(i) and (5)(a)). It is clubbed with the spouse who has the greater income before the inclusion.

Is the other person liable for the tax on clubbed income?

Yes. The person in whose name the asset stands, or who is a member of the firm, is liable to pay the part of the tax attributable to the clubbed income on a notice of demand, and joint holders are jointly and severally liable (section 100).

Official sources

Income Tax Department: Income-tax Act, 2025 (sections 25, 96 to 100, 154, 202, Schedule III)

Disclaimer

Freelancer Income Tax in India: Presumptive or Actual Books, TDS, Advance Tax and Audit (Tax Year 2026-27)

Posted on July 23, 2026 by CA Meet Dhrangadhariya

Last updated: 23 July 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

A freelancer’s fees are income from business or profession. For a specified profession (which now lists information technology) the Income-tax Act, 2025 lets a resident individual declare 50% of gross receipts up to ₹50 lakh (₹75 lakh if cash receipts are at most 5%) under section 58, with no books or audit.
The alternative is actual books: income is receipts less allowable expenses and depreciation, and an audit is needed once gross receipts in a profession exceed ₹50 lakh (section 63).
Clients deduct tax at source from professional fees at 10% (technical services at 2%) when the payment crosses ₹50,000 (section 393(1) Table Sl. No. 6); this is credited against your tax.
A presumptive taxpayer pays the whole advance tax by 15 March (section 408(2)); everyone else pays in four instalments.

A freelancer (a software developer, designer, consultant, writer, chartered accountant or similar) earns income from business or profession. This post explains the choices open to a resident individual freelancer under the Income-tax Act, 2025, which applies from 01/04/2026: whether to use the presumptive scheme or actual books, what tax clients deduct, when advance tax is due and when an audit is needed.

Step 1: Two ways to compute the income

Point	Presumptive (section 58)	Actual books (section 62)
Who	Resident individual, HUF or firm other than an LLP, in a specified profession	Anyone
Receipts limit	₹50 lakh; ₹75 lakh if cash receipts are 5% or less of the total	No limit, but an audit applies above ₹50 lakh
Income	50% of gross receipts (or more, if the actual profit is higher)	Receipts less allowable expenses and depreciation
Expenses	None to prove; all are taken as covered by the 50%	Must be actually incurred for the work and supported by bills
Books	Not required	Required in the form prescribed (Rule 46)
Audit	None (section 63(2))	Needed if gross receipts exceed ₹50 lakh
Advance tax	Whole amount by 15 March	Four instalments

Who is a “specified profession”?

Section 62(4) lists legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology and company secretary, plus any other profession the Board notifies. A freelance developer or IT consultant is therefore covered. For another kind of freelance work, check whether it fits the list or can be treated as a business under the business scheme in section 58 (6% or 8% of receipts, up to ₹2 crore).

Books requirement

A person in a specified profession must always keep books (section 62(1)(a)). For other professions and business, books are required if income exceeds ₹1,20,000 or receipts exceed ₹10 lakh in any of the three preceding years (or likely in the current year if newly started). For an individual or HUF the figures are ₹2,50,000 of income and ₹25 lakh of receipts (section 62(2)). Rule 46 lists what a professional must keep.

Step 2: Worked example

Asha is a resident freelance software consultant (a specified profession). In the tax year 2026-27 she receives ₹30,00,000 from clients, all through the bank. She has no other income. She is in the new tax regime. Her actual expenses are ₹12,00,000.

Particulars	Presumptive (section 58)	Actual books
Gross receipts	₹30,00,000	₹30,00,000
Income	₹15,00,000 (50%)	₹18,00,000 (receipts less ₹12,00,000)
Tax on slabs (section 202(1))	₹1,05,000	₹1,60,000

Slab calculation, presumptive: nil up to ₹4,00,000; 5% on the next ₹4,00,000 is ₹20,000; 10% on the next ₹4,00,000 is ₹40,000; 15% on the next ₹3,00,000 is ₹45,000; total ₹1,05,000. For actual books the same slabs give ₹20,000 plus ₹40,000 plus ₹60,000 (15% on ₹4,00,000) plus ₹40,000 (20% on ₹2,00,000) which is ₹1,60,000. The rebate under section 156(2) does not help at these incomes: it gives full relief only up to a total income of ₹12 lakh, and above ₹12 lakh it applies only if the tax is more than the income above ₹12 lakh (here ₹1,05,000 is less than ₹3,00,000, and ₹1,60,000 is less than ₹6,00,000). Health and education cess applies on top.

The presumptive route gives the lower tax here because her expenses (40% of receipts) are less than half of her receipts. If her expenses were 70% of receipts, actual books would show income of ₹9,00,000, less than the presumptive ₹15,00,000. Declaring that lower figure means keeping books under section 62 and getting an audit under section 63 (Table Sl. No. 2). Compare both every year.

Step 3: TDS from clients

Companies and many other clients deduct tax at source from your fees (section 393(1), Table Sl. No. 6(iii)):

Nature of payment	Rate	Threshold
Fees for professional services	10%	₹50,000
Fees for technical services that are not professional services	2%	₹50,000
Payee engaged only in the business of a call centre	2%	₹50,000

“Professional services” are services in legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising or other notified professions (definition in section 393). An individual or HUF who pays a freelancer and is not otherwise required to deduct tax is liable only when the payment exceeds ₹50 lakh in a year, at 2% (Table Sl. No. 6(ii)). Check the “TDS” credit in your tax statement before filing; it reduces your tax, and a refund arises if the TDS is more than the tax.

Step 4: Advance tax

If you declare income under section 58(2) (business or specified profession), the whole advance tax is due on or before 15 March of the financial year (section 408(2)).
Otherwise, advance tax is paid in four instalments: 15% by 15 June, 45% by 15 September, 75% by 15 December and 100% by 15 March (section 408(1)). Any amount paid by 31 March counts for the year (section 408(3)).
Interest is charged for a shortfall or delay under the interest provisions of the Act, which were not examined for this post.

Step 5: Audit and return

No audit if you declare the section 58 income (section 63(2)).
Audit if you keep actual books and gross receipts in the profession exceed ₹50 lakh (section 63, Table Sl. No. 1(c)), or if you claim a lower profit than the presumptive figure (Table Sl. No. 2). The audit report is in Form 26.
Return: a freelancer files the return of income each year. The ITR form depends on the Rule 164 conditions; the presumptive income is normally reported in the form for presumptive business income, and a freelancer with actual books and other heads uses the general business form.
Due date: 31 August for a person whose accounts are not required to be audited (section 263(1)(c) Table Sl. No. 3 as substituted by Finance Act 2026), and 31 October if the accounts are audited.

Common mistakes

Treating foreign client receipts as not taxable: a resident is taxed on income from all sources; export of services is a separate topic (including the GST side) that this post does not cover.
Forgetting the 15 March advance tax under presumptive taxation, and then paying interest.
Claiming lower profit than 50% without books or an audit.
Mixing personal and business payments, which makes actual-book claims difficult to support.
Taking cash receipts above 5% and assuming the ₹75 lakh limit still applies.

How CSM & Co LLP can help

We help freelancers choose between presumptive and actual taxation, maintain books, file returns, plan advance tax and handle tax audits. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Is a freelancer’s income salary or business income?

Fees from clients are income from business or profession, not salary, even if all the work is for one client. If you keep actual books, the expenses of earning it are deductible; a freelancer who also has a job reports the salary separately.

Can a freelancer use presumptive taxation?

Yes, if the freelancer is a resident individual, HUF or firm other than an LLP and the profession is a “specified profession”: legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration, information technology, company secretary, or any other profession the Board notifies (section 62(4)). Income is taken as 50% of gross receipts, up to ₹50 lakh of receipts, or ₹75 lakh if cash receipts are at most 5% of the total (section 58). Other freelancers, such as writers or designers, should check whether their work falls in the list or can use the business scheme.

When is advance tax due?

A freelancer who declares income under section 58(2) (business or specified profession) pays the whole advance tax on or before 15 March of the financial year (section 408(2)). Everyone else pays 15% by 15 June, 45% by 15 September, 75% by 15 December and the full amount by 15 March (section 408(1)).

How much TDS will clients deduct?

10% of fees for professional services, 2% for fees for technical services that are not professional services, and 2% for a call centre, in each case once a payment crosses ₹50,000 (section 393(1), Table Sl. No. 6(iii)). An individual or HUF client who is not otherwise required to deduct tax is liable only above ₹50 lakh in a year, at 2% (Table Sl. No. 6(ii)). The TDS appears in Form 26AS and the annual tax statement and is credited against your tax.

Is an audit needed?

Not if you declare the section 58 presumptive income (section 63(2)). Otherwise a person carrying on profession must get accounts audited if gross receipts exceed ₹50 lakh in the tax year (section 63, Table Sl. No. 1(c)); if you declare less than the presumptive profit, books under section 62 and an audit under section 63, Table Sl. No. 2, can also apply.

Does GST apply to freelancers?

GST is under a separate law with its own registration threshold and rules, and was not examined for this post. Check the current position at gst.gov.in before you cross the registration limit, or when you serve clients outside India.

Section map

Who is an associated enterprise (section 162)

International and specified domestic transactions

Determining the arm’s length price (section 165)

Documentation (section 171, Rule 84)

The accountant’s report: Form 48 (section 172, Rule 85)

Consequences of default

Practical points

How CSM & Co LLP can help

Frequently asked questions

Official sources

Related reading

Disclaimer

Old and new references

Section 159: treaties

A resident who wants a treaty benefit abroad

Foreign tax credit for a resident (Rule 76)

Documents and time limit

Section 160: no agreement

Practical points

How CSM & Co LLP can help

Frequently asked questions

Official sources

Related reading

Disclaimer

How often (section 173(1))

One Person Company, small company and dormant company (section 173(5))

Attending by video conferencing (section 173(2))

Notice (section 173(3) and (4))

Quorum (section 174)

Resolution by circulation (section 175)

Defects in appointment (section 176)

What if a company does not hold the meetings?

A simple annual plan

Points to check

Frequently asked questions

Official sources

Related reading

Disclaimer

Step 1: Residential status of an individual (section 6)

Not ordinarily resident (section 6(13))

Step 2: What income is taxed (section 5)

Step 3: Rates and relief

Bank accounts: NRE, NRO and FCNR

TDS on payments to a non-resident (section 393(2))

Reporting foreign assets

Practical points

How CSM & Co LLP can help

Frequently asked questions

Official sources

Disclaimer

Section 423: late or missing return (old 234A)

Section 424: advance tax default (old 234B)

Section 425: deferment of advance tax (old 234C)

Section 411(3): unpaid demand (old 220(2))

Paying interest with the return (section 266)

How CSM & Co LLP can help

Frequently asked questions

Official sources

Related reading

Disclaimer

Who must pay (sections 403 and 404)

How the amount is worked out (sections 405 and 406)

Due dates (section 408)

When the Assessing Officer asks (sections 407 and 409)

Self-assessment tax (section 266)

What happens if advance tax is short or late

Practical points

How CSM & Co LLP can help

Frequently asked questions

Official sources

Related reading

Disclaimer

What counts as dividend (section 2(40))

Buy-back is no longer dividend

Deemed dividend: loans to shareholders

What is not dividend

How dividend is taxed

TDS on dividend

Practical points