Category: Income Tax

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 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:

  1. 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
  2. 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
  3. 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

  1. 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.
  2. Do not assume that “NRI under FEMA” means “non-resident under the Income-tax Act”. The two tests are different.
  3. Keep a Tax Residency Certificate and the other treaty documents ready if you want treaty benefit.
  4. 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

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.

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 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

Related reading

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.

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

Posted on 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

  1. Re-estimate income before each instalment, especially after capital gains, a bonus or a large business receipt.
  2. Include all TDS in your estimate, but only on income that is part of your estimate (section 405).
  3. Keep proof of every payment, and check that it appears in your tax statement before you file the return.
  4. 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

Related reading

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.

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

Posted on 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:

  1. Any distribution by a company of accumulated profits, whether capitalised or not, that releases assets of the company to its shareholders.
  2. 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.
  3. A distribution on liquidation, to the extent attributable to accumulated profits just before liquidation.
  4. A distribution on reduction of capital, to the extent of accumulated profits.
  5. 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

  1. 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.
  2. Review buy-back plans. Since 01/04/2026 they are taxed as capital gains.
  3. 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.
  4. 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

Related reading

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.

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

Posted on 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:

  1. Money without consideration totalling more than ₹50,000: the whole sum is taxed.
  2. Immovable property without consideration whose stamp duty value exceeds ₹50,000: the stamp duty value is taxed.
  3. 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.
  4. 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.
  5. 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

Related reading

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.

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 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

  1. 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.
  2. Gifts to an adult child are outside section 99(1) but should be recorded properly.
  3. 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.
  4. 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

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.

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

Posted on 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

  1. 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.
  2. Forgetting the 15 March advance tax under presumptive taxation, and then paying interest.
  3. Claiming lower profit than 50% without books or an audit.
  4. Mixing personal and business payments, which makes actual-book claims difficult to support.
  5. 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.

Official sources

Related reading

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.

Presumptive Taxation of Non-Residents under Section 61 of the Income-tax Act, 2025: Shipping, Cruise, Aircraft, Oil and Electronics (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 02 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • Section 61 of the Income-tax Act, 2025 gathers the old non-resident presumptive sections 44B, 44BB, 44BBA, 44BBB, 44BBC and 44BBD in one table; the profit is a fixed percentage of the receipts and no deduction, loss or allowance is allowed against it.
  • The percentages are 7.5% for ships, 20% for cruise ships, 5% for aircraft, 10% for turnkey power projects (foreign company) and for mineral oil services and equipment hire, and 25% for services or technology given to a resident company that runs an electronics manufacturing facility.
  • Only the turnkey power and mineral oil cases can claim lower actual profit, and then only with books of account and an audit under sections 62 and 63.
  • A foreign ship that picks up cargo or passengers at an Indian port only occasionally is dealt with under section 316 (7.5%, return by the master before departure, port clearance withheld until tax is paid).

Some non-resident businesses are taxed on a fixed percentage of the receipts they earn from India, instead of on actual profit. In the 1961 Act these were separate sections: 44B (shipping), 44BB (mineral oil), 44BBA (aircraft), 44BBB (turnkey power projects), 44BBC (cruise ships) and 44BBD (electronics manufacturing services). The Income-tax Act, 2025, in force from 01/04/2026, puts all of them in one table in section 61(2).

The six cases

Specified business Specified assessee Profit taken as
1. Operation of ships (other than cruise ships) Non-resident 7.5% of (A + B)
2. Operation of cruise ships (conditions in Rule 44) Non-resident 20% of (A + B)
3. Operation of aircraft Non-resident 5% of (A + B)
4. Civil construction, erection, testing or commissioning of plant or machinery in a turnkey power project approved by the Central Government Foreign company 10% of the amount paid or payable, in or outside India
5. Services or facilities, including hire of plant and machinery, for prospecting for, or extraction or production of, mineral oils Non-resident 10% of (A + B)
6. Services or technology in India for setting up an electronics manufacturing facility, or for manufacturing electronic goods, for a resident company Non-resident 25% of (A + B)

In each case, A is the sum paid or payable to the assessee (or to another person on their behalf) for the Indian leg of the business, and B is the sum received or deemed to be received in India for the leg that starts outside India. For ships, A covers carriage shipped at an Indian port and includes demurrage, handling and similar charges; for aircraft it is carriage from any place in India. For cruise ships only the carriage of passengers counts, so on-board sales, dining and similar earnings are outside the base.

The result is deemed to be the profit of the business, charged under the head “Profits and gains of business or profession” for the tax year (section 61(2)).

Rules that apply to all six cases

  • No deductions. Any loss, allowance or deduction allowed by the Act cannot be set against the income computed under section 61(2) (section 61(4)).
  • Depreciation is still worked out in the background. The written down value of the assets used is computed as if depreciation had been claimed and allowed in every year (section 61(5)), so a later switch to normal computation starts from the right WDV.
  • Lower actual profit can be claimed only in cases 4 and 5, and only if the assessee keeps books of account under section 62 and gets an audit report under section 63 (section 61(3)).
  • Books and audit are triggered by section 62(2)(c) and the audit table in section 63 only if the assessee claims lower income in cases 4 and 5. A person who declares the section 61(2) figure needs no audit under section 63 (section 63(2)).
  • Case 5 and royalty or fees. Section 61 does not apply to case 5 where sections 54, 59, 207 or 527 apply to compute the profits or income referred to in them (section 61(6)). “Plant” in case 5 includes ships, aircraft, vehicles, drilling units and scientific apparatus (section 61(7)).

Cruise ship conditions (Rule 44)

The non-resident must (a) operate a passenger ship with a capacity of more than 200 passengers or a length of 75 metres or more, for leisure and recreation, with appropriate dining and cabin facilities; (b) operate it on a scheduled voyage or shore excursion that touches at least two Indian sea ports or the same Indian sea port twice; (c) operate it primarily for passengers and not for cargo; and (d) follow the procedure and guidelines, if any, issued by the Ministry of Tourism or the Ministry of Ports, Shipping and Waterways. Some older notes say “at least 200 passengers”; the Rule says “more than two hundred”.

Electronics manufacturing services (case 6)

The resident company must be establishing or operating an electronics manufacturing facility, or a connected facility, under a scheme notified by the Ministry of Electronics and Information Technology, and must not become ineligible for the scheme at any time in the tax year (section 61(8), Rule 45). Sections 59 and 207, which tax royalty and fees for technical services, do not apply to these amounts (section 61(9)).

Minimum alternate tax

The minimum alternate tax section (section 206) does not apply to a foreign company where its total income comprises solely profits and gains from a business referred to in section 61(2) and that income has been offered to tax at the rates in that section (section 206(1), clause (l)(iii)). Finance Act 2026 omitted some words after the reference to section 61(2), so confirm the latest wording before relying on this for a client.

Occasional shipping: section 316

A ship that belongs to or is chartered by a non-resident and carries passengers, livestock, mail or goods shipped at an Indian port is dealt with separately where the operator has no regular arrangement:

  1. 7.5% of the amount paid or payable for the carriage, in or outside India, including demurrage and handling charges, is deemed income accruing in India (section 316(2)).
  2. The master of the ship files a return before departure from each Indian port, showing the amounts paid or payable since the ship’s last arrival at that port. If this is not possible, satisfactory arrangements can be made for another person to file it within thirty days of departure (section 316(3) and (4)).
  3. Tax is assessed at the rate applicable to the total income of a company without an arrangement under section 393(1) (Table Sl. No. 7), and the master pays it. The order must be made within nine months from the end of the tax year in which the return is furnished (section 316(5) and (6)).
  4. Port clearance is withheld until the Commissioner of Customs or the authorised officer is satisfied that the tax is paid or satisfactory arrangements are made (section 316(8)).
  5. Option for regular assessment. The owner or charterer can claim, before the end of the year following the tax year of departure, that the total income be assessed under the other provisions of the Act. The amount paid under section 316 is then treated as advance tax and adjusted against the final tax, with any difference paid or refunded (section 316(9) and (10)).

Practical points

  • Choose the section 61 route knowingly: the percentage is fixed, but losses and allowances are lost, and a business with real losses can be worse off.
  • Check the fixed assessee: cases 1 to 3, 5 and 6 are for a non-resident, case 4 only for a foreign company.
  • Treaty protection can still matter. This post covers the domestic law only; the treaty position needs a separate check.

How CSM & Co LLP can help

We advise foreign shipping, aviation, construction and technology businesses on Indian tax, compute presumptive income and file returns. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What replaces sections 44B, 44BB, 44BBA, 44BBB, 44BBC and 44BBD?

Section 61 of the Income-tax Act, 2025. Its table lists six specified businesses, the specified assessee for each, and how the profit is computed (section 61(2)).

What is the presumptive rate for a non-resident shipping company?

7.5% of the sum paid or payable for carriage of passengers, livestock, mail or goods shipped at an Indian port (in or outside India), plus the sum received or deemed to be received in India for carriage from a port outside India, including demurrage and handling charges (section 61(2), Table Sl. No. 1).

Which cruise ships qualify for 20%?

A non-resident must operate a passenger ship of more than two hundred passengers capacity or 75 metres or more in length, for leisure and recreation, with dining and cabin facilities, on a scheduled voyage or shore excursion touching at least two Indian sea ports or the same port twice, primarily for passengers and not cargo, as per the procedure and guidelines of the Ministry of Tourism or the Ministry of Ports, Shipping and Waterways (Rule 44). Only the amount for carriage of passengers is counted.

Can I claim that my actual profit is lower?

Only in the turnkey power project case (foreign company, 10%) and the mineral oil services case (10%), and only if you keep books of account under section 62 and get an audit under section 63 (section 61(3)). The other cases are fixed.

Is MAT charged on a foreign company taxed under section 61?

Section 206, the minimum alternate tax section, does not apply to a foreign company whose total income is only profits and gains from a business referred to in section 61(2) offered to tax at the section’s rates (section 206(1), clause (l)(iii)). The reference to certain sub-clauses was omitted by Finance Act 2026; check the current text for your case.

What is section 316?

Section 316 deals with a ship belonging to or chartered by a non-resident that carries passengers, livestock, mail or goods shipped at an Indian port. 7.5% of the amount paid or payable is deemed income, the master of the ship files a return before departure from each Indian port, tax is assessed at the rate applicable to a company with no arrangement under section 393(1) (Table Sl. No. 7), and port clearance is not given until the tax is paid or secured.

Official sources

Related reading

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.

Cash Transaction Limits under the Income-tax Act, 2025: Sections 185 to 188 and Section 36(4) (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

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

Quick summary

  • Sections 185 to 188 of the Income-tax Act, 2025 replace the old sections 269SS, 269ST, 269SU and 269T: loans, deposits and property advances of ₹20,000 or more must come and go through banking modes, and receipts of ₹2,00,000 or more must not be in cash.
  • The penalty for breaking sections 185, 186 or 188 is equal to the full amount taken, received or repaid (sections 450, 451 and 453); not offering UPI and similar modes when turnover exceeds ₹50 crore costs ₹5,000 a day (section 452).
  • Separately, section 36(4) disallows an expense if more than ₹10,000 is paid to one person in a day by cash (₹35,000 for goods carriage hire), and section 36(5) treats the same cash payment of an earlier year’s liability as income.
  • Banking mode means an account payee cheque or draft, electronic clearing through a bank account, or a prescribed electronic mode.

Cash dealings above certain limits are barred or penalised under the income tax law. The 1961 Act scattered these rules in sections 269SS, 269ST, 269SU, 269T and 40A(3). In the Income-tax Act, 2025, which applies from 01/04/2026, the first four sit together in Chapter XII (sections 185 to 189), with penalties in sections 450 to 453, and the business expense rule is section 36(4) to (7).

Old and new sections

Old section New section Subject Limit
269SS 185 Taking or accepting a loan, deposit or specified sum ₹20,000 or more
269ST 186 Receiving money in cash ₹2,00,000 or more
269SU 187 Facility for digital payment modes Turnover above ₹50 crore
269T 188 Repaying a loan, deposit or specified advance ₹20,000 or more
40A(3) and 40A(3A) 36(4), (5), (6), (7) Expense paid in cash More than ₹10,000 in a day
271D, 271DA, 271E 450, 451, 453 Penalty Equal to the amount

Section 185: loans, deposits and property advances

No person may take or accept a loan, deposit or specified sum except by an account payee cheque, an account payee bank draft, electronic clearing through a bank account, or another prescribed electronic mode, if:

  • the amount (or aggregate amount) is ₹20,000 or more; or
  • the earlier loans, deposits or specified sums from the same person that remain unpaid, whether due or not, are ₹20,000 or more; or
  • the total of the two is ₹20,000 or more.

A specified sum is any sum receivable, as advance or otherwise, in relation to a transfer of immovable property, whether or not the transfer takes place. “Loan or deposit” means a loan or deposit of money (section 185(5)).

Example. Mr P took a loan of ₹10,000 by cheque from ABC and repaid ₹3,000 in cash, leaving ₹7,000 unpaid. If he now takes a further ₹15,000 in cash from ABC, the amount (₹15,000) plus the unpaid earlier loan (₹7,000) is ₹22,000, which is above ₹20,000. Section 185 is broken and the penalty is equal to the ₹15,000 accepted.

Exceptions

Section 185 does not apply to loans, deposits or sums taken from or by the Government, a banking company, the post office savings bank, a co-operative bank, a corporation established by a Central, State or Provincial Act, a Government company, or a body notified by the Central Government. It also does not apply where both parties have agricultural income and neither has income chargeable to tax under the Act. For a primary agricultural credit society or a primary co-operative agricultural and rural development bank, the limit with its members is ₹2,00,000 (section 185(4)).

Section 186: receipts of ₹2,00,000 or more

No person may receive ₹2,00,000 or more in aggregate from a person in a day, for a single transaction, or for transactions relating to one event or occasion from a person, except by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode. It does not apply to receipts by the Government, banks, the post office savings bank and co-operative banks, to transactions covered by section 185, or to persons or receipts the Central Government notifies.

Section 187: digital modes for large businesses

A person carrying on business or profession whose total sales, turnover or gross receipts exceeded ₹50 crore in the preceding tax year must give customers the facility to pay through the prescribed electronic modes in addition to any others. Rule 133 prescribes RuPay debit card, UPI (BHIM-UPI), UPI QR code and Tier III full KYC Central Bank Digital Currency wallets. The penalty is ₹5,000 a day (section 452).

Section 188: repayment of loans, deposits and advances

A bank branch, another company, a co-operative society, a firm or any other person must not repay a loan or deposit, or return a specified advance, except by account payee cheque, account payee bank draft drawn in the name of the person who made it, or electronic clearing or another prescribed electronic mode, where the amount with interest, or the total held from that person, is ₹20,000 or more. A bank branch may also repay by crediting the depositor’s savings or current account at that branch. The same exceptions as in section 185 apply, and for a primary agricultural credit society the limit with its members is ₹2,00,000. The penalty is the amount repaid (section 453).

Penalties

Section broken Penalty section Amount
185 (loan, deposit, specified sum) 450 Equal to the amount taken or accepted
186 (receipt) 451 Equal to the sum received
187 (digital modes) 452 ₹5,000 for every day of failure
188 (repayment) 453 Equal to the amount repaid

The Assessing Officer “may” impose these penalties, and the general rules of the penalty Chapter apply:

  • Reasonable cause: no penalty under sections 450, 451, 452 or 453 is imposed if the person proves there was reasonable cause for the failure (section 470).
  • Hearing: the order cannot be made without hearing the assessee, and a show-cause notice is required (section 471(1), as amended by Finance Act 2026).
  • Approval: the prior approval of the Joint Commissioner is needed where the penalty exceeds ₹10,000 (by the Income-tax Officer) or ₹20,000 (by the Assistant or Deputy Commissioner) (section 471(2)).
  • Time limit: the order must be passed within six months from the end of the quarter in which the proceedings are completed, the appeal order is received or the penalty notice is issued, as the case may be (section 472(1)).

Section 36(4) to (7): cash business expenses

Separate from the above, a business or professional expense is not allowed as a deduction if the payment, or the aggregate of payments made in a day to a person, exceeds ₹10,000 and is not made through a specified banking or online mode (section 36(4)). If a liability was allowed in an earlier year and is later paid in cash above the same limit, the amount is deemed to be business income of the year of payment (section 36(5)). For plying, hiring or leasing of goods carriages the limit is ₹35,000 (section 36(6)). The Rules can exempt cases having regard to banking facilities and business expediency (section 36(7)). The “specified banking or online mode” means an account payee cheque or bank draft, electronic clearing through a bank account, or another prescribed electronic mode (section 2).

A payment of more than ₹10,000 in a day in cash for acquiring an asset is also left out of the actual cost for depreciation (section 39(2)).

Reporting in the tax audit report and ITR

The tax audit report (Form 26) has a clause (clause 45 of the form) asking whether any loan, deposit or specified sum was taken or accepted above the section 185 limit, whether any receipt or payment above the section 186(1) limit was made otherwise than by the permitted modes, and whether any repayment above the section 188(1) limit was made otherwise than by those modes. The auditor reports these as facts, so keep proof of the mode of every large entry.

How CSM & Co LLP can help

We review cash entries before the tax audit, reply to penalty notices under sections 450 to 453 and set up payment practices that keep a business within the limits. Please reach out to our team and we will be happy to assist.

Frequently asked questions

What is the cash limit for taking a loan or deposit?

A loan, deposit or specified sum must come by account payee cheque, account payee bank draft, electronic clearing through a bank account or another prescribed electronic mode if the amount, or the amount together with the earlier loans and deposits from the same person that are still unpaid, is ₹20,000 or more (section 185(1)). This is the old section 269SS.

Can I receive ₹2,00,000 in cash for a sale?

No. Receiving ₹2,00,000 or more in a day from one person, for a single transaction, or for transactions relating to one event or occasion, is allowed only through banking modes (section 186). The penalty is equal to the sum received (section 451). Receipts by the Government, banks, post office savings banks and co-operative banks are outside the section.

Does the ₹20,000 limit apply to advances for property?

Yes. “Specified sum” means any sum receivable, as advance or otherwise, in relation to a transfer of immovable property, whether or not the transfer takes place (section 189(c)). Accepting it in cash at ₹20,000 or more attracts section 185 and a penalty equal to the amount.

What is the limit for cash business expenses?

If more than ₹10,000 is paid to one person in a day other than through a specified banking or online mode, the expenditure is not allowed as a deduction (section 36(4)). The limit is ₹35,000 for plying, hiring or leasing of goods carriages (section 36(6)).

Which payments are exempt from sections 185 and 188?

Dealings with the Government, banks, post office savings banks and co-operative banks, corporations created by a Central, State or Provincial Act, Government companies, and bodies notified by the Central Government. Section 185 also does not apply where both parties have agricultural income and neither has income chargeable to tax. The limit is ₹2,00,000 for loans and deposits between a primary agricultural credit society (or a primary co-operative agricultural and rural development bank) and its members.

Who must offer UPI and other digital payment modes?

A person carrying on business or profession whose total sales, turnover or gross receipts in the preceding tax year exceeded ₹50 crore (section 187). The modes listed in Rule 133 are RuPay debit card, UPI, UPI QR code and Tier III full KYC Central Bank Digital Currency wallets. The penalty is ₹5,000 for every day of failure (section 452).

Official sources

Related reading

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.

Charitable Trusts and NGOs under the Income-tax Act, 2025: Registration, Exemption and Compliance (Tax Year 2026-27)

Posted on by CA Meet Dhrangadhariya

Last updated: 10 September 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP

Quick summary

  • From 01/04/2026 a trust, society or section 8 company claims its tax benefit as a “registered non-profit organisation” under sections 332 to 355 of the Income-tax Act, 2025 (the old sections 11, 12, 12A, 12AB and 13).
  • Registration is applied for in Form 104 (provisional) or Form 105, and the order in Form 106 carries a 16 digit Unique Registration Number.
  • Regular income is taxed only on the part of 85% that is not applied or accumulated; specified income such as anonymous donations and benefits to related persons is taxed at 30%.
  • Books (Rule 187), audit in Form 112 and the return in ITR-7 are compulsory when income before the exemption exceeds the maximum amount not chargeable to tax.
  • Donors’ deduction needs a separate approval under section 354, Form 113 by 31 May and Form 114 donation certificates.

A charitable trust, a society or a section 8 company does not pay tax on its charitable income, but only if it is registered and follows a set of conditions. From 01/04/2026 those rules sit in sections 332 to 355 of the Income-tax Act, 2025, in a scheme that replaces the old sections 11, 12, 12A, 12AB and 13. The law calls such a body a registered non-profit organisation. This post follows the new Act and the Income-tax Rules, 2026, and explains where the old form numbers have gone.

Where the old sections have gone

Old (1961 Act) New (2025 Act and Rules 2026)
Sections 12A and 12AB (registration), Forms 10A and 10AB Section 332; Form 104 (provisional) and Form 105 (all other cases); order in Form 106 (Rule 181)
Sections 11 and 12 (exemption of property income and voluntary contributions) Sections 334 to 343 (regular income, 85% application, accumulation)
Section 11(1)(d) (corpus donations) Sections 339 and 340
Section 13 (denial of exemption) Sections 337 (specified income), 351 (specified violation), 353 (other violations)
Tax on accreted income (section 115TD) Section 352
Section 80G approval Section 354 (approval for donor deduction under section 133(1)(b)(ii))
Form 10B and 10BB (audit report) Form 112 (Rule 188)
Form 10 and 9A (accumulation, option) Forms 109 and 108 (Rules 185 and 184)
Forms 10BD and 10BE (donation statement and certificate) Forms 113 and 114 (Rule 190)

Section 11 of the 2025 Act is not the trust section: it is the general list of exempt income in Schedules II to VII. The older notes that call it the trust exemption refer to the 1961 Act.

Who can register (section 332)

The following may apply: a public trust, a society, a section 8 company, a university or an educational institution affiliated to it or recognised by the Government, an institution financed wholly or partly by the Government or a local authority, and certain bodies listed in Schedules III and VII. To be eligible the applicant must be constituted in India for one or more charitable purposes (section 2(23): relief of the poor, education, yoga, medical relief, preservation of environment, preservation of monuments or places of artistic or historic interest, and advancement of any other object of general public utility) or public religious purposes, and its properties must be held under an irrevocable trust for the benefit of the general public.

Forms, time limits and validity

Applications are filed electronically in Form 104 (provisional registration, to the Commissioner, CPC) or Form 105 (to the jurisdictional Principal Commissioner or Commissioner). The order in Form 106 carries a 16 digit Unique Registration Number (URN).

Case (section 332(3)) When to apply Order within Valid for
1. Activities not started, never registered Any time in the tax year from which registration is sought One month from the end of the month Three tax years
2. Activities started, never registered Any time in the tax year from which registration is sought Six months from the end of the quarter Five tax years
3. Provisional registration, activities started Within six months of commencement Six months from the end of the quarter Five tax years
4. Provisional registration about to expire, activities not started At least six months before expiry Six months from the end of the quarter Five tax years
5. Registration about to expire At least six months before expiry Six months from the end of the quarter Five tax years
6. Registration inoperative after a switch of regime Any time in the tax year from which it is to operate Six months from the end of the quarter Five tax years
7. Objects modified so that they no longer fit the registration Within thirty days of the modification Six months from the end of the quarter Five tax years

If the total income (without the benefit of this Part) did not exceed ₹5 crore in each of the two preceding tax years, the validity in cases 3 to 7 becomes ten years (section 332(5)). A late application can be condoned for reasonable cause (section 332(4)); if it is not, tax on accreted income can follow (section 332(6)). A trust that held registration before 01/04/2021 and let it lapse can ask for condonation under section 332(9).

How the income is taxed

The tax is the total of two parts (section 334): 30% on “specified income”, and the normal rate on taxable regular income and residual income.

  1. Regular income (section 335) is income from the charitable or religious activity, income from property, deposits or investments held for those purposes, voluntary contributions and the gains of permitted commercial activity. Corpus donations are left out (section 338(b)).
  2. Taxable regular income (section 336) is nil if 85% or more of the regular income is applied under section 341 or accumulated under section 342. If less is applied, the tax falls on 85% of the regular income reduced by the amount applied or accumulated.
  3. Specified income (section 337) is taxed at 30% in the year shown in the table of that section. It includes:
    - anonymous donations, except those up to ₹1,00,000 or 5% of total donations (whichever is higher), and except for bodies set up wholly for religious purposes or wholly for charitable and religious purposes (with a carve-out for donations directed to a university, other educational institution, hospital or medical institution that the body runs);
    - income applied directly or indirectly for the benefit of a related person (Rule 183);
    - income applied outside India (other than as the Board allows under section 338(a));
    - investments outside the permitted modes in Schedule XVI (section 350);
    - income applied for a purpose other than the one for which it is registered, and accumulated income that is misapplied, not applied in time, or paid to another organisation.
  4. Residual income is any other income, taxed at the normal rate (section 355(j)).

What counts as application (section 341)

  • Sums paid in India for the charitable or religious purpose in the year, and 85% of a donation to another registered non-profit organisation. Cash payments above the limits in sections 35(b)(i) and 36(4) to (7) do not count.
  • Repayment of a loan or re-deposit of a corpus withdrawal within five years can count as application, subject to the conditions in section 341(2).
  • A claim of depreciation on an asset whose cost was already counted as application is not allowed again (section 341(3)(a)).
  • If the regular income applied is below 85%, the shortfall can be treated as deemed application by opting in Form 108 by the due date of the return, and then it must be applied in India in the tax year of receipt or the next one (section 341(5) to (7), Rule 184).
  • Capital gains on a charitable asset are treated as applied if the net consideration is invested in another such asset (section 341(9)).

Accumulation (section 342) and the 15% balance (section 343)

Income can be set apart for up to five years by filing a statement in Form 109 by the due date of the return. The accumulated money must be held in the modes in Schedule XVI. A change of purpose needs an application in Form 110 (order in Form 111). The 15% of regular income that is neither applied nor accumulated is deemed accumulated income and must also be held in permitted modes (section 343).

Business income

A registered non-profit organisation must not carry on commercial activity unless it is incidental to its objects and separate books are kept (section 345). A body whose objects are in the nature of “advancement of any other object of general public utility” may earn at most 20% of its total receipts from commercial activity, and only in the course of that object (section 346). The gain from such activity is worked out as if the activity were a separate entity (Rule 182). Where a business undertaking is part of the trust property, the Assessing Officer can determine its income (section 344).

Compliance every year

Item Rule Detail
Books of account Section 347, Rule 187 Cash book, ledger, journal, bills and receipts, plus records of every project and institution, of each type of income and of specified and residual income
Audit Section 348, Rule 188 Report in Form 112, one month before the due date of the return (so 30 September when the return date is 31 October)
Return Section 349, Rule 164(10) ITR-7, within the time in section 263(1)(c), or the extended period in section 263(4) after Finance Act 2026
Option and statements Rules 184 and 185 Form 108 (deemed application) and Form 109 (accumulation), both by the return due date

Books, audit and return are required when the total income, without giving effect to this Part, exceeds the maximum amount not chargeable to income tax in the year. Missing any of the three, or a commercial activity that breaks section 346, makes the whole regular income taxable (less allowed expenditure in India for the objects) under section 353.

Violations and accreted income

A specified violation (section 351) includes applying income other than for the objects, commercial activity in breach of section 345, application for private religious purposes, benefits for a particular religious community or caste (for bodies created after commencement of the Act), activity that is not genuine, non-compliance with another law that has been finally held against the body, and false information in the application. The Commissioner can cancel the registration for that and all later years, after a hearing, within six months from the end of the quarter in which the first notice is issued.

Tax on accreted income (section 352) is charged at the maximum marginal rate on the market value of all assets less all liabilities (valued under Rule 189), after removing specified assets. It arises when registration is cancelled, when objects are changed and do not fit, when the body fails to apply for renewal, when it converts into a form that cannot be registered, when it merges with an entity that does not fit the rules (as amended by Finance Act 2026) or when assets are not transferred to another registered non-profit organisation within twelve months of dissolution. A merger with another registered non-profit organisation of the same or similar objects, meeting the prescribed conditions, is outside section 352 (section 354A).

Donor deduction (section 354)

Registration alone does not give donors a deduction. A registered non-profit organisation applies separately for approval under section 354 (approval for section 133(1)(b)(ii)), using Form 104 or Form 105 with the same time limits and validity as registration. The conditions include: no benefit for a particular religious community or caste, religious expenditure not above 5% of total income, no transfer of assets to a non-charitable purpose, regular accounts, and a donor certificate. The body must furnish the statement of donations in Form 113 and issue the certificate in Form 114 by 31 May after the financial year in which the donation is received (Rule 190).

Practical checklist

  1. Note the expiry of your registration and approval; file the renewal at least six months earlier.
  2. Plan the year so that at least 85% of regular income is applied or accumulated; file Form 108 or Form 109 before the return date.
  3. Keep corpus donations in a separate, permitted investment.
  4. Check every related person transaction (trustees, relatives, founders, donors above ₹1,00,000 in a year or ₹10 lakh in aggregate).
  5. File Form 112 and the return on time; file Form 113 and issue Form 114 by 31 May.

How CSM & Co LLP can help

We handle registration and renewal applications, yearly audit reports, ITR-7 filing and donor-approval compliance for trusts, societies and section 8 companies. Please reach out to our team and we will be happy to assist.

Frequently asked questions

Which section of the new Act replaces sections 11 and 12A for charitable trusts?

Chapter XVII, Part B (sections 332 to 355) of the Income-tax Act, 2025. Section 332 deals with registration, sections 334 to 343 with the taxation of income, and sections 347 to 349 with books, audit and return. Section 11 of the 2025 Act is a different section: it is the general list of exempt income (Schedules II to VII).

Does an existing 12A or 12AB registration continue?

The 2025 Act refers to registration under any “specified provision”, and a person with a valid registration that has not been cancelled is a registered non-profit organisation (section 355(g)). Check the expiry date on your registration order, because renewal is due at least six months before it ends (section 332(3), Table Sl. No. 5).

How much of the income must a trust spend?

Taxable regular income is nil if 85% or more of the regular income is applied for charitable or religious purposes (section 341) or accumulated under section 342. Otherwise the shortfall below 85% is taxed (section 336). A shortfall can be treated as deemed application by opting in Form 108, and then must be applied in India within the time in section 341(6).

Is an audit compulsory?

Yes, when total income without giving effect to this Part exceeds the maximum amount not chargeable to income tax in the year (section 348). The report is in Form 112, due one month before the due date of the return (Rule 188). The return is ITR-7 (section 349, Rule 164(10)).

Can a trust run a business?

Only if the activity is incidental to its objects and separate books are kept (section 345). A trust whose object is “any other object of general public utility” may earn at most 20% of its total receipts from commercial activity, and only in the course of carrying out that object (section 346).

What happens if registration is cancelled?

The organisation becomes liable to tax on accreted income at the maximum marginal rate, which is the market value of its assets less its liabilities, payable within fourteen days of the due date in the table in section 352(4). The same tax can arise on a change of objects, a merger with an ineligible entity or a failure to transfer assets on dissolution.

Official sources

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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.