🧾 Scope of Total Income Under Section 5 – Income Tax Act, 1961

📘 Introduction

Understanding the Scope of Total Income is fundamental to determining an individual’s or entity’s tax liability in India. Section 5 of the Income Tax Act, 1961, lays down the scope of total income depending on the residential status of the taxpayer — whether Resident, Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR). This section serves as a core pillar for tax computation and global income taxation.

🧠 What is Section 5 of the Income Tax Act?

Section 5 outlines what income is taxable in India based on residential status, defined under Section 6. It determines:

• Sources of income (Indian or foreign),

   

• Timing of income accrual or receipt,

   

• Territorial nexus for taxing foreign incomes.

   

🏠 Applicability Based on Residential Status

✅ 1. Resident and Ordinarily Resident (ROR)

• Taxable on: Global income (Indian + Foreign).

   

• Examples: Salary earned in India, rental income in the UK, interest from US bank.

   

⚖️ 2. Resident but Not Ordinarily Resident (RNOR)

• Taxable on: Income received/accrued in India + income from a foreign business controlled from India.

   

• Examples: Salary in India, foreign consultancy if managed from India.

   

🌍 3. Non-Resident (NR)

• Taxable on: Only income received or accrued in India.

   

• Examples: Rent from Indian property, capital gains on Indian shares.

   

🧾 Types of Incomes Covered Under Section 5

Section 5 classifies taxable income based on:

1. Income received in India

    

2. Income deemed to be received in India

    

3. Income accrued or arisen in India

    

4. Income deemed to accrue or arise in India

    

Each type varies by source and timing, which impacts its taxability under different residential statuses.

🔎 Examples for Clarity

⚠️ Important Clarifications & Judicial Interpretations

• CBDT Circular No. 4/2015: Clarifies that global income is taxable only for ROR.

   

• Supreme Court in CIT v. Keshavji Morarji (1967): Income becomes taxable only when it accrues or is received.

   

🌐 Relevance of DTAA in Section 5

For NRs and RNORs, income that may be doubly taxed in both India and a foreign country can be relieved under Double Taxation Avoidance Agreements (DTAAs).

✔ Example: A UK resident earning consultancy income in India may benefit from the India-UK DTAA, reducing tax liability.

🚫 Common Tax Traps to Avoid

1. Misunderstanding global income: NR mistakenly reports global income.

    

2. Control of foreign business from India: May make foreign income taxable for RNORs.

    

3. Deemed accruals misunderstood: Overseas contracts with Indian nexus can create tax liability.

    

🏛️ Legal Sections Related to Scope of Income

• Section 5: Scope of Total Income

   

• Section 6: Residential Status

   

• Section 9: Income deemed to accrue or arise in India

   

• Section 90/91: DTAA & relief from double taxation

   

📌 Real-World Use Case

🔹 Scenario: Mr. X, an RNOR, earns a foreign pension and Indian rent.
🔸 Taxation:

• Foreign pension: ❌ Not taxable

   

• Rent from India: ✅ Taxable

   

🎯 Conclusion

The Scope of Total Income under Section 5 is the backbone of the Income Tax Act’s taxation framework. Correct classification based on residential status is essential to avoid legal complications and optimize tax planning.

❓ FAQs

Q1. What is the scope of total income under Section 5 of the Income Tax Act?
👉 It defines how income is taxed in India based on a person’s residential status—covering income received, accrued, or deemed to arise in India or abroad.

Q2. Is global income taxable for a resident in India?
✅ Yes, global income is taxable only if the individual is a Resident and Ordinarily Resident (ROR).

Q3. What income is taxable for an NRI in India under Section 5?
🔹 Only income that is received, accrued, or arises in India.

Q4. What is the difference between ROR and RNOR in taxation?
🧾 RORs pay tax on global income, while RNORs are taxed only on Indian income and income from a foreign business managed from India.

Q5. Does DTAA affect income taxed under Section 5?
✔ Yes, DTAA helps avoid double taxation for NRs and RNORs on income taxed in both countries.