Section 5 of Income Tax Act: Understanding Scope and Chargeability of Total Income

When it comes to taxation, one of the most crucial aspects is to identify what exactly counts as income. The Income Tax Act, 1961, through Section 5, lays the foundation for this understanding. It specifies the scope of total income that can be taxed in India. Whether you are an individual, HUF, company, or partnership, your chargeability of income depends largely on the provisions of Section 5.

In simple words, Section 5 of the Income Tax Act states the provisions relating to income that is taxable in the hands of the person. It draws boundaries around what income is included & what is excluded, based on residential status, the place of earning, and the time of accrual or receipt.

For instance, the total income of any previous year of a person who is a resident includes not just income earned in India but also income earned outside India. For non-residents, however, the scope is narrower. Let us explore this section in detail.

Scope of Total Income under Section 5

Section 5 provides the scope of total income, which varies depending on whether the assessee is:

• Resident & Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident (NR)

For a resident, the total income of any previous year of a person who is a resident includes:

1. Income received in India.
2. Income deemed to be received in India.
3. Income accruing or arising in India.
4. Income deemed to accrue or arise in India.
5. Income accruing or arising outside India (i.e., global income).

This means that if you are a resident earning abroad, your salary, rent, business income, or investments overseas will still be taxable in India.

For a non-resident, only the following is taxable:

• Income received in India.
• Income deemed to be received in India.
• Income accruing or arising in India.
• Income deemed to accrue or arise in India.

Thus, non-residents are not liable to pay tax on their foreign income unless it has a direct nexus with India."

Also Read: Do You Qualify as a Resident? Discover How a Simple Clause Can Decide Your Tax Fate

Income of RNOR (Resident but Not Ordinarily Resident)

The category of RNOR works as a middle ground between resident & non-resident. For them, Section 5 of Income Tax Act ensures that:

• Income earned or received in India is taxable.
• Foreign income is taxable only if it is derived from a business controlled in India or a profession set up in India.

This provision is especially relevant for returning NRIs who become residents after living abroad.

Income Earned in Excess of ₹15 Lakh – Special Provisions

One of the interesting interpretations under Section 5 is for high earners. The law recognizes individuals earning total income in excess of ₹15 lakh, especially in the context of residency tests. The Finance Act introduced tighter residency rules for individuals who earn substantial income in India but claim to be non-residents by staying abroad.

If such individuals are not liable to tax in any other country, they can still be treated as deemed residents, and their total income may fall under Indian taxation.

What Section 5 Really Means in Practice

Let’s break this down with a practical example:

• Case 1: Resident Indian
  Mr. A works in India, owns a house in the UK, and earns rental income abroad. As per Section 5 of Income Tax Act 1961, his global income, including foreign rent, will be taxed in India.
• Case 2: Non-Resident
  Mr. B is an NRI working in Dubai. He earns salary in Dubai & also has a property in Mumbai that generates rental income. His Dubai salary is not taxable in India. But his Mumbai property income will be taxed in India.
• Case 3: RNOR
  Mr. C returned to India after living abroad for 20 years. He now qualifies as RNOR. His foreign business income will be taxable in India only if it is controlled from India.

This clearly shows how Section 5 states the provisions relating to income that is taxable in the hands of the person based on residency.

Relation with “Previous Year”

Another important aspect of Section 5 is that it talks about the total income of any previous year of a person who is a resident or otherwise. Here, previous year simply means the financial year immediately preceding the assessment year.

For example, if you are filing your return for AY 2025–26, the “previous year” would be FY 2024–25. Your total income of this period, depending on your residential status, will be taxed as per Section 5.

Also Read: Relief from Double Taxation for Indian Residents

Why Section 5 is the Backbone of Indian Taxation

Without Section 5, there would be ambiguity over what to include in total income. The scope of total income ensures that taxation is fair & aligned with global practices. Most countries follow a similar principle — residents are taxed on global income, while non-residents are taxed only on local income.

The section also prevents tax evasion by high-income individuals who may attempt to shift residency status. By linking rules with earning total income in excess of ₹15 lakh, it ensures compliance and proper revenue collection.

Judicial Interpretations of Section 5

Over the years, courts have given clarity on the scope of total income:

• Income is chargeable on receipt or accrual basis. Even if you do not receive money physically but it accrues to you, it may still be taxable.
• Double taxation agreements (DTAA) override Section 5 in cases of conflict. This protects residents from being taxed twice on the same income.
• Deemed accrual provisions bring into scope certain types of income like interest, royalty, or technical fees, even if earned outside India, if linked to Indian sources.

These interpretations highlight that Section 5 provides the scope of total income but its application often depends on context and judicial rulings.

Key Takeaways from Section 5 of Income Tax Act

1. Residents are taxed on global income.
2. Non-residents are taxed only on Indian income.
3. RNORs have a hybrid taxation model.
4. Earning total income in excess of ₹15 lakh may trigger deemed residency.
5. Section 5 ensures clarity on provisions relating to income taxable in the hands of the person.
6. It is the starting point for computing taxable income before applying exemptions, deductions, or rebates."

Also Read: Bilateral Relief from Double Taxation

Conclusion

The analysis of Section 5 of Income Tax Act shows that it is one of the most critical provisions for both taxpayers & the Income Tax Department. By clearly defining the scope of total income, it ensures transparency, fairness, and consistency in tax collection.

If you are a resident earning income abroad, an NRI earning in India, or someone with total income of any previous year of a person who is a resident, understanding Section 5 is vital for avoiding mistakes and ensuring compliance.

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