Section 9 deemed accrual: when foreign-rendered services to Indian payer become India-taxable for an NRI

An NRI sitting in Dubai or San Jose who invoices an Indian company for software design or technical advisory often assumes that because the work is rendered abroad, the income falls outside the Indian tax net. Section 9 of the Income-tax Act 1961 disagrees. The provision creates a deeming fiction: even when the NRI is physically abroad and the contract is executed abroad, certain categories of income are treated as having accrued in India because the payer, the source, or the user of the service is Indian. The Finance Act 2023 sharpened the edge of this fiction by lifting the withholding rate under Section 115A on royalties and fees for technical services (FTS) paid to non-residents from 10% to 20%, effective from assessment year 2024-25. For an FY 2025-26 invoice raised on 21 May 2026, this is the live rule the Indian payer must apply under Section 195 before remitting, subject only to the lower DTAA rate where a valid tax residency certificate (TRC) is on file.

The architecture is unforgiving. Section 9(1)(vii) does not care where you sit or where you log in from; if the services are utilised in India, the fee is deemed to accrue in India. Section 9(1)(vi) catches royalty for software licensing irrespective of the place of grant, after Explanation 4 (inserted retrospectively by Finance Act 2012) clarified that the right to use computer software is included. The Significant Economic Presence rule in Explanation 2A to Section 9(1)(i) brings digital services into the "business connection" net once revenue or user thresholds are crossed.

FEMA / DTAA Position

The Foreign Exchange Management Act 1999 governs whether and how the rupee receipt can leave India, but it does not decide whether the income is taxable. That question belongs to the IT Act, read with the applicable double tax avoidance agreement (DTAA). Professional fees paid by an Indian resident to a non-resident are a current account transaction and are freely permissible under FEMA, provided the Indian payer routes the remittance through an authorised dealer (AD) bank with Form 15CA and a Form 15CB chartered accountant certificate where the payment is taxable in India.

The DTAA position pivots on whether the recipient country has signed a treaty with India and whether that treaty contains a "make available" clause for technical services. The clause narrows the FTS article: the fee is taxable as FTS only if the provider transfers a technical skill or process to the payer such that the payer can independently apply it after the contract ends. Routine consulting that leaves no transferable skill behind escapes the FTS article and may fall under business profits (Article 7), which is taxable in India only if the consultant has a permanent establishment (PE) here.

The treaty rates above are those published by India's Ministry of Finance for the United States (effective 12 September 1991), United Kingdom (effective 26 October 1993), and United Arab Emirates (effective 22 September 1993). The 20% Section 115A default is the rate set by Finance Act 2023 on royalties and FTS paid to non-residents, applicable from assessment year 2024-25.

Two further FEMA planks matter. FEMA Notification 5(R)/2016 (Deposit Regulations) defines the bucket the receipt must land in: rupee receipts of an NRI on India-source professional income credit to a Non-Resident Ordinary (NRO) account. The Reserve Bank of India Master Direction on Remittance of Assets caps onward remittance of NRO-held funds at USD 1 million per financial year, on production of a 15CA/CB pair certifying that taxes have been paid.

Tax Treatment in India

The starting point is Section 5(2) of the IT Act, which restricts the scope of total income for a non-resident to income received or deemed received in India, or that accrues or is deemed to accrue in India. Section 9 supplies the deeming rules. Section 9(1)(vii)(b) deems FTS payable by an Indian resident to accrue in India, subject to a narrow carve-out for services utilised in a business carried on outside India that earns income from a source outside India. Section 9(1)(vi)(b) does the same for royalty. An Indian payer making payment to an NRI consultant for technical or managerial services almost always has a withholding obligation under Section 195.

The mechanics of the withholding are governed by Section 195 read with Section 90(2): the rate to be applied is the rate in force under the IT Act or the rate under the applicable DTAA, whichever is lower, provided the recipient furnishes a valid TRC (Section 90(4)) and Form 10F (Rule 21AB of the IT Rules). Where no TRC is on file, the payer must withhold at the Section 115A rate of 20%, increased by the applicable surcharge and the 4% health and education cess.

The NRI consultant is not required to file in India if every rupee of her India-source income has been correctly withheld and she has no other India-source income (Section 115A(5)). Where she chooses to be assessed on a net basis (claiming deductible expenses), a return becomes mandatory under Section 139(1). The consultant's gross professional income should be modelled through the NRI tax calculator before pricing, because a 20% TDS plus surcharge and cess can compress realised cash flow significantly when no TRC is in place. The Equalisation Levy of 6% under Chapter VIII of the Finance Act 2016 sits parallel to Section 9(1)(vii) and applies only to online advertising services paid to a non-resident not having a PE in India.

Tax Treatment Abroad

Once the Indian payer has withheld tax under Section 115A or the applicable DTAA, the consultant's country of residence determines how that tax is recovered. The recovery mechanism is foreign tax credit (FTC). The Indian DTAAs with the United States (Article 25), the United Kingdom (Article 24), and the United Arab Emirates (Article 25) all adopt the credit method: the country of residence taxes the worldwide income of its resident, but allows a credit against domestic tax up to the amount of the foreign tax paid.

For an India-USA consultant, the Indian payer withholds at 15% (FTS treaty rate with TRC), the consultant reports the gross fee on US Form 1040 Schedule C, and claims a Form 1116 foreign tax credit. The credit is limited to the US federal tax otherwise payable on the same slice of foreign-source income; any excess can be carried back one year and forward ten years under Section 904(c) of the US Internal Revenue Code. Because the "make available" clause in Article 12 of the India-US DTAA narrows the FTS article, many pure consulting engagements that do not transfer a technical process will not qualify as FTS at all, and the consultant may be able to argue under Article 7 (business profits) that no Indian tax is due in the absence of a PE.

The India-UK position mirrors the US position on the "make available" test and the credit method, with Article 24(2) giving the UK resident a credit for Indian tax. For UAE residents, the machinery is simpler: the UAE imposes a 9% federal corporate tax under Federal Decree-Law 47 of 2022 (effective for financial years starting 1 June 2023) but no personal income tax on individual freelancers below the corporate-tax threshold. A UAE-resident freelancer earning India-source FTS bears the 10% Indian treaty withholding as a final cost, with no opposing UAE personal tax to credit against, which makes UAE freelancers structurally more sensitive to obtaining and renewing their TRC.

A second-order effect consultants overlook is the difference between gross-basis withholding in India and net-basis taxation abroad. If a US consultant invoices USD 100,000, pays USD 15,000 of Indian tax, and after expenses reports USD 60,000 of net business profit at a 24% US marginal rate, her US tax on that slice is USD 14,400. The Form 1116 limitation caps the credit at USD 14,400, and the residual USD 600 of Indian withholding rolls forward. The lesson is to model the engagement using gross invoice figures when designing the price.

Repatriation Mechanics

Professional services income earned by an NRI from an Indian client is India-source income under the FEMA Deposit Regulations 2016 and credits to an NRO account by default. The NRE and FCNR(B) accounts are reserved for foreign-source income brought into India.

Once funds are in the NRO account, they are subject to the repatriation cap of USD 1 million per financial year (April to March), as set out in Regulation 4 of the FEMA Deposit Regulations 2016. The cap aggregates across all NRO accounts and asset classes belonging to the same NRI. The AD bank requires Form 15CA filed online on the income-tax portal, Form 15CB (required only where remittance exceeds Rs 5 lakh in aggregate for the financial year and is chargeable to tax), the NRI's PAN, TRC, and Form 10F where DTAA relief is claimed.

The Indian payer's withholding under Section 195 plays a dual role: it is the tax-collection mechanism and the audit trail the AD bank relies on. Where the Indian payer remits directly to the NRI's overseas bank account, Section 195 still applies and the payer remains responsible for 15CA/15CB compliance. The USD 1 million cap does not apply to direct overseas remittance of current-income professional fees that were never received in an NRO account, but it applies to any subsequent transfer of NRO-held savings out of India.

For deployment of India-source receipts in Indian markets through the Portfolio Investment Scheme, the receipt path runs NRO -> PIS-NRO sub-account -> stock purchase; the mechanics are detailed in the PIS account framework explainer. For retirement instruments, the NPS Tier 1 PFRDA explainer walks through OCI eligibility. Where receipts are split between consulting and US-source salary, the India-USA DTAA Article 15 employment explainer covers the salary side. The full repatriation worksheet is in the NRI repatriation calculator, and the rental analogue (TDS under Section 195 by the tenant) is modelled in the rental income tax calculator.

FAQ

Does Section 9(1)(vii) apply if the entire consulting work is performed outside India?

Yes. Section 9(1)(vii)(b) deems fees for technical services payable by a person resident in India to accrue in India irrespective of where the services are rendered. The Finance Act 2010 inserted an Explanation (clarified further by Finance Act 2012) confirming that the source rule operates regardless of whether the non-resident has a residence or place of business in India, or has rendered services in India. The only carve-out is where the services are utilised in a business carried on by the Indian payer outside India that earns income from a source outside India.

What is the 'make available' test, and when can I argue out of FTS?

Article 12(4)(b) of the India-US DTAA and Article 13(4)(c) of the India-UK DTAA restrict the FTS article to services that "make available" technical knowledge, experience, skill, know-how, or processes to the payer. The Karnataka High Court in CIT v. De Beers India Minerals read this as requiring the transfer of a technical capability that the payer can independently apply after the contract ends. Routine consulting or one-off advisory that does not transfer such a capability often falls outside the FTS article and defaults to Article 7 (business profits), which requires a PE for India to tax.

Why was the Section 115A rate raised to 20% in 2023?

Finance Act 2023 amended Section 115A to raise the rate of withholding on royalty and FTS paid to non-residents from 10% to 20%, effective for income arising on or after 1 April 2023 (assessment year 2024-25). The stated rationale in the Finance Minister's Budget speech of 1 February 2023 was rate parity with most DTAA rates (which sit between 10% and 15%), to neutralise the incentive to operate outside the treaty network. The practical effect is that an NRI consultant without a TRC now bears 20% gross withholding under the IT Act.

Does Equalisation Levy interact with Section 9 FTS taxation?

No. Section 10(50) of the IT Act exempts income that has suffered Equalisation Levy under Chapter VIII of the Finance Act 2016 from income-tax. If a payment qualifies as online advertising, the Indian payer applies 6% Equalisation Levy and the NRI's income is exempt from income-tax. If it does not qualify, Section 195 read with Section 9(1)(vii) applies and full FTS withholding kicks in.

Can I use my NRE account to receive India-source consulting fees?

No. The FEMA Deposit Regulations 2016 restrict NRE account credits to foreign-source income. India-source income — FTS, rent, dividends — must credit to an NRO account. Attempts to route India-source income through an NRE account are a FEMA contravention and can attract compounding under Section 13 of the FEMA 1999, even if the underlying income tax has been paid.

What documentation do I need to claim DTAA treaty relief at withholding?

A valid TRC issued by the foreign tax authority covering the relevant financial year (Section 90(4) of the IT Act); Form 10F filed online on the income-tax portal (Rule 21AB of the IT Rules); and a no-PE declaration on the consultant's letterhead confirming the absence of an Indian permanent establishment. Without this trio, the Indian payer is obliged to withhold at the gross Section 115A rate of 20% rather than the treaty rate.

How does the Significant Economic Presence rule change the analysis for a digital consultant?

Explanation 2A to Section 9(1)(i), inserted by Finance Act 2018 and operationalised by CBDT Notification 41/2021 dated 3 May 2021, creates a "business connection" in India where a non-resident has aggregate India-source revenue above Rs 2 crore in a financial year, or systematic and continuous interaction with 3 lakh or more users in India through digital means. Where SEP is established, the income is taxable on a business-profits basis (subject to DTAA). For individual NRI consultants the thresholds are unlikely to bite, but platform-style operators must monitor both.