Non-residents doing business in India must understand when Indian income tax applies. The key issues are residence, Indian-source income, business connection, treaty relief and TDS. In 2026, this becomes more important due to the transition to the Income-tax Act, 2025 and increased scrutiny of cross-border payments.
Who is a Non-Resident?
Indian tax law uses the number of days a person stays in India to decide residential status.
A person is a resident in India if:
- The person stays in India for 182 days or more in a financial year; or
- The person stays in India for 60 days or more in that year and 365 days or more during the four years before that year.
If the person does not meet either test, the person is a non-resident.
For a company, the test is different. A foreign company is a non-resident unless its place of effective management is in India. This means its key management and business decisions happen in India.
Residential status decides what income India has the right to tax.
A non-resident pays tax in India on:
- Income received in India;
- Income treated as received in India;
- Income earned in India;
- Income treated as earned in India.
Income earned and received outside India stays outside Indian tax for a non-resident.
What Creates Tax in India?
Business Connection and Permanent Establishment
India taxes a non-resident when the non-resident has a business connection in India.
A business connection means real business activity in India for the non-resident. This includes an office, agent, employee, project, or other business presence in India.
Tax treaties use the term Permanent Establishment, or PE.
A PE includes:
- A branch;
- An office;
- A factory;
- A workshop;
- A fixed place of business;
- An agent who signs contracts for the foreign company.
If a foreign company has a PE in India, India taxes the profit linked to that PE.
If no tax treaty applies, Indian domestic law uses the broader business connection test.
Royalties and Fees for Technical Services
India taxes royalties and fees for technical services when the payment has an India connection.
This applies when:
- The service is used in India; or
- The payer is an Indian resident.
If the non-resident has a PE in India and the income is connected to that PE, normal business tax rules govern the income.
If there is no PE, special tax rates govern the income.
Presumptive Tax for Non-Resident Businesses
For specified non-resident businesses, Indian law uses presumptive tax.
This means the law treats a fixed percentage of receipts as income. The non-resident does not need full Indian books of account for these specified activities.
These rules cover:
- Shipping;
- Mineral oil exploration;
- Aircraft operations;
- Turnkey power projects;
- Cruise ship operations;
- Electronics manufacturing services and technology.
Foreign shipping income has a separate rule. The ship master or agent must file a return before the ship leaves an Indian port.
Transfer Pricing
Transfer pricing rules govern transactions when related businesses in different countries deal with each other.
These rules cover transactions such as:
- Sale or purchase of goods;
- Services;
- Loans;
- Use of intellectual property;
- Lease of assets.
The price between related businesses must be an arm’s length price. This means the price must match the price independent parties would use for the same transaction.
Two businesses are associated enterprises when one controls or participates in the management, capital, or control of the other. A shareholding of 26% or more also creates an associated enterprise relationship.
Indian law gives methods to decide the arm’s length price, including:
- Comparable Uncontrolled Price Method;
- Resale Price Method;
- Cost Plus Method;
- Profit Split Method;
- Transactional Net Margin Method.
The Transactional Net Margin Method is used a lot in India for service transactions.
Safe Harbour Rules and Advance Pricing Agreements
Safe harbour rules give accepted margins or prices. If the taxpayer follows the rule, the tax department accepts the transfer price.
An Advance Pricing Agreement, or APA, is an agreement with the tax department on transfer pricing for future transactions.
An APA gives certainty and reduces disputes. It covers the agreed period and also covers earlier years under rollback rules.
Transfer Pricing Penalties
Taxpayers must keep transfer pricing documents.
They must also get a Chartered Accountant report in Form 3CEB.
Failure to file the report attracts a penalty.
Failure to give required documents attracts a penalty based on the value of the international transaction.
Tax Deducted at Source
When an Indian person or business pays a non-resident, the payer must check whether the payment is taxable in India.
If the payment is taxable, the payer must deduct tax before payment. This is called Tax Deducted at Source, or TDS.
Section 195 is the main rule.
TDS starts at the earlier of:
- The date the payment is credited in the accounts; or
- The date the payment is made.
Indian businesses must review foreign payments such as:
- Software licence fees;
- Consultancy fees;
- Royalties;
- Technical service fees;
- Management fees.
If tax is not deducted when required, the payer loses the expense deduction and faces interest and penalties.
Grossing Up
A contract sometimes says the non-resident must receive a fixed amount after tax.
In that case, the payer must increase the payment amount and deduct tax on the higher amount.
This is called grossing up.
Lower TDS Certificate
A non-resident with a lower Indian tax liability must ask the tax officer for a lower deduction certificate.
The certificate tells the Indian payer to deduct tax at a lower rate.
This is useful where a tax treaty gives a lower rate.
PAN Requirement
A non-resident who receives Indian income should give a PAN to the Indian payer.
If the non-resident does not give a PAN, tax is deducted at a higher rate.
Special Tax Rates
Indian law gives special rates for non-residents for income such as:
- Dividends;
- Royalties;
- Fees for technical services;
- Interest;
- Income from securities;
- Capital gains;
- Global Depository Receipts;
- Foreign currency bonds.
Capital gains tax depends on the asset and the holding period.
Short-term gains on listed equity have a special rate. Long-term gains on listed equity above the threshold have a special rate. Other long-term gains have separate rules.
Interest Deduction Limit
An Indian subsidiary of a foreign company has a limit on interest deduction for interest paid to a related foreign lender.
The deduction is capped at 30% of EBITDA or the actual interest paid, whichever is lower.
This rule stops groups from using excess debt to reduce Indian tax.
Advance Rulings
A non-resident planning an Indian transaction has the option to ask the tax authority for an advance ruling.
The ruling explains how the transaction will be taxed.
The ruling binds the applicant and the tax department for that transaction.
This gives certainty before the transaction starts.
Compliance Rules
Tax Return
A non-resident must file an Indian tax return if taxable income is above the basic exemption limit.
A non-resident Indian does not need to file a return where the income consists of specified investment income and long-term capital gains, and tax has been deducted at the correct rate.
Liaison Office
A foreign company with a liaison office in India must file an annual statement with the tax department.
Failure to file attracts a penalty.
Country-by-Country Reporting
Large multinational groups must file country-by-country reports when they cross the revenue threshold.
The report gives details for each country, including:
- Revenue;
- Profit;
- Tax paid;
- Employees;
- Assets.
Crypto-Asset Reporting
Specified crypto-asset transactions require reporting.
Regulators focus on this area because digital asset activity is rising.
Conclusion
India has detailed tax rules for non-residents. These rules cover income tax, TDS, transfer pricing, anti-avoidance, capital gains, reporting and compliance. A non-resident entering India through a subsidiary, branch, project office, contract, or investment must review tax impact at the start.
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