Territorial Scope and Applicability of Income-tax Act, 2025

Introduction

The Income-tax Act, 2025 introduces a reorganised and simplified legal framework while largely retaining the core principles of taxation followed under the Income-tax Act, 1961. One such foundational concept is the territorial scope and applicability of the Act. Understanding where and to whom the Act applies is critical for taxpayers, professionals, businesses, and foreign entities dealing with India.

This article explains the territorial reach of the Income-tax Act, 2025, who is covered under it, and how income is taxed based on geographical nexus.

What is Territorial Scope under Income-tax Act, 2025?

The territorial scope refers to the geographical extent within which the Income-tax Act, 2025 operates and the categories of income and persons it covers.

Under the new Act, the law applies to:

The whole of India, and

Income having a direct or indirect connection with India, even if earned outside India.

The Act follows the principle of residential status and source of income, rather than mere physical location.

Applicability of the Act – Who Is Covered?

The Income-tax Act, 2025 applies to the following persons:

Individuals

Hindu Undivided Families (HUFs)

Firms and LLPs

Companies (Indian and foreign)

Association of Persons (AOPs)

Body of Individuals (BOIs)

Artificial Juridical Persons

Any person whose income falls within the scope of total income as defined under the Act becomes subject to taxation.

Income Covered within Territorial Scope

The Act taxes income based on the following principles:

1. Income Received or Deemed to be Received in India

Any income received in India, whether earned in India or abroad, falls within the scope of taxation.

2. Income Accruing or Arising in India

Income that accrues or arises in India, directly or indirectly, is taxable in India, even if received outside India.

3. Income Deemed to Accrue or Arise in India

Certain incomes such as interest, royalty, fees for technical services, and business income through a business connection in India are deemed to accrue in India.

Applicability Based on Residential Status

The Income-tax Act, 2025 continues to link territorial applicability with residential status:

Resident: Taxable on global income

Non-Resident: Taxable only on income received, accrued, or deemed to accrue in India

Resident but Not Ordinarily Resident (RNOR): Taxable on Indian income and specified foreign income

Thus, even income earned outside India can be taxable if the person qualifies as a resident.

Applicability to Foreign Entities and NRIs

Foreign companies, non-residents, and NRIs are covered under the Act if they have:

Income sourced from India

A business connection or permanent establishment in India

Transactions attracting withholding tax provisions

This ensures that the Act has extra-territorial reach, aligned with international tax principles.

Key Takeaway for Taxpayers and Professionals

The Income-tax Act, 2025 reinforces that taxation is not limited by physical borders alone. The source of income, residential status, and economic nexus with India determine tax liability.

For taxpayers and professionals, understanding territorial scope helps in:

Correct tax planning

Avoiding litigation

Ensuring compliance for cross-border transactions

Conclusion

The territorial scope and applicability of the Income-tax Act, 2025 ensure that India retains the right to tax income connected with its economy while maintaining clarity and continuity with earlier law. While the structure is modernised, the core principles remain familiar, making transition smoother for taxpayers and professionals.

Written by:
Abhishek Gupta
Chartered Accountant
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