Direct Taxes
Income Tax Act, 1961
India’s taxation system is governed by the Income Tax Act, 1961, under which residents pay tax on their worldwide income, and non-residents, including foreign companies, pay tax only on India-sourced income. A significant reform is underway with the proposed Income Tax Bill, 2025, which aims to replace the 1961 Act with simplified language, impartial assessments, clearer tax slabs, and expedited resolution of disputes. A parliamentary committee has recommended approximately 285 amendments, including time-bound litigation procedures and the option to claim deductions on dividends from domestic subsidiaries.
Transfer Pricing (Sections 92–92F)
Sections 92–92F regulate pricing within transactions between Associated Enterprises (AEs), both domestic and international, requiring them to comply with the arm’s-length principle, the price at which transactions between two related parties are conducted, assuming they were independent of each other as if they were dealing with an unrelated third party. The law permits methods such as CUP, RPM, CPM, PSM, TNMM, and others. Companies must maintain supporting documentation (Section 92D) and file a certified accountant’s report (Form 3CEB) under Section 92E
The Safe Harbour Rules (Section 92CB), available to qualifying taxpayers, allow simplified compliance with agreed profit margins and relief from detailed audits. Recent expansions include raising the eligibility threshold to ₹300 crore and covering new areas like lithium-ion batteries, updates that support greater certainty and reduce compliance burdens. To provide tax certainty to the assessees opting for safe harbour, the amendments are applicable to two assessment years 2025-26 and 2026-27 vide Notification Income-Tax No. 21/2025 | Dated: 25th March, 2025
Withholding Tax
(Sections 194/195)
When an Indian entity pays a non-resident (individual or company) for interest, royalties, dividends, technical or professional fees, rent, capital gains, and other services, tax must be deducted at source, either when the payment is credited or actually paid, using either the higher domestic rate or applicable Double Tax Agreement (DTAA) rate, whichever benefits the recipient. Even small transactions are covered, and remittances exceeding ₹5 lakh require Form 15CA and a CA certificate in Form 15CB. Lower, concessional rates (around 5%) may apply for interest on foreign-currency loans under Sections 194LC/LD. These measures ensure India c