Residential Status for NRIs & Seafarers: Section 6, RNOR, Deemed Residency and DTAA Explained (AY 2026–27)

By CA Surekha Ahuja

For most taxpayers, tax planning begins with deductions and exemptions.

For NRIs, Merchant Navy officers, seafarers and overseas professionals, it begins with a far more important question:

What is your residential status under Section 6 of the Income-tax Act?

The answer determines whether your foreign salary remains outside Indian taxation entirely — or whether your global income becomes fully taxable in India.

A taxpayer earning ₹50 lakh abroad may legally pay tax in India only on Indian-source income if he qualifies as a Non-Resident. Another taxpayer with identical earnings may face an entirely different outcome because of one error in residential status determination.

For AY 2026–27, this means carefully evaluating day-count rules, RNOR eligibility, deemed residency under Section 6(1A), DTAA availability, Tax Residency Certificates, Form 10F compliance and the Country of Residence field in the return — before filing.

This guide explains the law, its practical application and the mistakes that most commonly trigger demand notices.

Why Residential Status Matters More Than Citizenship

The most important principle to understand upfront: taxability under Indian law depends on residential status — not citizenship.

An Indian citizen can be a Non-Resident for tax purposes. A foreign national can become a tax resident of India if the statutory conditions are met. Citizenship, passport, or domicile do not determine tax liability.

The Three Statuses and Their Tax Consequences

Residential Status	Foreign Income Taxable in India?	Indian Income Taxable?
Resident and Ordinarily Resident (ROR)	✅ Yes — global income taxed	✅ Yes
Resident but Not Ordinarily Resident (RNOR)	❌ Generally no	✅ Yes
Non-Resident (NR)	❌ No	✅ Yes

Practical Income-by-Income View

Income Type	NR	RNOR	ROR
Foreign salary earned abroad	Not taxable	Generally not taxable	Taxable
Foreign bank interest	Not taxable	Generally not taxable	Taxable
Foreign investments	Not taxable	Generally not taxable	Taxable
Indian rental income	Taxable	Taxable	Taxable
Indian FD interest	Taxable	Taxable	Taxable
Indian capital gains	Taxable	Taxable	Taxable

Key rule: Residential status is determined every financial year independently. Last year's status does not govern the current year.

Section 6: The Basic Residency Rules

An individual becomes resident in India under Section 6 if either condition is satisfied:

Condition 1 — Stay in India for 182 days or more during the financial year.

Condition 2 — Stay in India for 60 days or more during the year, AND 365 days or more during the preceding four financial years combined.

Special provisions modify these thresholds for Indian citizens, Persons of Indian Origin, NRIs and seafarers. Those modifications are covered below.

Merchant Navy Officers and Seafarers: Special Rules

Residential status for seafarers requires separate analysis because services are performed across international waters and multiple jurisdictions simultaneously.

The 184-Day Benchmark

For Merchant Navy officers serving on foreign-going ships, the operative threshold is 184 days outside India (185 in a leap year):

Days Outside India	Residential Position
184 days or more	Generally Non-Resident
Less than 184 days	Further examination required

Where Non-Resident status is established, foreign salary earned for services rendered outside India generally falls entirely outside Indian taxation.

How Days Are Counted

The primary document is the Continuous Discharge Certificate (CDC), which records sign-on date, sign-off date, vessel details and voyage particulars. In any scrutiny or dispute, CDC records carry greater evidentiary weight than passport entries.

One critical point many officers miss: days spent in Indian territorial waters are treated as days spent in India. This single error routinely causes seafarers to miscalculate their 184-day count — and lose Non-Resident status they believed they had.

Budget 2025: Formal Employment Contract Now Required

From AY 2026–27, a formal employment contract is mandatory to claim the seafarer's residential status exemption. An offer letter, informal arrangement or verbal understanding no longer qualifies. If your contract is not formalised, do this before filing.

What Is Taxable Once Non-Resident Status Is Established?

Income	Taxable in India?
Foreign salary earned outside India	❌ Not taxable
Foreign bank interest	❌ Not taxable
Foreign investments	❌ Not taxable
Indian rental income	✅ Taxable
Indian FD interest	✅ Taxable
Indian capital gains	✅ Taxable

Documentation Every Seafarer Should Maintain

Proper documentation is the deciding factor when foreign salary claims face scrutiny:

• Formal employment contract
• CDC records (complete, unbroken)
• Wage slips and salary statements
• Salary remittance records to NRE account
• NRE account bank statements
• Employer certification where available

The 60-Day, 120-Day and 182-Day Rules for General NRIs

For non-seafarers — NRI employees, returning professionals, investors and Persons of Indian Origin — residential status requires a careful review of both physical presence and Indian income.

Days in India	Indian Income	Likely Status
Below 60 days	Any amount	Non-Resident
60–119 days	Any amount	Generally Non-Resident*
120–181 days	Above ₹15 lakh	RNOR
120–181 days	Up to ₹15 lakh	Generally Non-Resident
182 days or more	Any amount	Resident (ROR)

*Subject to the four-year look-back rule.

The Four-Year Look-Back Rule

Many taxpayers focus only on their current year stay. The law also examines physical presence during the preceding four financial years. If you have spent 365 or more days in India over those four years and you are in India for 60 or more days in the current year, you may become Resident regardless of this year's stay alone.

This is the rule that most commonly catches NRIs returning for extended family visits.

RNOR: The Valuable Middle Status

RNOR sits between Non-Resident and fully taxable Resident. For returning NRIs and overseas professionals relocating to India, it provides a transition period during which foreign income generally remains outside the Indian tax net.

Income Type	RNOR Treatment
Foreign salary earned abroad	Generally not taxable
Foreign investment income	Generally not taxable
Indian income (all types)	Taxable

Section 6(1A): The Deemed Resident Provision

Section 6(1A) was introduced specifically to address Indian citizens who were not considered tax residents anywhere in the world — most commonly those working in zero-tax jurisdictions such as Dubai, Bermuda, Panama or the Cayman Islands.

When Deemed Residency Applies

All three conditions must be satisfied simultaneously:

1. The taxpayer is an Indian citizen
2. Indian income exceeds ₹15 lakh in the financial year (foreign salary is excluded from this calculation)
3. The taxpayer is not liable to tax in any other country or territory

What "Not Liable to Tax" Means in Practice

This is where many taxpayers make a critical error. A residence visa, work permit or Emirates ID does not establish foreign tax residency. The only document that reliably demonstrates foreign tax liability is a Tax Residency Certificate (TRC) issued by the foreign country's tax authority.

Document	Proof of Tax Residency?
UAE Residence Visa / Emirates ID	❌ No
Work Permit	❌ No
Foreign Bank Account	❌ No
Tax Residency Certificate (TRC)	✅ Yes

The Important Relief Most People Don't Know

A common and costly misconception: deemed residency automatically results in global taxation. That is incorrect.

A taxpayer covered by Section 6(1A) is treated as Resident but Not Ordinarily Resident (RNOR) — not as a fully taxable Resident.

Particulars	Position
Foreign salary earned and received abroad	Generally not taxable
Foreign investments	Generally not taxable
Indian income	Taxable
Global taxation	❌ Does not apply

The deemed resident rule means India acknowledges you procedurally as a resident — but your foreign income remains protected as long as it is earned and received outside India.

ITR Field	Your Entry
Residential Status	Resident but Not Ordinarily Resident (RNOR)
Country of Residence	India
DTAA claim	Not applicable — no foreign tax residency to invoke

DTAA: When It Is Relevant and When It Is Not

A Double Taxation Avoidance Agreement becomes relevant only when the same income faces taxation in two jurisdictions simultaneously.

If you are a Non-Resident in India and your foreign salary is already exempt under domestic law, DTAA is not required — the exemption operates independently.

Situation	DTAA Required?
NR in India + foreign salary already exempt	❌ No
NR in India + income taxable in both India and abroad	✅ Yes
RNOR with valid TRC from a treaty country	May be relevant
ROR claiming foreign tax credit on income taxed abroad	✅ Yes
RNOR with no foreign tax residency	❌ No — no treaty to invoke

What You Need to Claim DTAA Protection

1. Tax Residency Certificate (TRC) — issued by the foreign country's tax authority, not the embassy
2. Form 10F — filed online on the Income Tax portal before or alongside the ITR
3. DTAA article reference — cited correctly in the return

India has comprehensive treaties with 89+ countries including UAE, UK, USA, Singapore, Canada, Germany, Australia and Mauritius.

Country of Residence in ITR: The Most Frequently Mis-Reported Field

Incorrect reporting of Country of Residence is one of the most common errors in NRI returns — and one of the most consequential.

Your Situation	Country of Residence in ITR
NR with no foreign tax residency (no TRC)	Not Resident in Any Country
NR with UAE Tax Residency Certificate	United Arab Emirates
NR with UK Tax Residency Certificate	United Kingdom
NR with USA Tax Residency Certificate	United States
RNOR with no foreign tax residency	India
RNOR with UAE Tax Residency Certificate	United Arab Emirates
Resident (ROR)	India

The most expensive mistake: Non-Resident seafarers without a TRC selecting "India" as their country of residence because they are Indian citizens. Indian citizenship is not Indian tax residency. If you are Non-Resident with no TRC, the correct entry is "Not Resident in Any Country."

Four Case Studies

Case 1: Merchant Navy Officer with UAE TRC

Rajesh is a Merchant Navy officer on a UAE-flagged vessel. He was outside India for 255 days. Indian income: ₹9 lakh. Foreign salary: ₹24 lakh (credited to NRE account). He holds a UAE Tax Residency Certificate.

Point	Result
Days outside India	255 — exceeds 184-day threshold
Residential status	Non-Resident
Foreign salary taxable in India	❌ No
DTAA applicable	✅ Yes — India-UAE, Article 15
Country of Residence in ITR	United Arab Emirates
Action	File Form 10F + attach TRC

Tax payable in India: On ₹9 lakh Indian income only.

Case 2: Seafarer on Bermuda-Flagged Vessel (Section 6(1A) Applies)

Sameer served on a Bermuda-flagged vessel and was outside India for 235 days. Indian income: ₹17 lakh. Foreign salary: ₹26 lakh. Bermuda has no income tax. He has no TRC.

Point	Result
Days outside India	235 — would normally indicate Non-Resident
Indian income	₹17 lakh — exceeds ₹15 lakh threshold
Tax liability abroad	None — Bermuda is zero-tax
Section 6(1A) triggered	✅ Yes — all three conditions met
Residential status	Deemed Resident (RNOR)
Foreign salary taxable in India	❌ No — earned and received abroad
DTAA applicable	❌ No — no foreign tax residency
Country of Residence in ITR	India

Tax payable in India: On ₹17 lakh Indian income only. Foreign salary remains exempt.

The key lesson: The days count alone does not determine status. Section 6(1A) overrides the basic day-count test when Indian income exceeds ₹15 lakh and there is no foreign tax liability.

Case 3: NRI with US Green Card

Amit holds Indian citizenship and a US Green Card. He was in India for 100 days. Indian income: ₹11 lakh. Foreign salary: ₹35 lakh. Green Card holders are automatically treated as US tax residents by the IRS.

Point	Result
Days in India	100 — below 182
Residential status in India	Non-Resident
US status	Resident (Green Card)
Tie-breaker required	No — India says Non-Resident
Country of Residence in ITR	United States

Tax payable in India: On ₹11 lakh Indian income only. Salary taxable in USA.

Case 4: UK-Based NRI Investor Visiting India

Priya is a UK-based NRI investor who visited India for 95 days. Indian income: ₹6 lakh (FD interest and rental). UK income: ₹30 lakh. She holds a UK Tax Residency Certificate.

Point	Result
Days in India	95 — below 120-day threshold
Four-year look-back	No significant prior India residency
Residential status	Non-Resident
Country of Residence in ITR	United Kingdom
India-UK DTAA	Applicable for treaty-eligible income

Tax payable in India: On ₹6 lakh Indian income only.

AY 2026–27 Pre-Filing Compliance Checklist

For Merchant Navy Officers and Seafarers

• Verify day count using CDC — sign-on to sign-off
• Account for days in Indian territorial waters (these count as India days)
• Confirm formal employment contract is in place (Budget 2025 requirement)
• Check whether Indian income crosses ₹15 lakh threshold
• If taxed abroad — obtain Tax Residency Certificate from foreign authority
• Ensure foreign salary is credited to NRE account, not savings account
• Determine correct residential status: NR / RNOR / Deemed Resident
• Select correct Country of Residence using the matrix above
• File Form 10F if claiming DTAA benefit
• Disclose foreign salary in Schedule EI if NR or RNOR
• File ITR-2 by 31 July 2026

For General NRIs and Overseas Investors

• Calculate days in India accurately using passport entries
• Apply the four-year look-back test
• Examine RNOR eligibility if staying 120 days or more with Indian income above ₹15 lakh
• Obtain TRC from foreign tax authority where applicable
• File Form 10F for any DTAA claim
• Review foreign asset disclosure requirements
• Confirm residential status before filing — do not assume continuity from prior year
• File ITR-2 by 31 July 2026

Six Mistakes That Frequently Trigger Tax Issues

1. Incorrect day counting — Failing to count territorial waters days or using passport entries instead of CDC leads to wrong residential status and failed exemption claims.

2. Treating a UAE resident visa as a TRC — Emirates ID and residence visas are immigration documents. A Tax Residency Certificate must be obtained separately from the UAE Federal Tax Authority.

3. Ignoring Section 6(1A) — Seafarers working in zero-tax jurisdictions with Indian income above ₹15 lakh often overlook this provision entirely and file with incorrect Non-Resident status.

4. Selecting "India" as Country of Residence without a TRC — Indian citizenship does not mean Indian tax residency. Without a TRC, Non-Residents must select "Not Resident in Any Country."

5. Foreign salary credited to a savings account — Salary in an NRE account carries a clear paper trail supporting the exemption. A savings account does not, and can invite scrutiny.

6. No formal employment contract — From AY 2026–27, this is a compliance requirement, not a suggestion. Formalise the contract before the filing deadline.

Summary: Key Rules at a Glance

Who You Are	Operative Threshold	Residential Status	Foreign Income Exempt?
Seafarer, 184+ days outside India	184 days outside	Non-Resident	✅ Yes
Seafarer, Indian income > ₹15L, no foreign tax	Section 6(1A)	Deemed Resident (RNOR)	✅ Yes
General NRI, under 60 days in India	60 days	Non-Resident	✅ Yes
NRI visitor, 120–181 days, Indian income > ₹15L	120 days	RNOR	✅ Yes
Any individual, 182+ days in India	182 days	Resident (ROR)	❌ No

 Conclusion

For NRIs, Merchant Navy officers, seafarers and globally mobile professionals, residential status is not merely a disclosure in the income tax return. It is the legal foundation upon which the taxation of every rupee of income rests.

The distinction between Non-Resident, RNOR and Resident determines the taxability of foreign salary, overseas investments and global income. Equally important are the implications of Section 6(1A), the availability of DTAA protection through a Tax Residency Certificate and Form 10F, and the accurate reporting of Country of Residence.

Before filing for AY 2026–27, undertake a careful residential status review — do not rely on assumptions based on citizenship, visas, passports or last year's filing.

The most important tax question for every NRI and seafarer is not how much income was earned. It is whether the taxpayer was a Non-Resident, RNOR or Resident under Section 6. Every other tax consequence follows from that single answer.

Special Incomes Under the Income-Tax Act, 2025: Tax Rates, Taxable Base, Permitted Deductions & Loss Set-Off Rules

 By CA Surekha Ahuja

A Complete Guide to Cryptocurrency, Online Gaming Winnings, Lottery Income, Patent Royalty, Carbon Credits, Unexplained Income and Other Special Tax Regimes

AY 2025–26 | Sections 190 to 195 of the Income-Tax Act, 2025

Most taxpayers focus on the tax rate. However, for special income categories under the Income-Tax Act, 2025, the rate is only one part of the computation. Equally important is determining the taxable base and understanding whether any deduction, allowance, expense claim, or loss set-off is permitted.

A taxpayer may know that a particular income is taxable at 30%, but the more important questions often are:

• 30% of what amount?
• Is any deduction permitted?
• Can losses be adjusted?
• Does TDS discharge the entire tax obligation?

The Income-Tax Act, 2025 answers these questions differently for different categories of special income. In most cases, the law not only prescribes a fixed tax rate but also restricts or completely prohibits deductions and loss adjustments.

As return filing for AY 2025–26 gathers pace and AIS, TDS and TCS reporting become increasingly data-driven, understanding these provisions correctly is critical to avoiding computation errors, notices and future tax disputes.

What Makes These Incomes Special?

Unlike salary, business income, house property income or most investment income that are generally taxed under normal slab rates, certain categories of income are subject to special taxation provisions.

These provisions generally prescribe:

• A fixed tax rate;
• A specific taxable base;
• Restrictions on deductions; and
• Restrictions on loss set-off and carry forward.

Accordingly, taxpayers should always follow the following sequence:

The Four-Step Rule

Step 1 – Identify the applicable section

Step 2 – Determine the taxable base

Step 3 – Allow only deductions specifically permitted

Step 4 – Apply the prescribed tax rate

Most computational errors arise at Steps 2 and 3.

Quick Reference Table: Special Income Tax Rates, Taxable Base, Deductions and Loss Rules

Section	Income Category	Tax Rate	Taxable Base	Deduction Allowed	Loss Set-Off
194(4)	Virtual Digital Assets (Crypto, NFTs)	30%	Sale consideration less cost of acquisition	Cost of acquisition only	Not permitted
194(5)	Online Gaming Winnings	30%	Net winnings as prescribed	None	Not permitted
194(1)	Lottery, Gambling and Betting	30%	Gross winnings	None	Not permitted
194(2)	Patent Royalty	10%	Eligible royalty income	None	Not applicable
194(3)	Carbon Credit Transfers	10%	Gross consideration	None	Not permitted
194(6)	Life Insurance Business Profits	12.5%	Profits of life insurance business	As provided	As applicable
195	Unexplained Income	60% plus surcharge	Entire unexplained amount	None	Not permitted
192	Block Assessment Income	60% plus surcharge	Undisclosed income assessed	None	Not permitted
193	GDR Income	10% / 12.5% / Slab	As specified	As specified	As applicable
191	Taxable RPF Balance	Special computation	Schedule XI mechanism	Special rules	As applicable
190	Average Rate Relief	Rate mechanism	For rate purposes	Not applicable	Not applicable

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Virtual Digital Assets (Crypto, NFTs & Other VDAs) – Sec.194(4)

(Corresponding to earlier Section 115BBH)

Particulars	Position
Tax Rate	30%
Taxable Base	Sale consideration less cost of acquisition
Deduction Allowed	Cost of acquisition only
Loss Set-Off	Not permitted
Carry Forward	Not permitted

The VDA taxation regime remains one of the strictest provisions under the Act.

Only the cost of acquisition is deductible. No deduction is available for exchange charges, gas fees, wallet fees, mining expenses, platform charges or other incidental expenditure.

Further, losses from VDA transactions cannot be adjusted against any other VDA gains or any other head of income and cannot be carried forward.

Online Gaming Winnings – Section 194(5)

(Corresponding to earlier Section 115BBJ)

Particulars	Position
Tax Rate	30%
Taxable Base	Net winnings as prescribed
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

The taxable amount is the net winnings computed under the prescribed rules.

No deduction is available for entry fees, participation costs, subscriptions or platform charges.

TDS deducted by the gaming platform does not remove the obligation to disclose the income in the return.

Lottery, Gambling and Betting Winnings – Section 194(1)

(Corresponding to earlier Section 115BB)

Particulars	Position
Tax Rate	30%
Taxable Base	Gross winnings
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

This provision taxes winnings on a gross basis.

No deduction is permitted for lottery tickets, betting stakes or participation expenses.

Patent Royalty – Section 194(2)

(Corresponding to earlier Section 115BBF)

Particulars	Position
Tax Rate	10%
Taxable Base	Eligible royalty income
Deduction Allowed	None
Option Requirement	Before return due date

The concessional rate substitutes the benefit of claiming related expenditure.

To qualify, the patent should generally be registered in India, developed in India and belong to the true and first inventor.

Carbon Credit Transfers – Section 194(3)

(Corresponding to earlier Section 115BBG)

Particulars	Position
Tax Rate	10%
Taxable Base	Gross consideration
Deduction Allowed	None
Loss Set-Off	Not permitted

The transfer of carbon credits is taxable on a gross basis and no expenditure is deductible.

Life Insurance Business Profits – Section 194(6)

Particulars	Position
Tax Rate	12.5%
Taxable Base	Profits of life insurance business
Applicability	Life insurance companies
Deduction Position	As provided under the section

This provision applies to life insurance companies and not to policyholders.

Unexplained Income – Section 195

(Corresponding to earlier Section 115BBE)

Particulars	Position
Tax Rate	60% plus surcharge
Taxable Base	Entire unexplained amount
Deduction Allowed	None
Loss Set-Off	Not permitted
Carry Forward	Not permitted

This provision generally covers:

• Unexplained cash credits;
• Unexplained investments;
• Unexplained money;
• Unexplained assets;
• Unexplained expenditure; and
• Certain hundi-related transactions.

The burden of explaining the nature and source lies on the taxpayer.

Other Important Special Provisions

Section 192 – Block Assessment of Undisclosed Income

• Tax Rate: 60% plus surcharge
• No deductions
• No loss set-off
• No carry-forward benefit

Section 191 – Taxable Recognised Provident Fund Balance

Taxation is governed by the special mechanism contained in Schedule XI.

Section 193 – GDR Income of Knowledge Sector Employees

• Dividend Income – 10%
• Long-Term Capital Gains – 12.5%
• Other Income – Slab Rates

Section 190 – Average Rate Relief

Provides a rate-computation mechanism where exempt income is considered for determining the applicable tax rate.

The Expense Question: Why Most Computation Errors Occur

The most common error is assuming that a genuine expense automatically becomes deductible.

That assumption is incorrect for special-income provisions.

Where the Act expressly prohibits deduction of expenditure or allowance, the restriction is absolute. Commercial necessity, actual payment or business purpose cannot override an express statutory prohibition.

This principle is particularly important for Virtual Digital Assets; Online Gaming Winnings; Lottery and Betting Income; and Unexplained Income.

Before Filing Your Return: Practical Compliance Checklist

Before filing the return, taxpayers should verify:

✓ Correct identification of the applicable provision.

✓ Correct determination of the taxable base.

✓ Whether any deduction is specifically permitted.

✓ Restrictions on loss set-off and carry forward.

✓ TDS and TCS credits reflected in AIS and Form 26AS.

✓ Proper disclosure of the income in the return.

Remember: TDS credit reduces tax payable. It does not eliminate the obligation to disclose the income.

Final Takeaway

For special incomes, the tax rate is often only the beginning of the analysis.

The more important questions are:

• What amount is taxable?
• What deductions are permitted?
• Can losses be adjusted?
• What compliance obligations remain despite TDS deduction?

The correct sequence remains:

Identify the income → Determine the taxable base → Allow only statutory deductions → Apply the prescribed rate → Report the income → Claim the TDS credit separately.

For AY 2025–26, following this sequence may be the most effective way to avoid notices, adjustments and future tax disputes.

Clause 22(ii) of Form 3CD — A Reporting Obligation Wider Than the Law It Serves

By CA Surekha Ahuja

 When a mandatory reporting clause requires figures that have no bearing on any tax disallowance, it is not rigour — it is an unnecessary burden on businesses and auditors alike. A hard look at the mismatch between Clause 22(ii) and Section 43B(h).

There is a specific kind of compliance burden that is harder to justify than a difficult one — and that is a purposeless one. Clause 22(ii) of Form 3CD, as currently worded, falls squarely into this category. It demands reporting of data that has no connection to the tax disallowance it is meant to facilitate.

This post examines the structural mismatch between Clause 22(ii) and Section 43B(h), explains why the current reporting scope is wider than any legitimate tax purpose, and suggests both interim practical steps for practitioners and the case for reform.

What Clause 22(ii) Requires

Clause 22(ii) of Form 3CD requires the tax auditor to report the total amount required to be paid to a Micro or Small Enterprise (as referred to in Section 15 of the MSMED Act, 2006) during the previous year — not merely the amount outstanding at year-end.

The Core Mismatch: Flow Data vs. Stock-Based Disallowance

Section 43B(h), inserted by the Finance Act 2023 with effect from FY 2023–24, disallows any sum payable to a Micro or Small Enterprise as a business deduction unless it is actually paid within the credit period prescribed under Section 15 of the MSMED Act — 15 days (without written agreement) or 45 days (with written agreement). The amount remaining unpaid beyond these limits as at 31st March is added back. Amounts paid during the year — whether in 10 days or 40 days — are tax-neutral. No disallowance. No consequence.

This is, by design, a stock-based disallowance. It operates on what remains unpaid at year-end. Clause 22(ii), however, demands flow data — the total amount that moved through the ledger over twelve months. These two are structurally incompatible.

Parameter	Clause 22(ii) Requires	Section 43B(h) Operates On
Total invoiced by MSME vendors during the year	Yes — mandatorily Tax Irrelevant	Not needed
Amounts paid within 15/45 days during the year	Yes — part of computation Zero consequence	Fully deductible — no examination required
Amount unpaid at 31st March beyond credit period	Yes — included Relevant	This is the only figure that drives disallowance
Interest on delayed MSME payments (P&L)	Implicit verification expected	Disallowed regardless under Sec 23 of MSMED Act — no audit consequence

"If a business has paid ₹11.4 crore to MSME vendors during the year and ₹60 lakh remains unpaid at 31st March, only ₹60 lakh is relevant to Section 43B(h). Clause 22(ii) requires reporting and verification of the entire ₹12 crore — an exercise with zero incremental tax consequence."

Three Questions That Need Answers

1 What is the administrative purpose of "total during the year"?

The aggregate payment figure has no corresponding entry in any vendor's ITR, making cross-verification impossible. It does not determine the disallowance quantum, which depends solely on the year-end unpaid balance. If the intent is MSME policy data collection, the mechanism for that is the Ministry of MSME — not a tax audit report. The clause's reporting scope is wider than any identifiable tax purpose.

2 Was Clause 22(ii) recalibrated when Section 43B(h) was inserted?

Section 43B(h) was inserted by the Finance Act 2023. Clause 22(ii) predates it and appears to have been carried forward without alignment to the new disallowance provision. The result is a reporting obligation drafted around an older framework being applied to a provision with a fundamentally different operative basis. This is not a policy disagreement — it is a drafting misalignment that has created a recurring compliance burden with no corresponding tax outcome.

3 Should the tax auditor verify MSME interest provisions?

Interest on delayed MSME payments under Section 16 of the MSMED Act is non-deductible under Section 23 of that Act — regardless of how it is treated in the books. Whether the auditor verifies that adequate interest has been provided changes nothing in the tax computation. This is an audit step without an audit consequence, which is a use of professional time that is difficult to justify.

The Practical Burden

For a business with 150 or more vendors, complying with Clause 22(ii) as currently worded requires: identifying all vendors holding valid UDYAM registrations as Micro or Small enterprises (which most ERP systems do not natively track); extracting twelve months of payment history for each such vendor; date-stamping each transaction against invoice dates to verify payment timelines; and presenting all of this to the tax auditor for verification.

For large manufacturing or trading concerns, this is a multi-week exercise each audit season — consuming finance team bandwidth, ERP customisation effort, and significant audit hours. The cost is real and recurring. The tax outcome it generates is nil, to the extent amounts were paid during the year.

The Logical Fix

Restrict Clause 22(ii) reporting to: (a) amounts remaining unpaid to MSME vendors at the close of the previous year, categorised by whether they fall within or beyond the permissible credit period under Section 15 of the MSMED Act; and (b) the quantum added back under Section 43B(h). This aligns reporting with the disallowance provision it is meant to facilitate — and eliminates the rest as superfluous.

Interim Practical Approach for Tax Auditors

Until the clause is amended, the following approach can bring structure to the exercise while managing the scope to what is professionally defensible:

Recommended Protocol — AY 2025–26 Onwards

→Management representation as the primary basis. Obtain a written representation from management listing all MSME-registered vendors (with UDYAM numbers), total amounts invoiced during the year, amounts paid, and amounts outstanding at year-end with dates. This defines your verification perimeter and shifts the factual foundation to management.

→Vendor-tagged ledger data. Where the client's accounting system permits MSME-tagging of the vendor master, a ledger extract is the most efficient and defensible basis. Advocate for prospective tagging so that future years are less burdensome.

→Risk-based sampling for the "total during year" figure. Since this figure has no tax consequence, a documented risk-based sampling approach — rather than exhaustive verification — is professionally defensible, provided the methodology is clearly recorded in the working papers.

→Scope limitation disclosure. Where MSME classification data is unavailable — as will frequently be the case for vendors who have not shared UDYAM details — state this limitation explicitly in the audit file. The auditor's responsibility is bounded by information reasonably available and formally requested.

→Formal ICAI representation. Raise this through your regional branch to ICAI's Direct Taxes Committee for a representation to CBDT. The ask is narrow, technically grounded, and non-controversial: align Clause 22(ii) reporting with the operative scope of Section 43B(h).

The rationalisation of Clause 22(ii) is precisely the kind of targeted, technical reform that such representations are designed to achieve. The ask does not dilute MSME protection in any way — Section 43B(h) should remain exactly as it is. The ask is simply to align the reporting obligation with the tax consequence. That is a request that is difficult to argue against on either policy or administrative grounds.

In Summary

Clause 22(ii) as currently worded requires reporting of the total amount paid to MSME vendors during the entire previous year. Section 43B(h) disallows only what remains unpaid at year-end. The former is a flow measure; the latter is a stock-based disallowance. Aligning the two is not a radical ask — it is basic legislative housekeeping that would save the business community and the auditing profession significant effort every audit season, at no cost to revenue and no dilution of MSME protection.

Section 43B(h) and All Income Tax Provisions Triggered by Vendor Documentation for FY 2025–26

 By CA Surekha Ahuja

Vendor Documentation and FY 2025–26 Year-End Compliance: Section 43B(h), MSMED Act, and Supporting Income Tax Provisions

Part 1 of this series covered the five documents required from vendors and the Form 3CD clause map. This post covers the complete Income Tax Act framework that mandates vendor documentation — including Section 43B(h) (the MSME payment rule operative from FY 2023–24), the parallel compound interest liability under the MSMED Act, and four supporting provisions under the Income Tax Act, 1961 — Sections 145, 40A(3), 269SS/269T, and 40(a)(ia) — each of which is directly engaged by your vendor ledger data for FY 2025–26.

Section 43B(h) — MSME Payment Disallowance

Section 43B(h) was inserted in the Income Tax Act, 1961 with effect from FY 2023–24 (Assessment Year 2024–25). It is fully operative for AY 2026–27 (FY 2025–26). The provision stipulates that any sum payable to a Micro or Small Enterprise is deductible as a business expense only if actually paid within the credit period prescribed under the MSMED Act, 2006. If the amount remains outstanding as at 31 March 2026 beyond the permitted credit period, the deduction is denied in the year of accrual — irrespective of when it is eventually paid.

Credit Periods under MSMED Act:

Situation	Maximum Credit Period
No written agreement between buyer and MSME vendor	15 days from date of delivery/acceptance
Written agreement between buyer and MSME vendor	45 days (maximum permissible; cannot be extended by contract)

Tax Impact — Section 43B(h):

Scenario	Tax Treatment
Payment made within the credit period	Full deduction allowed in FY 2025–26. No disallowance. No adverse disclosure in Form 3CD Clause 26(B)
Payment outstanding beyond the credit period as at 31/03/2026	Deduction disallowed in FY 2025–26 (AY 2026–27). Allowed only in the year of actual payment

Applies to: Micro and Small Enterprises — not Medium Enterprises. The Udyam Registration Certificate is the only basis for this classification.

Form 3CD Clause 26(B): The tax auditor must disclose, vendor-wise, all amounts payable to Micro and Small Enterprises, the credit period applicable, amounts paid within time, and amounts outstanding beyond the credit period. This clause cannot be completed without MSME Declarations and Udyam Certificates for each such vendor.

Compound Interest Liability — Section 16, MSMED Act, 2006

This provision operates independently of Section 43B(h) and is frequently overlooked.

Particulars	Details
Provision	Section 16, MSMED Act, 2006
Trigger	Any delayed payment to a Micro or Small Enterprise beyond the agreed or statutory credit period
Rate of Interest	Compound interest at three times the RBI bank rate, with monthly rests
When it Applies	From the day after the due date of payment — automatically, without any demand from the vendor
Applies to	Micro and Small Enterprises only
Relation to Section 43B(h)	Both apply independently. The income tax disallowance does not discharge the compound interest liability

This liability does not require a demand notice, court order, or any action by the vendor. It accrues as a matter of law and may be raised in proceedings before the MSME Facilitation Council (MSEFC) at any time.

Section 145 — Method of Accounting

Under Section 145 of the Income Tax Act, 1961, income chargeable under the head "Profits and Gains of Business or Profession" must be computed in accordance with either the mercantile basis or cash basis of accounting, applied consistently. The tax auditor confirms this under Form 3CD Clause 1.

The auditor's certification of the method of accounting depends on the verifiability of the balances in the books. Confirmed vendor statements — establishing that accruals recorded in the books correspond to amounts the vendor also records as receivable — are the external evidence of this verifiability. Without vendor confirmations, the creditor balances in the books are supported only by internal records, which is an insufficient audit position.

Section 40A(3) — Cash Payment Disallowance

Particulars	Details
Provision	Section 40A(3), Income Tax Act, 1961
Trigger	Cash payment exceeding ₹10,000 to a single vendor in a single day
Disallowance	100% of the payment — no proportionate relief
Form 3CD Clause	Clause 21(d) — Auditor must report all such payments
Vendor Document	Statement of Accounts (Document 1) — used to cross-verify all cash transactions in the vendor ledger

There is no threshold below which cash payments are acceptable once they exceed ₹10,000 to a single person in a day. The disallowance is absolute. Vendor account statements, when reconciled against the books, bring cash payments into view as a distinct category for the tax auditor's examination.

Sections 269SS and 269T — Prohibition on Cash Loans and Deposits

Particulars	Details
Section 269SS	Prohibits acceptance of any loan, deposit, or advance of ₹20,000 or more in cash in a single transaction
Section 269T	Prohibits repayment of any such loan, deposit, or advance in cash
Penalty	Sections 271D and 271E — Penalty equal to the full amount of the impugned transaction
Form 3CD Clause	Clause 31 — Tax auditor must specifically identify and report contraventions
Vendor Document	Statement of Accounts (Document 1) — ledger cross-check to surface such transactions

Contraventions of Sections 269SS and 269T must be disclosed in Form 3CD Clause 31 by the tax auditor. Vendor confirmations and account statements allow both the business and the auditor to identify such transactions before the return is filed — when they can still be addressed — rather than in an assessment proceeding.

Section 40(a)(ia) — TDS Disallowance

Particulars	Details
Provision	Section 40(a)(ia), Income Tax Act, 1961
Trigger	TDS required but not deducted, or deducted at a rate lower than applicable, on vendor payments
Applicable Sections	Section 194C (contractors), 194J (professionals/technical services), 194I (rent), 194H (commission), 194Q (purchase of goods above threshold)
Disallowance	30% of the underlying payment — not merely the TDS amount
Form 3CD Clause	Clause 34(b) — Auditor must verify and report TDS deducted, deposited, and Form 16A issued
Vendor Document	Form 16A (Document 5) + 26AS/AIS reconciliation

Illustration: Professional fee paid to a vendor: ₹10,00,000. TDS @ 10% required but not deducted: ₹1,00,000. Disallowance u/s 40(a)(ia): ₹3,00,000 (30% of ₹10,00,000) — not merely ₹1,00,000. Reconciliation of the vendor's Form 16A against 26AS and the TDS register is the mechanism for identifying such gaps before the audit.

Consolidated Provision Reference Table — FY 2025–26 (AY 2026–27)

Provision	Subject	Consequence	Vendor Document
Section 43B(h)	MSME payment beyond credit period	Disallowance of outstanding amount in year of accrual	MSME Declaration + Udyam Certificate
Section 16, MSMED Act	Delayed payment to Micro/Small Enterprise	Compound interest at 3× RBI bank rate, monthly rests	MSME Declaration + Udyam Certificate
Section 145	Method of accounting — verifiability	Adverse audit remark; unverifiable balances	Statement of Accounts + Balance Confirmation
Section 40A(3)	Cash payment above ₹10,000 to single vendor	100% disallowance of the payment	Statement of Accounts
Section 269SS/269T	Cash loan/deposit/repayment above ₹20,000	Penalty equal to full transaction amount — Sections 271D/271E	Statement of Accounts
Section 40(a)(ia)	TDS not deducted or short-deducted	30% disallowance of underlying expenditure	Form 16A + 26AS/AIS reconciliation

Compliance Tip

• Send the vendor request letter for all five documents on or before 15 June 2026.
• Maintain a separate MSME Vendor Register recording each vendor's Udyam status, credit period applicable, invoice dates, payment dates, and any overdue amounts as at 31/03/2026.
• Vendors who do not respond by 30 June 2026 may be treated as Non-MSME — but only if the request was formally made in writing and documented.
• Reconcile 26AS and AIS with your TDS payable ledger and every Form 16A received before submitting data to the tax auditor.
• The Tax Audit Report (Form 3CD) is due by 30 September 2026.

Closing Insight

Each of the six provisions covered in this post — Section 43B(h), Section 16 of the MSMED Act, Section 145, Section 40A(3), Sections 269SS/269T, and Section 40(a)(ia) — operates independently. A business may be exposed to more than one of them simultaneously for the same vendor transaction. The five-document vendor request covers all of them. Collecting these documents is not a year-end administrative task — it is the evidence base on which your tax audit rests.

Form 15CA and Form 15CB Replaced — Complete Guide to Form 145 and Form 146 Under the Income Tax Act 2025

 By CA Surekha Ahuja

From 1 April 2026, every Indian company or individual making a payment to a non-resident must use Form 145 instead of Form 15CA, and every Chartered Accountant certifying such payments must issue Form 146 instead of Form 15CB. The numbers changed. The obligations didn't. But UDIN is now mandatory, the exempt categories list grew, and the filing sequence is stricter. Here is everything you need to know.

What replaced what — the full picture

Until 31 Mar 2026

Remitter declarationForm 15CA

CA certificateForm 15CB

Section195(6), Act 1961

RuleRule 37BB

Exempt categories28

UDIN on CA certNot mandatory

CA cert threshold₹5 lakh

From 1 Apr 2026 Form 145

ReplacesForm 15CA

Filed byIndian payer / remitter

SectionSec 397(3)(d), Act 2025

RuleRule 220

Filing basisPer transaction, before each remittance

Exempt categories33 (5 new added)

PartsA, B, C, D

From 1 Apr 2026 Form 146

ReplacesForm 15CB

Filed byChartered Accountant only

SectionSec 397(3)(d), Act 2025

RuleRule 220

When requiredTaxable remittance >₹5L, no AO cert

UDINNow mandatory on every Form 146

Can be withdrawn?Yes — within 7 days

How Form 145 and Form 146 work together — the mandatory sequence

For a taxable remittance above ₹5 lakh — this sequence is non-negotiable

Step 1

Non-resident

File Form 41 + TRC

Establishes DTAA eligibility. Generates ARN. Payer cannot apply treaty rate without this ARN.

Step 2

Indian payer

Assign Form 146 to CA

Log in → My Account → Add CA → enter CA's membership number → assign Form 146.

Step 3

Chartered Accountant

File Form 146 with UDIN + DSC

CA certifies income nature, TDS rate, DTAA article. Generates acknowledgement number. UDIN is mandatory.

Step 4

Indian payer

File Form 145 Part C

Links Form 146 ARN. Declares remittance details and DTAA rate to tax department. e-Verify via DSC or EVC.

Step 5

Bank (AD)

Process remittance

Bank requires Form 145 acknowledgement + Form 146 + A2 form + supporting docs. 1–3 working days.

Form 145 — the four parts explained

A

Part A

Taxable remittances where aggregate does not exceed ₹5 lakh in the tax year.

No CA certificate needed. Simpler declaration by remitter.

No Form 146 needed

B

Part B

Taxable remittances exceeding ₹5 lakh where an Assessing Officer certificate (Form 128) has been obtained specifying the TDS rate.

Needs Form 128 — not Form 146

C

Part C

Taxable remittances exceeding ₹5 lakh with no AO certificate. Most common scenario for business payments.

Form 146 must be filed by CA first. Remitter links Form 146 ARN here.

Requires Form 146 ARN first

D

Part D

Remittances that are not taxable in India — no TDS, no CA certificate.

Simple declaration that the payment falls outside Indian tax scope.

No Form 146 needed

Form 146 — what the CA certifies and what's new

The biggest change from Form 15CB: UDIN is now mandatory on every Form 146. UDIN is an 18-digit alphanumeric number generated on the ICAI portal that makes every CA certificate tamper-proof and verifiable in real time. A Form 146 without a valid UDIN is considered invalid — the remitter cannot use it to file Form 145 Part C, and the bank will not process the remittance. CAs must generate the UDIN on the ICAI portal before or at the time of filing.

Form 146 also now requires the CA's PAN and firm registration number. Once a Form 146 is used by the remitter in Part C of Form 145, it is marked "consumed" and cannot be reused. It can be withdrawn within 7 days if filed in error — but withdrawal automatically updates the linked Form 145 Part C status to "Withdrawn."

Step-by-step filing procedure

Filing Form 145 — Parts A, B, D (no CA certificate)

Step 1

Log in

PAN + password at incometax.gov.in

Step 2

Navigate to form

e-File → Income Tax Forms → File Income Tax Forms → Act 2025 tab → Form 145

Step 3

Select Part

Choose A, B, or D based on taxability and amount. Fill remitter, remittee, amount, purpose, TDS details.

Step 4

Preview, e-Verify, submit

DSC or EVC. Download acknowledgement. Submit to bank with A2 form.

Filing Form 145 Part C — with CA certificate (Form 146)

Step 1 — Indian payer

Assign Form 146 to CA

My Account → Add CA → enter membership number → assign Form 146 to the transaction

Step 2 — CA

File Form 146 with UDIN

CA logs in → generates UDIN on ICAI portal → files Form 146 with DSC → provides acknowledgement number to remitter

Step 3 — Indian payer

File Form 145 Part C

Enter Form 146 acknowledgement number → fill remittance details → preview → e-Verify (DSC or EVC) → submit → give acknowledgement to bank

Exempt remittances — when Form 145 is not needed

Rule 220(3) lists 33 categories of exempt remittances — up from 28 under the old Rule 37BB. Five new import-related RBI purpose codes have been added that were previously grey areas. Common examples of typically exempt remittances include: payment for imports of goods, travel expenses, education remittances, medical treatment abroad, maintenance of close relatives, and subscription fees for international publications. Always verify the current Rule 220(3) list before assuming an exemption applies — assumptions can be costly.

Transition rule — old forms already filed

Form 15CA/15CB filed before 31 March 2026 remain valid provided the actual remittance occurred on or before the date specified in those forms. If the remittance was not completed within that window, fresh Form 145 and Form 146 must be filed.

Accrual in old year, remittance in new year: If income accrued in February 2026 but remittance happens in April 2026 — the reporting format follows the law in force on the date of remittance (Form 145/146 under Act 2025). But the taxability and rate are governed by the Act applicable to the year of accrual (Act 1961). Two different Acts applying to one transaction — confirm with your CA before processing.

Decision table — which form do you need?

Situation	Form required	Filed by	Timing
Taxable remittance ≤₹5L in the year	Form 145 Part A	Indian payer	Before each remittance
Taxable remittance >₹5L — AO rate certificate obtained	Form 145 Part B	Indian payer	Before each remittance · attach Form 128
Taxable remittance >₹5L — no AO certificate	Form 146 first then Form 145 Part C	CA files 146 · payer files 145	CA files 146 → payer uses ARN in Part C → before remittance
Remittance not taxable in India	Form 145 Part D	Indian payer	Before each remittance
Remittance falls under Rule 220(3) exempt list	No form needed	—	Verify exemption applies first
Non-resident wants DTAA lower rate	Form 41 + TRC — non-resident files annually	Non-resident	Once per tax year · before ARN is shared with payer

Penalties for non-compliance

Default	Liable party	Consequence	Severity
Form 145 not filed before remittance	Indian payer	Penalty up to ₹1 lakh under Section 462. Bank will refuse to process remittance — transaction blocked.	Critical
Inaccurate information in Form 145	Indian payer	Penalty up to ₹1 lakh under Section 462	Critical
Form 146 filed without UDIN	CA	Certificate considered invalid. Form 145 Part C cannot proceed. Remittance blocked.	Critical
Incorrect information in Form 146	CA	Penalty up to ₹10,000 per certificate	High
TDS not deducted or short deducted	Indian payer	Assessee-in-default. 1% per month interest + penalty equal to TDS amount + 100% expense disallowance	Critical
Form 145 and Form 146 data mismatch	Indian payer	Selected for AO verification. Risk of demand, interest, and scrutiny.	High

Common errors — click to expand fix

CriticalWarningCompliance

1

Form 146 filed without UDIN — certificate invalid

CA submits Form 146 but UDIN was not generated on the ICAI portal first. Entire certificate is void. Form 145 Part C cannot be linked to it. Remittance blocked.

CA filing

2

Form 145 Part C filed before Form 146 — wrong sequence

Indian payer tries to file Part C before the CA has filed Form 146. Portal will not accept Part C without a valid Form 146 acknowledgement number.

Payer filing

3

CA not registered on e-filing portal / no DSC registered

CA cannot file Form 146 without being registered on incometax.gov.in and having a valid DSC registered. Form 146 can only be submitted via CA's DSC — no EVC alternative.

CA filing

4

Wrong Part selected in Form 145

Remitter selects Part A for a remittance that exceeds ₹5 lakh — or selects Part C unnecessarily for a non-taxable payment. Wrong part cannot be changed after submission.

Payer filing

5

Form 145 and Form 146 data mismatch — triggers AO scrutiny

Inconsistencies between remittance amount, date, or DTAA details in Form 145 and Form 146 flag the transaction in the ITBA system. Common cause: exchange-rate differences between filing date and remittance date.

Compliance

6

Bank refuses to process remittance — Form 145 acknowledgement missing

Authorised Dealer (bank) requires Form 145 acknowledgement + Form 146 + A2 form before processing. Incomplete documentation package causes remittance to be held.

Bank processing

7

Assuming Form 145 is not needed — exempt category misidentified

Remitter assumes payment is exempt under Rule 220(3) without verifying the current 33-category list. Form 145 not filed. Bank may still process but tax department flags the transaction.

Compliance

8

Old Form 15CA / 15CB used for April 2026 onwards remittances

Finance teams continue using old form numbers after the transition. Forms 15CA and 15CB are not valid for any remittance made from 1 April 2026 onwards.

Compliance

Pre-filing checklist for Indian payers

Non-resident has filed Form 41 and shared ARN — confirm before any payment

Determined correct Part (A / B / C / D) based on taxability and amount

Verified payment is not in the Rule 220(3) exempt list before assuming no form needed

For Part C: CA assigned on portal and Form 146 filed with valid UDIN before starting Form 145

Form 146 acknowledgement number in hand before opening Part C

Remittance amount, date, and DTAA article consistent between Form 145 and Form 146

Form 145 e-verified via DSC or EVC — acknowledgement downloaded

Full documentation package ready for bank: Form 145 + Form 146 + A2 + invoice + TDS challan

TDS deducted at correct rate — DTAA rate only if Form 41 ARN received from non-resident

All records retained for 7 years for potential AO scrutiny

Also read: Form 41: Complete Guide for Non-Residents — Filing Procedure, Portal Errors, Fixes & TDS Consequences (2026) — covers the non-resident's obligation to file Form 41 and TRC before DTAA benefits can be claimed on any payment from India.