## Interest [Section 9(1)(v)]

Interest paid/payable will be deemed to accrue or arise in India if paid by:

### Source 1: Government of India

Interest paid by Government of India → Always deemed to accrue/arise in India.

### Source 2: Paid by a Resident

Interest paid by a Resident is deemed to accrue/arise in India EXCEPT when the loan is used for earning income outside India through a business/profession carried on outside India OR earning income from any other source outside India.

Use of Loan by Resident Borrower	Interest Taxable in India?
For business/profession in India	YES
For earning income from any other source in India	YES
For business outside India	NO

### Source 3: Paid by a Non-Resident

Interest paid by an NR is deemed to accrue/arise in India ONLY if loan is used in India:

Use of Loan by NR Borrower	Interest Taxable in India?
For business/profession in India	YES
For earning income from any other source in India	YES
For business outside India / source outside India	NO

### Visual Examples

Example 1: Yash (R) takes loan from Nora (NR). Interest paid by Yash to Nora.

If Yash uses loan for business in India OR for earning any income from any source in India → Interest deemed to accrue/arise in India (taxable in Nora's hands in India).

Example 2: Johnny (NR) takes loan from Nora (NR). Interest paid by Johnny to Nora.

If Johnny uses loan for business in India OR for earning income from any source in India → Interest deemed to accrue/arise in India.
If Johnny uses it outside India → NOT taxable in India.

Worked example

### Example 1

Example: Mr. R (Resident) borrows ₹50 lakh from Mr. N (NR) and uses it to set up a factory in India. Interest paid to Mr. N = ₹5 lakh.

Solution: Loan used by Resident for business in India → Interest deemed to accrue/arise in India → ₹5 lakh taxable in India in Mr. N's hands.

### Example 2

Example: Mr. J (NR) borrows from Mr. N (NR) and uses funds entirely for a business in London.

Solution: Loan used by NR outside India → Interest NOT deemed to accrue/arise in India → Not taxable in India.

⚠️ Common exam mistakes

Looking at the lender's residential status to determine taxability — what matters is the borrower's status and use of the loan.
Treating interest paid by NR to NR as always taxable in India — it's taxable only if the loan is used in India.
Forgetting that interest from Government of India is always taxable in India regardless of recipient location.

Bare-Act text Section 9(1)(v) · Income-tax Act, 1961 · click to expand

Section 9(1)(v): Income by way of interest payable by — (a) the Government; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India.

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Interest Deemed to Accrue or Arise in India [Sec 9(1)(v)]

Worked example

⚠️ Common exam mistakes