Rule 9 of Income-tax Rules, 2026: A Structured Framework for Estimating Non-Resident Income

The Income-tax Rules, 2026, introduce Rule 9, a landmark provision that formalizes how the Indian tax department may estimate the taxable income of non-residents. Rule 9 of the Draft Income-tax Rules, 2026, establishes a structured framework for estimating the taxable income of non-residents when precise figures cannot be determined.

If the Assessing Officer believes that income, whether earned directly or indirectly through assets, property, sources of income, or business connections in India, cannot be accurately quantified, they are empowered to compute it on a reasonable basis.

This may involve calculating income as a percentage of relevant turnover, proportionally allocating profits based on Indian receipts relative to global business receipts, or applying any other method deemed appropriate. The rule aims to ensure fair and transparent estimation in cases where documentation is incomplete or unavailable.

The rule also allows for flexibility by permitting the AO to adopt any other suitable method that aligns with the nature of the business and available information. This ensures that the estimation process remains adaptable to diverse scenarios, including complex cross-border arrangements and unconventional income streams.

Rule 9 of Income-tax Rules, 2026

Cross-border taxation has always posed challenges for tax authorities. Non-residents often earn income linked to India through assets, property, business connections, or indirect arrangements. However, due to the nature of such transactions, documentation may be incomplete, inaccessible, or ambiguous. This creates hurdles in accurately computing taxable income.

Rule 9 addresses this gap. It provides a formal mechanism for Assessing Officers (AOs) to estimate income when it cannot be “definitely ascertained.” The rule is not about expanding powers; it’s about codifying them. By laying down acceptable methods of estimation, Rule 9 reduces arbitrariness and enhances predictability in assessments.

Application of Rule 9

Rule 9 is triggered when the AO forms an opinion that income accruing or arising in India either directly or indirectly cannot be precisely determined.

This may occur in several scenarios:

• The taxpayer fails to respond to notices or file returns.
• Records are incomplete, inconsistent, or unverifiable.
• Income is derived through complex arrangements lacking clarity.
• Transactions involve indirect business connections or layered ownership structures.

Importantly, Rule 9 applies only to non-residents. It is designed to address the unique challenges posed by cross-border income flows and offshore entities with Indian ties.

Rule 9 applies specifically to non-resident persons. It covers income derived directly or indirectly through or from:

• Any asset or source of income in India
• Any property situated in India
• Any business connection in India

If the AO thinks that the actual amount of such income cannot be precisely determined, Rule 9 authorizes estimation for assessment to income-tax.

Method of Estimation

Rule 9 outlines three distinct methods for estimating income:

1. Percentage of Turnover

The AO may compute income as a percentage of the turnover accruing or arising in India. This method is particularly useful when receipts are known, but profit margins are unclear. For example, if a foreign consultancy earns ₹10 crore from Indian clients but fails to disclose expenses, the AO may estimate profits at a reasonable percentage say 20% based on industry benchmarks.

2. Proportionate Allocation of Profits

If the taxpayer provides global financials but not India-specific breakdowns, the AO may allocate profits proportionately. For instance, if Indian receipts constitute 30% of total global receipts, then 30% of global profits may be deemed taxable in India. This method ensures fairness when partial data is available.

3. Other Suitable Methods

The AO retains the flexibility to adopt any other method deemed suitable. This could include applying sectoral profit ratios, benchmarking against similar entities, or using historical trends. The emphasis is on reasonableness and adaptability to diverse business models.

Illustrative Scenarios

Let’s consider a few practical examples:

Case 1: An NRI owns rental property in India but does not disclose maintenance expenses. The AO may estimate net income using standard deduction rates.

Case 2: A foreign tech firm earns royalties from Indian users but fails to segregate Indian revenue. The AO may allocate profits based on user base or traffic data.

Case 3: A company ignores repeated notices. The AO may adopt best judgment based on industry averages and past filings.

In each case, Rule 9 provides a structured path for estimation, backed by procedural fairness.

Conclusion

Rule 9 of the Draft Income-tax Rules, 2026, marks a pivotal shift in India’s approach to non-resident taxation. By codifying estimation powers and laying down clear methodologies, it enhances transparency, reduces arbitrariness, and strengthens compliance.

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