Section 174 of the Income-tax Act, 2025 — Avoidance of Income-tax by Transfer of Income to Non-Residents

In plain language

What Section 174 is really about

Section 174 of the Income-tax Act, 2025 is an anti-avoidance provision. It stops residents from dodging Indian tax by parking income or assets with a non-resident (typically an offshore company, trust or entity) while still keeping the ability to enjoy or control that income. In simple words: if you shift income abroad on paper but you still benefit from it, the tax law treats that income as YOURS and taxes it in your hands in India.

This section is the successor to the old Section 93 of the Income-tax Act, 1961. The 2025 Act re-numbers and modernises the language, but the core intent is unchanged — defeat cross-border schemes designed to escape Indian tax.

Who it applies to

• Resident individuals and other residents who transfer assets (or arrange transfers) so that income becomes payable to a non-resident.
• The person caught is called the "first-mentioned person" — the one who made or benefits from the transfer.
• It applies whether the transfer happened before or after the Act came into force (1 April 2026), so old structures are not automatically safe.
• It covers transfers done alone or in conjunction with "associated operations" — later steps, side deals or connected arrangements that help the scheme work.

The key trigger — "power to enjoy"

The heart of Section 174 is the concept of power to enjoy the non-resident's income. You are treated as having power to enjoy that income (and hence taxed on it) if any of these are true:

• The income is dealt with so as to benefit you at some point, in any form.
• The receipt of that income increases the value of assets you hold.
• You receive or are entitled to a benefit funded out of that income.
• You can, by a power of appointment, revocation or otherwise, get beneficial enjoyment of the income.
• You can control the application of the income, directly or indirectly.

There is also a separate limb for capital sums: if you (the transferor) receive a capital sum — such as a loan, repayment of a loan, or a payment not made for full value — that is connected to the transfer or associated operations, the offshore income is deemed yours.

The escape route — bona fide commercial transactions

Section 174 is not meant to punish genuine business. The section will not apply if the first-mentioned person satisfies the Assessing Officer that:

• Neither the transfer nor any associated operation had tax avoidance as its purpose or one of its purposes; or
• The transfer and all associated operations were bona fide commercial transactions and were not designed to avoid tax.

The burden of proof is on you, the taxpayer, to demonstrate genuine commercial substance — not on the department.

Protection against double taxation

Once income has been taxed in your hands under Section 174, and you actually receive that same income later (as income or in any other form), it is not taxed again. This prevents the same money from being hit twice.

How it interacts with related sections

• Transfer pricing (Sections 161–173): Those deal with pricing transactions with associated enterprises at arm's length. Section 174 is different — it re-attributes income itself where a scheme shifts it offshore.
• General Anti-Avoidance Rules (GAAR): Section 174 is a specific anti-avoidance rule; GAAR is the broader safety net. Both can apply to cross-border arrangements.
• Clubbing provisions: Similar in spirit — income is taxed in the hands of the person who really controls it, not the nominal recipient.

Practical implications for taxpayers

• If you hold or fund an offshore company or trust and can still benefit from its income, expect scrutiny.
• Maintain strong documentation — commercial rationale, board minutes, arm's-length terms — to prove bona fide intent.
• Combined with disclosure duties under the Black Money Act and Schedule FA foreign-asset reporting, hiding offshore benefits is increasingly risky.