Residential Status Under Section 6 Of Income Tax Act

It is important for the Income Tax Department to determine the residential status of a tax paying individual or company. It becomes particularly relevant during the tax filing season. In fact, this is one of the factors based on which a person’s taxability is decided.

Let us explore the residential status and taxability in detail.

Significant amendment from FY 2020-21: An individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India, only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries.

Meaning and Importance of Residential Status

The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year. Also to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we have discussed about - how the residential status of an assessee can be determined for any particular financial year. 

How to Determine Residential Status?

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

1. A resident and ordinarily resident (ROR)
2. A resident but not ordinarily resident (RNOR)
3. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident

A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :

1. Stay in India for a year is 182 days or more in previous year or

2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year

Exceptions to Residential Status

1. In the event an individual who is a citizen of India leaves India as a member of the crew of an Indian ship or for the purpose of employment during the FY, he will qualify as a resident of India only if he stays in India for 182 days or more.
2. Indian citizen or person of Indian origin who stays outside India comes on a visit to India during the relevant previous year. However, such a person having a total income, other than the income from foreign sources which exceeds Rs.15 lakhs during the previous year will be treated as a resident in India if – 

• he stays in India during the relevant previous year for 182 days or more, or 
• he stayed in India for 365 days or more during the previous 4 years and has been in India for at least 120 days in the previous year.

As mentioned as a significant amendment above, the individual will be treated as a “deemed resident of India” if a citizen of India having total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries. 

The amendment can be further simplified as below-

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident and ordinarily resident (ROR) or Resident but not ordinarily Resident (RNOR). He will be an ROR if he meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, there are 3 situations in which an individual is said to be RNOR

• if any individual fails to satisfy either or none of the above-mentioned conditions.
• If an individual is an Indian citizen or person of Indian origin having a total income more than exceeding Rs.15 lakhs (excluding foreign income), who has been in India for 120 days or more but less than 182 days during that previous year.
• If an individual is deemed to be a resident in India, by default, he will be considered as a Resident and Not Ordinarily Resident.

Non-resident

An individual  failing to satisfy the condition of stay in India for :

1. 182 days or more in the previous year or 
2. 60 days or more in the previous year and 365 days in the 4 years preceding previous years

will be considered as a Non-Resident for that financial year. 

Points to Note

Stay in India includes stay in the territorial waters of India i.e. 12 nautical miles into the sea from the Indian coastline.

The period of stay need not be continuous or active.

Both the date of departure as well as the date of arrival in India are considered while counting the number of days stayed in India.

For Income tax purposes the residence of an individual has nothing to do citizenship, place of birth or domicile. Therefore, an individual can be resident in more than one country even though he has only one domicile.   

Important Terms to Understand

Before proceeding further on the key aspects of Section 6 of the Income Tax Act, 1961, you should be familiar with certain terminologies. They are explained below: 

Income from foreign sources: It implies income earned outside India, excluding the income sourced from a business operated in or a profession set up in India, which is not deemed to accumulate or arise in India.

Non-resident Indian (NRI): An NRI is an individual who is a citizen of India or Indian origin but not a resident.

Person of Indian Origin (PIO): An individual shall be considered to be of Indian origin if he/she or either his/her parents or any of his/her grandparents was born in undivided India.

Taxability

Resident and Ordinarily Resident: A resident and ordinarily resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India.

Resident but not ordinarily resident: There is a thin line in taxability of income between ROR and RNOR, on below incomes RNORs are not required to pay taxes.

• Income earned outside India as well as received outside India.

Non-Resident: A Non-resident will be charged tax only on the income ‘received in India’ or source of income ‘received from India’. However, income earned outside India, having no connection with India, is not taxable

Examples:

• ‘received in India’ - interest on Fixed deposits kept with banks in India. Technically called as Income earned in India.
• ‘received from India’ - payment from an Indian person/company in a foreign bank account for the services provided to such person. Technically called as Income accrued from India.

Residential Status of HUF

Resident: An HUF would be resident in India if its management is made from the members in India, if not will be considered a Non-resident.

Resident and ordinarily resident/ Resident but not ordinarily resident 

If Karta (manager) of resident HUF satisfies the below conditions, then HUF will be treated as resident and ordinarily resident, otherwise, it will be resident but not ordinarily resident. 

• should be resident in at least 2 previous years out of the last 10 years.
• Stay in the last 7 years should be 730 days or more.

Note: Only individuals and HUFs can be Resident and not ordinarily residents in India. All other classes of assesses can be either a resident or non-resident.

Residential Status of a Company

A company would be resident in India in the following circumstances :

• If it is an Indian Company
• The place of effective management in the previous year is in India.

Note: Place of effective management means a place where management and commercial decisions that are necessary for the conduct of business or entity are taken.

Residential Status of Firms, LLPs, AOPs, BOIs, Local authorities and Artificial juridical persons

In simple words, again, the residential status will depend on the place from where the management of the above persons management is made, similar to HUF, if it's done by members in India, then it will be resident, else it will be non-resident.

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