Residential Status and Taxation for Individuals

Residential status plays an important role in determining the taxability of income. Act has laid down clear provisions to determine the residential status. These provisions are based on total stay in India, origin of the person etc. So let’s see in detail that what the concept of Residential Status under Income Tax is

Contents

Meaning of Residential Status

Residential status is first step to compute taxes of any individual.

  • The residential status in case of an Individual can be of three types:-
    • Resident ordinarily resident
    • Resident not ordinarily resident
    • Non-resident.
  • Tax incidence on certain income is dependent on the residential status of the person.
  • Staying in India also includes living in the limit of territorial waters of India.
  • The date of arrival and date of departure are both counted as stay in India.

Now, let us see how to determine residential status as per IT Act.

Importance of Determining Residential Status

The residential status of any individual is determined each year. Therefore, the same individual can be resident in one year and non-resident in another. Section-6 of the Income Tax Act contains the criteria to determine the residential status.

After determining the Residential Status as per Income Tax Act, taxability of income tax is decided.

Residential Status in case of Individuals

As per Sec.6 any person who satisfies any of the following conditions is considered as resident-

  • Stayed in India for 182 days or more during the previous year, or,
  • Whose stay during 4 preceding previous years is 365 days or more and is 60 days or more in the relevant financial year.
Exceptions to the above rule are:-

The period of 60 days will be substituted with 182 days in case of:-

  1. An Indian Citizen/Person of Indian Origin who has left country for employment.
  2. Person who has left as a crew member.

Now, once a person qualifies as a resident it needs to verified if he is a ROR/RNOR

Further ROR (Resident Ordinarily Resident) will be a person who

  • Was a resident in 2 years out of past 10 immediately previous years.and
  • Has stayed in India for at least 730 days in 7 immediately preceding years.

RNOR (Resident not ordinarily Resident) will be the person who satisfies any 1 of the above secondary conditions.

Non- Resident will be the person who does not satisfy any of the above conditions.

Recent Amendments as per Finance Act,2020

Recently Finance Act, 2020 has brought some changes to the above rules.

  • In case of an Indian Citizen or Person of Indian Origin the period of 60 days above will be substituted with 120 days. If total income of the person excluding the income from foreign sources exceeds Rs.15 lakhs.
  • The following person will be deemed as a resident in India-
    1. An Indian Citizen whose total income (excluding foreign sources) exceeds Rs.15 lakhs. And
    2. He is not liable to pay tax in any other country then such person will be deemed resident in India.

Foreign sources means income that has accrued or arise outside India. However, income from a business controlled in India or a profession set up in India will be included.

Taxation of Individuals on basis of Residential Status under Income Tax Act

The taxability of Income is decided on the basis of Residential Status as per Income Tax Act. Hence, same income can be taxable in one’s hands but not in others. We will now see that which kind of income is taxable in whose hands.

 

Nature of Income

Residential Status
Resident Ordinarily Resident Resident Not Ordinarily Resident Non-Resident
Income accrues or arises in India Taxable Taxable Taxable
Income deemed to accrue or arise in India Taxable Taxable Taxable
Income received in India Taxable Taxable Taxable
Income deemed to be received in India Taxable Taxable Taxable
Income accruing outside India from a business controlled from India or from a profession set up in India Taxable Taxable Not Taxable
Income other than above (i.e., income which has no relation with India) Taxable Not Taxable Not Taxable

Meaning of some Important Terms

Now, we will see the meaning of some terms used in above table:-

Income Deemed to Accrue or Arise in India

Following is treated as Income deemed to accrue or arise in India.

  • Capital Gain from a property situated in India
  • Salary income from Indian Government, for services outside India.
  • Income from business connection in India.
  • Income from any asset, source located in India.
  • Interest or Royalty/Fees for technical services from Government of India.
  • Dividend from an Indian Company.
  • If resident pays an interest or Royalty/Fees for technical services. Then such income will be deemed to accrue or arise in India, in hands of the payee. This will apply even if business is located outside India.
  • When Interest or Royalty/Fees for technical services received from non-resident for a business setup in India. It will be deemed to accrue or arise In India.

Business Connection established in India

A business connection is considered as established in India on basis of few parameters. When a person acts on behalf of a non-resident and performs any of the following activities:-

  • Person has the authority to conclude contracts on behalf of Non-resident.
  • Where a person is responsible to maintain and deliver stock on behalf of Non-Resident.
  • If such person is responsible to secure order in India for the non-resident.

Conclusion

From above discussion we have largely understood the meaning of Residential status under Income Tax Act. We have also seen the impact of Residential Status on taxable income. Therefore, we can say that residential status is a base on which taxation stands. Residential Status under Income Tax Act is a very important factor to decide taxability of Income. So, do not delay and get in touch with your consultant to determine your residential status. As doing the same may help you file your returns correctly.

CategoryIncome Tax

CA Rishabh Maheshwari is an associate Chartered Accountant having expertise in conducting statutory and internal audits of large clients. He has also done a certified course on Concurrent audits of banks. He is responsible for coordination, planning, team leadership in connection with Audits and GST of Private and Public Companies with an experience of almost 3 years.

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