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    Determination of Residential Status in India and taxability of income

    Published Tue, 01 Nov 2022 | Updated Tue, 01 Nov 2022

    1667294910-Determination of Residential Status in India and taxability of income (2).jpg

    Determination of residential status of a tax-payer individual or company is very essential as it is one of the important factors to determine a person’s taxability of income in India. Taxability of an income in the hands of a person primarily depends on the following:

    • Residential status of the person

    • Nature of income earned by him

    The term “residential status” is used here for the purpose of defining taxability of income in India, and it should not be construed in relation to citizenship in India. An individual may be a citizen of India but may not be resident for a particular year for tax purposes or vice-versa.

    Residential status is classified in following Categories:

    • Resident: Residents are further classified in following categories in case of Individuals and HUF

      • Resident and Ordinarily Resident (ROR)

      • Resident but Not Ordinarily Resident (RNOR)

    • Non-Resident (NR)

    We are summarizing below criteria for determination of residential status in different cases:

    A. Determination of Residential status of Individuals

    To determine residential status of Individuals, following steps are followed:

    • Determine if person is a resident in India 

    • If yes,  then to identify if he is ordinarily resident or not ordinarily resident in India 

    • If criteria for residency if not fulfilled he will be considered as non-resident 

    A.1     Determination of Resident Individual 

    As per Section 6(1) of Income tax Act, 1961, an individual is said to be resident in India in any particular year, if, he,

    1.  is in India during the previous year for a total period of 182 days or more; or

    2. has been in India for 365 days or more in immediately 4 years preceding to previous years and at least 60 days (refer note 1 and note 2)  in the previous year 

    Notes:

    1. In following cases condition as given above in point (2) is not applicable:

      1. An Indian citizen who leaves India for the purposes of employment outside India, or

      2. An Indian citizen who leaves India in any previous year as a member of the crew of a foreign bound ship (Period from joining date to ship after filing of continuous discharge certificate till the singing off date is considered as outside India); or

      3. An Indian citizen or a person of Indian origin who, being outside India, comes on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grand-parents (maternal or paternal) were born in undivided India.

    Further in condition-2 (as referred above) from financial year 2020-21, In case of Indian citizen or a person of Indian origin whose total income, other than foreign sources, exceeds Rs. 15 lakh during the previous year, the period of 120 days shall be considered instead of 60 days. Income from Foreign sources means total income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India)

    2.  While computing the period of stay in India, stay is not required for a continuous period and aggregate period of stay even in breaks need to be considered. Further stay can be at any place such as place of residence, business etc.

    3.  Further as per decision of Authority for Advance Rulings, both, day of departure from India and day of arrival in India are to be counted as stay in India.

    4.  Deemed Resident: In another significant change from FY 2020-21, any Indian citizen having total income (other than the income from foreign sources) exceeding fifteen lakh rupees during that year will be deemed to be resident in India in that year, if he is not liable to be taxed in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

    A.2     Determination of Ordinarily Resident (ROR) or Not Ordinarily Resident (RNOR)

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

    1. The individual stays in India for 730 days or more during the past 7 years immediately preceding the relevant previous year, and

    2. The individual is a non-resident in India for maximum 8 years out of 10 years immediately preceding the relevant previous year (i.e resident in 2 years or more out of past 10 years)

    Therefore, if any resident individual not meeting any of the above conditions will become Resident and Not Ordinarily Resident (RNOR).

    Further, deemed resident as referred in clause (4) above shall always be treated as Resident not ordinarily resident.

    A.3     Non-Resident 

    An individual who is not satisfying any of residential condition will be considered as Non-Resident for that year.

    B. Residential Status for HUF, firms or other association of persons

    A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India. In other words, these persons shall be considered as resident if the control and management of its affairs is situated wholly or partly in India.

    Further if HUF is resident then residential status of KARTA determines whether the HUF is ROR or RNOR.

    C. Residential status of companies

    A company is said to be a resident in India in any financial year, if—

     (i) it is an Indian company; or

     (ii) its place of effective management, in that year, is in India.

    Explanation- For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.

    Other points to consider:

    Every other person is said to be resident in India in any particular year in every case, except where during that year the control and management of his affairs is situated wholly outside India. (Section 6(4) of Income tax Act).

    Taxability of Income for different residential status

    Taxability of different type of income for different residential status is summarized below:

    Source of Income

    Resident and Ordinarily Resident (ROR)

    Resident but not ordinarily resident (RNOR)

    Non Resident

    Income received or is deemed to be received in India

    Taxable

    Taxable

    Taxable

    Income accrues or deemed to accrue in India

    Taxable

    Taxable

    Taxable

    Income accrues or arises outside India

    Taxable

    Taxable if derived from a business controlled from India or from a profession setup in India.

    Not taxable 

     

    Readers may also note that India has entered in Double Taxation Avoidance Agreement (DTAA) with various countries to avoid the possibility of paying double tax in different countries on a particular income.

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