Residential Status Under Section 6 Of Income Tax Act

Determining the residential status of an individual or a company for income tax purposes is crucial for the Income Tax Department, especially during tax filing season. This status significantly influences an individual’s taxability in India.

Let’s delve deeper into the concept of residential status and taxability.

Key Amendment from FY 2020-21: An Indian citizen who is not liable to tax in any other country will be deemed a resident in India only if their total income (excluding foreign sources) exceeds Rs 15 lakh and they have no tax liability in other countries.

A person’s taxability in India is based on their residential status for a specific financial year. The term “residential status” is defined under Indian income tax laws and should not be conflated with citizenship. An Indian citizen may be classified as a non-resident for a given year, while a foreign citizen may qualify as a resident based on their income tax assessment.

Different types of taxpayers, such as individuals, firms, and companies, have varying methods of determining residential status. This article focuses on how to ascertain an assesse’s residential status for a financial year.

How to Determine Residential Status

The income tax laws in India categorize taxpayers into the following groups:

  1. Resident and Ordinarily Resident (ROR)
  2. Resident but Not Ordinarily Resident (RNOR)
  3. Non-Resident (NR)

Taxability varies across these categories. Before discussing taxability, it’s essential to understand how a taxpayer is classified as a resident, RNOR, or NR.

Resident

A taxpayer qualifies as a resident of India if they meet one of the following conditions:

1. Stay in India for 182 days or more during the previous year, or

2. Stay in India for at least 365 days during the preceding four years along with at least 60 days in the relevant financial year.

Exceptions to Residential Status

  1. Crew Members: An Indian citizen leaving India as a crew member of an Indian ship or for employment during the financial year will qualify as a resident only if they stay in India for 182 days or more.
  2. Indian Citizens Abroad: An Indian citizen or person of Indian origin visiting India during the relevant year will be deemed a resident if their total income (excluding foreign sources) exceeds Rs 15 lakh and they meet one of the following:
    • Stay in India for 182 days or more during the relevant previous year, or
    • Stay in India for 365 days during the preceding four years and at least 120 days in the current year.

As highlighted in the significant amendment, an individual will be treated as a “deemed resident of India” if they are a citizen of India, have total income (excluding foreign sources) exceeding Rs 15 lakh, and have no tax liability in other countries.

Resident Not Ordinarily Resident (RNOR)

Once an individual is classified as a resident, the next step is to determine whether they are a Resident and Ordinarily Resident (ROR) or a Resident but Not Ordinarily Resident (RNOR). An individual is considered ROR if they meet both conditions:

1. Resident in at least 2 out of the 10 previous years, and

2. Stayed in India for 730 days or more during the last 7 years.

An individual is classified as RNOR under the following situations:

  • Fails to meet either of the above conditions.
  • An Indian citizen or person of Indian origin with income exceeding Rs 15 lakh (excluding foreign income) who stays in India for 120 days or more but less than 182 days during the previous year.
  • If deemed a resident in India, the individual will be automatically classified as Resident and Not Ordinarily Resident.

Non-Resident (NR)

An individual is classified as a Non-Resident if they do not meet the stay conditions of:

  1. 182 days or more during the previous year, or
  2. 60 days or more during the previous year along with 365 days in the four years preceding the previous year.

Key Points to Consider

  • Stay in India includes the territorial waters up to 12 nautical miles from the coastline.
  • The duration of stay need not be continuous.
  • Arrival and departure dates count toward the total days stayed in India.
  • Residential status is independent of citizenship, birth location, or domicile, allowing for the possibility of being a resident in multiple countries simultaneously.

Important Terms to Understand

Familiarize yourself with these key terms related to Section 6 of the Income Tax Act, 1961:

Income from Foreign Sources: This refers to income earned outside India, excluding income sourced from an India-based business or profession that is not considered to accrue in India.

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

Person of Indian Origin (PIO): An individual is recognized as having Indian origin if they, their parents, or grandparents were born in undivided India.

Taxability

Resident and Ordinarily Resident (ROR): Individuals in this category are taxed in India on their global income, including both income earned within India and income from foreign sources.

Resident but Not Ordinarily Resident (RNOR): RNOR individuals are not required to pay taxes on:

Non-Resident (NR): Non-residents are taxed only on income ‘received in India’ or income ‘accrued from India.’ Income earned outside India, without any ties to India, remains non-taxable.

Examples:

Residential Status of HUF

Resident: An HUF is considered a resident in India if its management is performed by its members in India; otherwise, it is classified as a Non-Resident.

Resident and Ordinarily Resident / Resident but Not Ordinarily Resident

If the Karta (manager) of a resident HUF meets the following conditions, the HUF is treated as Resident and Ordinarily Resident; otherwise, it is classified as RNOR:

  • The Karta must have been a resident in at least 2 previous years out of the last 10 years.
  • They should have stayed in India for 730 days or more in the last 7 years.

Note: Only individuals and HUFs can be classified as Resident and Not Ordinarily Resident in India. Other entities can only be classified as either Resident or Non-Resident.

Residential Status of Companies

A company is regarded as a resident in India under the following conditions:

Note: The “place of effective management” refers to where key management and commercial decisions essential to conducting a business are made.

Residential Status of Firms, LLPs, AOPs, BOIs, Local Authorities, and Artificial Juridical Persons

Similarly, the residential status of these entities is determined by the location from which their management is exercised. If managed by members in India, they will be classified as residents; otherwise, they will be deemed non-residents.

The amendment can be further simplified as below-