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Residential status and Tax incidence

The residential status of a person is required to be determined for each assessment year in order to determine the scope of total income. The basis of determination of residential status in respect of each person is laid down under the provisions of section 6 which are analyzed hereinafter.

Residential status of an Individual under Income Tax Act, 1961

Residential status of an individual for income-tax purposes depends on the physical stay of the individual in India. Based on the period of stay in India in a given financial year, an individual may be classified as:

  • Resident
  • Not ordinarily resident (NOR)
  • Non-resident (NR).

Tests of residence under the act

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A. An individual is a resident in India if he stays in India for:

  • At least 182 days during a financial year
  • At least 60 days during a financial year and 365 days or more during the 4 years preceding that fiscal year.

Exceptions to the above:

  • The 60-day period mentioned above will be substituted for 182 days in case of the following persons:-
    •  A citizen of India who leaves the country as a crew member of an Indian ship or for the purposes of employment outside India
    • A Citizen of India or PIO who visits India in any previous year.

B. An individual is an NOR in India if:

  • He is an NR in India in 9 of 10 financial years preceding the relevant fiscal year
  • His stay in the 7 years preceding the relevant financial year is in the aggregate 729 days or less.

C. An individual is an NR in India if:

  •  He does not satisfy any of the two conditions mentioned in A above.

Non-Resident Indian (NRI)

An NRI is defined as a citizen of India or a PIO who is not a resident.

Person of Indian Origin (PIO)

A person shall be deemed to be of Indian origin if he or either of his parents or grandparents were born in an undivided India.

Residential Status of HUF – Sec 6(2)

A HUF is said to be resident in India when during that year control and management is situated wholly or partly in India. In other words it will be non-resident in India if no part of the control and management of affairs is situated in India.

Control and management lies at the place where decision regarding the affairs of the HUF are taken.

A resident HUF is said to be resident and ordinarily resident in India if the karta of the HUF satisfies both the following conditions:

1. He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous year

And

2. He has been in India for 730 days or more during 7 previous years immediately preceding the relevant previous year.

If the karta of HUF does not satisfy any or both of the above conditions, then HUF shall be resident but not ordinarily resident in India.

Residential Status of Firms, AOP, BOI etc – Sec 6(2), 6(4)

A Firm, AOP, BOI etc is said to be resident in India when during that year control and management is situated wholly or partly in India. In other words it will be non-resident in India if no part of the control and management of affairs is situated in India.

Control and management lies at the place where decision regarding the affairs of the firms etc are taken.

Residential Status of Companies – Sec 6(3)

Indian Company is always resident in India

Foreign Company is resident in India if control and management of its affairs is situated wholly in India during relevant previous year i.e. if all the board meetings of the foreign company is held in India, then it shall be resident, otherwise non-resident.

Relation between residential status and incidence of tax [Section 5]

Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual of receipt of income:

Indian Income and foreign income

Indian Income: Any of the following three is an Indian income:

i) If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year;

ii) If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year;

iii) If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year;

Foreign income: If the following conditions are satisfied, then such income is foreign income:

i)   Income is not received (or not deemed to be received) in India; and

ii) Income does not accrue or arise (or does not deemed to accrue or arise) in India.

The provisions of residential status are tabulated as below:

Whether income is received (or deemed to be received) in India during the relevant years Whether income accrues (or arises is deemed to accrue or arise) in India during the relevant years. Status of Income
Yes Yes Indian Income
Yes No Indian Income
No Yes Indian Income
No No Foreign Income

Incidence of tax for different taxpayers is as follows:

Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):

  Resident and ordinarily resident Resident but not ordinarily resident Non-resident
Indian Income Taxable Taxable Taxable
Foreign Income
If it is business income and business is controlled wholly or partly in from India Taxable Taxable Not taxable
If it is income from profession which is set up in India Taxable Taxable Not taxable
If it is business income and business is controlled from outside India Taxable Not taxable Not taxable
If it is income from profession which is set up outside India Taxable Not taxable Not taxable
Any other foreign income (like salary, rent, interest etc.) Taxable Not taxable Not taxable

Any other taxpayer (like company, firm, co-operative society, association of persons, body of individuals, etc):

Resident Non-resident
Indian Income Taxable Taxable
Foreign Income Taxable Not taxable

Conclusion:

Indian Income: Indian income is always taxable in India irrespective of the residential status of the taxpayer;

Foreign Income: Foreign income is taxable in the hands of resident in case of a firm, co-operative society, association of persons, body of individuals or resident and ordinarily resident in case of individuals and HUFs in India. Foreign income is not taxable in the hands of non-resident in India.

In the hands of resident but ordinarily resident taxpayer, foreign income is taxable only if it is

  • Business income and business is controlled wholly or partly in from India; and
  • Income from profession which is set up in India
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