The concept of residential status is pivotal under Indian income tax laws, as it determines the scope of taxable income in India. Residential status for income tax purposes may vary from year to year and differs significantly from the definitions under other Indian laws such as the Citizenship Act, Foreign Exchange Management Act (FEMA), Aadhaar Act, etc.
It is also important to note that a person may be a resident in more than one country in the same financial year, depending on the relevant tax laws. While the determination is generally based on the duration of stay in India, the provisions of a Double Taxation Avoidance Agreement (DTAA), where applicable, may also influence residential status.
Determination of Residential Status – Individuals
Under Section 6 of the Income Tax Act, 1961, an individual is considered Resident in India in a previous year if either of the following conditions is satisfied:
- The individual is present in India for 182 days or more during the relevant previous year; or
- The individual is present in India for 60 days or more during the relevant previous year and for 365 days or more during the four years immediately preceding the relevant previous year.
An individual who does not satisfy both of the above conditions is classified as a Non-Resident (NR).
Exceptions and Special Cases
- In the case of an Indian citizen or a person of Indian origin visiting India, the second condition (60 days) is replaced with 182 days.
- Similarly, for an Indian citizen leaving India as a crew member of an Indian ship or for the purpose of employment abroad, the 60-day condition is substituted with 182 days.
Deemed Residency – Section 6(1A)
Introduced by the Finance Act, 2020, Section 6(1A) applies from Assessment Year 2021–22. It states that an Indian citizen whose total income (excluding income from foreign sources) exceeds ₹15 lakh, and who is not liable to pay tax in any other country, shall be deemed to be a Resident in India.
Residential Status – Hindu Undivided Family (HUF)
The residential status of an HUF is determined by the location of its control and management. If the decision-making authority of the HUF is situated in India, the HUF is considered a Resident in India, regardless of whether the Karta resides in India or not.
Residential Status – Companies
1. Indian Companies
As per Section 6(3)(i), an Indian company is always treated as a Resident in India, regardless of the control or ownership residing outside India. An Indian company cannot be a non-resident.
2. Foreign Companies
Under Section 6(3)(ii):
- A foreign company is considered Resident in India if its Place of Effective Management (POEM) is in India during the previous year, provided its turnover/gross receipts exceed ₹50 crore.
- If the turnover/gross receipts do not exceed ₹50 crore, the foreign company is always considered Non-Resident, as per Circular No. 8/2017, dated February 23, 2017.
POEM refers to the place where key management and commercial decisions necessary for the conduct of the business as a whole are made. The CBDT’s Circular No. 6/2017, dated January 24, 2017, provides guiding principles for determining POEM.
Residential Status – Other Entities
The residential status of the following entities is determined by the location of control and management:
- Firms
- Limited Liability Partnerships (LLPs)
- Association of Persons (AOPs)
- Body of Individuals (BOIs)
- Local Authorities
- Artificial Juridical Persons
If the control and management of these entities are exercised wholly or partly from India, the entity is considered a Resident in India.
Classification of Individual Residents
1. Resident and Ordinarily Resident (ROR)
As per Section 6(6), an individual who is a resident is considered Resident and Ordinarily Resident (ROR) in India if:
- He/she has been resident in India in at least 2 out of the 10 preceding years, and
- Has stayed in India for 730 days or more in the 7 preceding years.
2. Resident but Not Ordinarily Resident (RNOR)
An individual is classified as RNOR if he/she:
- Has not been a resident in at least 2 out of the 10 previous years, or
- Has not stayed in India for 730 days or more in the 7 preceding years, or
- Is an Indian citizen or person of Indian origin who visits India and has:
- Total income exceeding ₹15 lakh (excluding income from foreign sources), and
- Stayed in India for 120 days or more but less than 182 days in the previous year.
The RNOR status can be retained for up to three financial years after returning to India from abroad. This classification allows certain tax exemptions similar to Non-Resident Indians (NRIs), thus easing the financial transition for returnees.
Key Implications
- Resident and Ordinarily Residents (RORs) are taxed on their global income.
- RNORs and Non-Residents (NRs) are taxed only on income that is accrued, received, or deemed to be received in India.
Disclaimer
The content provided above is intended solely for informational and explanatory purposes and does not constitute financial or legal advice. The rules and interpretations mentioned herein are based on current provisions and are subject to changes in law and judicial rulings. Readers are advised to consult a qualified tax professional or financial advisor before making any tax-related decisions.
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