Is the residential status of a person relevant for determining the taxability of the income in his hands?

Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.
Taxability of any income in the hands of a person depends on the following two things :
(1)  Residential status of the person as per the Income-tax Law; and
(2)  Nature of income earned by him.
 Hence, residential status plays a vital role in determining the taxability of the income.

What are the different classes of residential status prescribed under the Income-tax Law for an individual?

For the purpose of Income-tax Law, an individual can have any one of the following residential status:

(1) Resident and ordinarily resident in India

(2) Resident but not ordinarily resident in India

(3) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging Income-tax?

The Income-tax Law has its own set of provisions for determining the residential status of a person. Thus, while determining the residential status of a person under the Income-tax Law, the facts like Indian citizenship, Indian passport, etc., have no relevance.
From the point of view of Income-tax Law, a person will be treated as a resident in India if he satisfies the criteria specified in this regard under the Income-tax Act.

What are the different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)?

For the purpose of Income-tax Law, a HUF can have  any one of the following residential status:

(1) Resident and ordinarily resident in India

(2) Resident but not ordinarily resident in India

(3) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the HUF would be  a resident and ordinarily resident and in the next year it may become non-resident or resident but not ordinarily resident and again in the next year its status may change or may remain same.

What are the different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF?

For the purpose of Income-tax Law, a person other than an individual or a HUF, i.e., company, partnership firm, etc., can have any one of the following residential status:

(1) Resident

(2) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the taxpayer would be a resident and in the next year may become non-resident and again in the next year the status may change or may remain same.

How to determine the residential status of an Individual?

To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.

Step 1 given below will ascertain whether the individual is resident or non-resident and

step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.

Step 1: Determining whether resident or non-resident

Under the Income-tax Law, an individual will be treated a as resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions):

(1) He is in India for a period of 182 days or more in that year; or

(2) He is in India for a period of 60 days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year.

If an individual does not satisfy any of the above conditions he will be treated as non-resident in India.

Note : Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming 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.

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions:

(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

In short, following test will determine the residential status of an individual:

  • If the individual satisfy any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.
  • If the individual satisfy any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.

If the individual satisfy no conditions satisfied at step one, then he will become non-resident.

How to determine the residential status of a HUF for the purpose of the Income-tax Law?

To determine the residential status of a HUF, the first step is to ascertain whether the HUF is resident or a non-resident. If the HUF turns to be a resident, then the next step is to ascertain whether it is resident and ordinarily resident or is resident but not ordinarily resident.

Step 1 given below will ascertain whether the HUF is resident or non-resident and step 2 will ascertain whether the HUF is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the HUF turns to be a resident.

Step 1: Determining whether resident or non-resident

For the purpose of Income-tax Law, a HUF will be treated as resident in India, if the control and management of the affairs of the HUF is located (partly or wholly) in India.

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

A resident HUF will be treated as resident and ordinarily resident in India during the year if its manager (i.e. karta or manager) satisfies both the following conditions :

(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

A resident HUF whose manager (i.e. karta or manager) does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.

In short, following test will determine the residential status of a HUF :

  • If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies both the conditions specified at step 2, then the HUF will become resident and ordinarily resident in India.
  • If the control and management of the affairs of the HUF is located (partly or wholly) in India and the manager (i.e. karta or manager) satisfies none or only one condition specified at step 2, then the HUF will become resident but not ordinarily resident in India.

If the control and management of the affairs of the HUF is located wholly outside India, then the HUF will become non-resident.

How to determine the residential status of a company?

An Indian company is always resident in India, irrespective of the location of its control and management of affairs. In other words, a company incorporated in India will always be considered as resident of India.

A company other than an Indian company (i.e., a foreign company) is said to be resident in India during the year, if the control and management of its affairs for that year is located wholly in India.

How to determine the residential status of a person other than an individual, HUF and company?

Every person other than an individual, HUF and company is said to be resident in India during the year, if the control and management of its affairs for that year is located wholly or partly in India.

Which incomes are charged to tax in India in the hands of a taxpayer?

The following chart highlights the tax incidence in case of different persons:

Nature of income

Residential status

ROR (*)

RNOR (*)

NR (*)

Income which accrues or arises in India

Taxed

Taxed

Taxed

Income which is deemed to accrue or arise in India

Taxed

Taxed

Taxed

Income which is received in India

Taxed

Taxed

Taxed

Income which is deemed to be received in India

Taxed

Taxed

Taxed

Income accruing outside India from a business controlled from India or from a profession set up in India

Taxed

Taxed

Not taxed

Income other than above (i.e., income which has no relation with India)

Taxed

Not taxed

Not taxed

(*) ROR means resident and ordinarily resident.

RNOR means resident but not ordinarily resident.

NR means non-resident.

Which incomes are deemed to be received in India?

Following incomes are treated as incomes deemed to be received in India:

  • Interest credited to recognised provident fund account of an employee in excess of 9.5% per annum.
  • Employer’s contribution to recognised provident fund in excess of 12%.
  • Transferred balance in case of reorganisation of unrecognised provident fund.
  • Contribution by the Central Government or other employer to the account of the employee in case of notified pension scheme refered to in section 80CCD.

What incomes are deemed to have accrue or arise in India?

Following incomes are treated as incomes deemed to have accrued or arisen in India:

  • Capital gain arising on transfer of property situated in India.
  • Income from business connection in India.
  • Income from salary in respect of services rendered in India.
  • Salary received by an Indian national from Government of India in respect of service rendered outside India. However, allowances and perquisites are exempt in this case.
  • Income from any property, asset or other source of income located in India.
  • Dividend paid by an Indian company.
  • Interest received from Government of India.
  • Interest received from a resident is treated as income deemed to have accrued or arisen in India in all cases, except where such interest is earned in respect of funds borrowed by the resident and is used for carrying on business/profession outside India or is in respect of funds borrowed by the resident and is used for earning income from any source outside India.
  • Interest received from a non-resident is treated as income deemed to accrue or arise in India if such interest is in respect of funds borrowed by the non-resident for carrying on any business/profession in India.
  • Royalty/fees for technical services received from Government of India.
  • Royalty/fees for technical services received from resident is treated as income deemed to have accrued or arisen in India in all cases, except where such royalty/fees relates to business/profession/other source of income carried on by the payer outside India.
  • Royalty/fees for technical services received from non-resident is treated as income deemed to have accrued or arisen in India if such royalty/fees is for business/profession/other source of income carried by the payer in India.

When is a business connection said to be established?

Business connection includes a profession at connection. Business connection includes a person acting on behalf of a non-resident who performs any one or more of the following:

  • If such person has in India authority to conclude contracts on behalf of the non-resident (it will not include cases where authority is restricted to contract for purchase of goods or merchandise behalf such non-resident); or
  • If such person in India habitually maintains stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or
  • If such person habitually secures orders in India mainly or wholly for the non-resident or for non-resident under the same management.

No business connection shall be deemed to have been established, if the business is carried on through an independent broker, general commission agent or other agent (i.e., a broker or commission agent who is not working mainly or wholly for such non-resident or other non-resident under same management), provided such person is working in his ordinary course of business.

Only so much of income which accrues or arises due to such business connection is deemed to be income accruing or arising from India and not the entire income of the non-resident.

What is the objective of FEMA?

The main objective of FEMA is to facilitate external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India. FEMA deals with provisions relating to procedures, formalities, dealings, etc. of foreign exchange transactions in India. The transactions relating to foreign exchange have been classified under FEMA into two main categories, viz., (1) Current Account Transaction, (2) Capital Account Transaction.

What is capital account transaction?

As defined in section 2(e) of the FEMA, “capital account transaction” means transactions which alters the assets or liabilities, including contingent liabilities outside India, of persons resident in India or assets or liabilities including contingent liabilities, in India, of persons resident outside India and includes transactions referred to in section 6(3) of the FEMA. Transactions covered in section 6(3) of FEMA are as follows: –

  • Transfer or issue of any foreign security by a person resident in India.
  • Transfer or issue of any security by a person resident outside India.
  • Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India.
  • Any borrowing or lending in foreign exchange in whatever form by whatever name called.
  • Any borrowing or lending in rupees in whatever form or whatever name called between a person resident in India and a person resident outside India.
  • Deposits between persons resident in India and persons resident outside India.
  • Export, import or holding of currency or currency notes.
  • Transfer of immovable property outside India, other than a lease not exceeding five years by a person resident in India.
  • Acquisition or transfer of immovable property in India, other than lease not exceeding five years by a person resident outside India.
  • Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred –
  1. by a person resident in India and owed to a person resident outside India or
  2. by a person resident outside India.

Note : Section 6(3) has been omitted by Finance Act, 2015 w.e.f. a date yet to be notified.

What is current account transaction?

As defined in section 2(j) of the FEMA, “current account transaction” means a transaction other than a capital account transaction and without prejudice to the generality of the foregoing such transaction includes :–

  • Payments due in connection with foreign trade, other current business, services and short-term banking and credit facilities in the ordinary course of business,
  • Payments due as interest on loans and as net income from investments,
  • Remittances for living expenses of parents, spouse and children residing abroad, and
  • Expenses in connection with foreign travel, education and medical care of parents, spouse and children.
  • In terms of section 5 of the FEMA, Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawl is a current account transaction provided  that Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.

What are the major provisions covered in FEMA, 1999?

The major provisions of FEMA, 1999 relate to following matters :

  • Dealing in foreign exchange, etc.
  • Holding of foreign exchange, etc.
  • Current account transactions
  • Capital account transactions
  • Export of goods and services
  • Realization and repatriation of foreign exchange
  • Exemption from realization and repatriation in certain cases.
  • Provisions relating to authorised persons. i.e. authorised by RBI to deal with foreign exchange or in foreign securities
  • Power of RBI to inspect authorized person
  • Contravention and penalties
  • Adjudication and appeal
  • Directorate of enforcement
  • Miscellaneous provisions
(Republished with Amendment)

Posted Under

Category : Income Tax (20862)
Type : Articles (10801) Featured (3634)