Home, Abroad or Both? The Tax Implications of Residential Status in India

1) Introduction:

Imagine Riya, an Indian software engineer. She works in Bengaluru for five months and then receives an onsite opportunity in Dubai for the remaining part of the financial year. Her Indian salary is credited to her bank account in India, while her Dubai salary is credited abroad. As the financial year ends, Riya finds herself puzzled.

Should she pay tax in India? Should she pay tax in Dubai? Or is she required to pay tax in both countries? This very confusion introduces us to the foundational principles of taxation under the Income Tax Act, 1961. Tax is a compulsory financial charge imposed by the government for public welfare and development. Under this Act, a person who is liable to pay tax is called an assessee and “income” is not limited to salary alone as it includes rent, interest, business profits, capital gains, and even certain gifts. Once a person earns income that falls within the scope of the Act, they become an assessee and are required to determine how much of that income is taxable in India. But here is the crucial point: Tax liability does not depend on citizenship but it depends on residential status. Residential status acts as the gateway that decides the scope of income taxable in India. It answers the fundamental question:

Is India entitled to tax only the income which is earned within its territory, or the individual’s entire global income? Thus, before calculating tax, before claiming deductions, and before filing returns, the first and most decisive step for someone like Riya is to determine her residential status for that financial year. Only then can the true extent of her tax liability be understood.

2) Relevance of Residential Status:

Residential status is the foundation upon which the entire structure of income taxation is built under the Income Tax Act, 1961. This is because residential status defines the scope of total income that India has the legal authority to tax.

2.1) Indian and Global Income: It determines whether a person will be taxed only on income earned or received within India, or whether income earned outside India may also fall within the Indian tax net. Thus, two individuals earning the same amount globally may face completely different tax liabilities in India solely because of their residential classification.

2.2) Avoid Double Taxation: Further, residential status plays a crucial role in addressing issues of international taxation and double taxation. In cases where income is taxed in more than one country, residential status helps determine eligibility for relief under Double Taxation Avoidance Agreements (DTAA) and the availability of foreign tax credits. It also significantly affects compliance obligations, such as the requirement to disclose foreign assets, report overseas bank accounts, and fulfill specific return filing conditions. Importantly, residential status is not permanent; it is determined separately for each financial year based on the individual’s physical presence in India.

3) Different Taxable entities: Concept of Asseessee

Under the Section 2(7) of Income Tax Act, 1961, the term assessee refers to a person who is liable to pay tax or against whom any proceeding under the Act is taken. The Act recognizes the following taxable entities (persons), all of which may become an assessee:

• Individual
• Hindu Undivided Family (HUF)
• Company
• Firm
• Association of Persons (AOP)
• Body of Individuals (BOI)
• Local Authority
• Artificial Juridical Person

Residential Status of assesse: The residential status of the assessee is determined for each previous year. This status is crucial because it decides whether the assessee will be taxed only on income arising in India or on global income.

4) Section 6 of Income Tax Act:

Section 6 of the Income Tax Act, 1961 deals with the determination of residential status of a person for income tax purposes. The importance of Section 6 lies in the fact that tax liability in India does not depend on citizenship or nationality, but on residential status. This section provides the legal criteria to determine tax liability based mainly on physical presence in India (in the case of individuals) and the place of control and management (in the case of other entities). Since residential status determines the scope of income taxable in India: whether only Indian income or global income will also be taxable?  Section 6 acts as the foundation for calculating total income under the Act. It must be applied separately for each previous year, making it a crucial starting point in determining any assessee’s tax liability.

4.1) Classification of residential status of an individual under section 6

Under Section 6 of the Income Tax Act, 1961, the residential status of an individual is determined in two stages. First, we check whether the person is Resident or Non-Resident. If the individual qualifies as a Resident, the second step is to determine whether they are Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR/NOR).

4.1.1) ROR: If a person is Resident and Ordinarily Resident (ROR) then his global income shall also be taxable in India along with income earned in India.  An individual is treated as Resident in India if he/she satisfies any one of the following basic conditions:

Example: Sneha has been residing in India continuously for the past several years. During the relevant previous year, she stayed in India for more than 182 days and also satisfies the additional residential conditions relating to earlier years. She earns:

• Consultancy income from a client in India
• Rental income from a property she owns in Australia

 Since she qualifies as a Resident and Ordinarily Resident (ROR), both her Indian consultancy income and her Australian rental income (global income) are taxable in India.

4.1.3) Exceptions to basic 60 day Rule: Under Section 6(1) of the Income Tax Act, 1961, the normal condition includes stay of 60 days in the relevant previous year. However, this 60-day limit is extended to 182 days in the following special cases:

Case1: Where an Indian citizen leaves India during the previous year for the purpose of employment outside India, or as a member of the crew of an Indian ship, the 60-day condition is substituted with 182 days. The expression “for the purpose of employment” is interpreted broadly. The individual need not be unemployed at the time of leaving; even a person already employed in India who leaves on a foreign assignment qualifies. This position has been clarified in British Gas India (P.) Ltd., In re and K. Sambasiva Rao v. ITO. In such cases, the individual will be treated as resident only if his stay in India during the previous year is 182 days or more.

Case2: Where an Indian citizen or a Person of Indian Origin (PIO) comes to India on a visit during the previous year, the 60-day condition is again replaced by 182 days. A person is regarded as of Indian origin if he, or either of his parents or any of his grandparents (maternal or paternal), was born in undivided India. Accordingly, such a person will be treated as resident only if his stay in India during the relevant previous year is 182 days or more.

4.1.3) (RNOR/NOR): If a Resident individual does not satisfy any one or both of the additional conditions mentioned above, they are classified as Resident but Not Ordinarily Resident (RNOR/NOR). The global income in case of NOR shall not be taxable and only income earns in India is taxable. According to Section 6(6), a person is RNOR if:

Example: Meera works in Singapore and visits India occasionally. During the relevant previous year, she stayed in India for only 120 days and does not satisfy the additional stay conditions under Section 6 of the Income Tax Act, 1961. Therefore, she is treated as a Non-Resident (NR). She earns:

• Rent from a house property in Chennai
• Salary for her job in Singapore

In this case, the rental income from Chennai is taxable in India, as it arises in India. However, her Singapore salary, earned and received outside India, is not taxable in India since she is a Non-Resident.

4.1.4) (NR): If the above conditions are not satisfied then the person is considered as Non- Resident. If an individual is classified as a Non-Resident (NR) under Section 6 of the Income Tax Act, 1961, the scope of taxation in India is restricted. In such cases, India has the authority to tax only the income that is received, deemed to be received, accrued, or arisen in India during the relevant previous year. Income earned and received outside India, which has no connection with India, does not fall within the Indian tax net. Therefore, a Non-Resident is liable to tax only on Indian-sourced income and not on global income.

4.2) Residential Status of Hindu Undivided Family

The residential status of a Hindu Undivided Family (HUF) is determined under Section 6(2) and Section 6(6) of the Income Tax Act, 1961.

According to Section 6(2): A HUF is considered resident in India in any previous year unless the control and management of its affairs is situated wholly outside India during that year. This means that if even a part of the control and management is exercised from India, the HUF will be treated as resident. Only when the entire control and management is completely outside India will the HUF be regarded as non-resident. Once a HUF is classified as resident.

According to Section 6(6): It further determines whether it is Resident and Ordinarily Resident or Resident but Not Ordinarily Resident. For this purpose, the residential history of the Karta (manager) becomes relevant. If the Karta has been non-resident in nine out of the ten preceding previous years, or has stayed in India for 729 days or less during the seven preceding previous years, the HUF will be treated as Not Ordinarily Resident. Otherwise, it will be treated as Resident and Ordinarily Resident.

4.3) Residential Status of Firm and Association of Persons

The residential status of a Firm and an Association of Persons (AOP) is determined under Section 6(2) of the Income Tax Act, 1961. A firm or AOP is treated as resident in India unless the control and management of its affairs is situated wholly outside India during the relevant previous year. If even part of the control and management is exercised in India, the entity will be considered resident. Unlike individuals and HUFs, firms and AOPs are not further classified into ordinarily resident or not ordinarily resident; they are simply categorized as resident or non-resident based on the place of control and management.

4.4) Residential Status of Company

The residential status of a company is determined under Section 6(3) of the Income Tax Act, 1961. A company is treated as resident in India if it is incorporated in India, or if its Place of Effective Management (POEM) during the relevant previous year is in India. POEM refers to the place where key management and commercial decisions are made. Thus, residency depends on the location of effective management, not merely the place of incorporation. A company is non- resident when it’s control and management is carried wholly outside India.

4.5) Residency of Every Other Person

Under Section 6(4) of the Income Tax Act, 1961, entities other than individuals and HUFs are treated as resident in India unless the control and management of their affairs is situated wholly outside India during the relevant previous year. In simple terms, if key managerial and strategic decisions are taken from India, the entity will be considered resident. Only when the entire control and management is completely outside India it will be treated as non-resident.

4.6) Uniform Residential Status

Section 6(5) clarifies that residential status applies to the person as a whole for the entire year. If a person is resident in respect of one source of income, they will be treated as resident for all sources of income for that year. In short, residential status cannot vary for different incomes; it remains the same for the whole previous year.

5) Judicial Interpretations governing residential status:

Annamalai Chettiar v. ITO, [1958] 34 ITR 88

In this case the Madras High Court held that the mere existence of a family house in India, or the residence of some members (including the Karta) in India during the relevant previous year, does not by itself establish that the control and management of the HUF’s affairs is situated in India. The Court emphasized that the decisive factor is the actual place where key decisions concerning the affairs of the HUF are taken. Likewise, the temporary absence of the Karta from India does not automatically render the HUF non-resident. The residential status must be determined based on the location of effective control and management, and not merely on physical presence.

CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC).

The Supreme Court clarified that the expression “control and management” refers to de facto (actual) control and management, and not merely the legal right or power to control. Thus, for determining residential status, what is relevant is where the control is actually exercised in practice, and not where the authority theoretically exists. In other words, the focus is on the real and effective management of affairs, not on formal or nominal control. Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities.

 Rai Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.).

In this case the court held that whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities.

 V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168,

The Supreme Court held that section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them.

Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC)

In this case the court held that the burden of proving that an individual or a company is resident in India lies on the department.

Conclusion:

Residential status under the Income Tax Act, 1961 forms the cornerstone of determining tax liability in India, as it defines whether only Indian-sourced income or an assessee’s global income will be subject to taxation. Through Section 6 and its judicial interpretation, the law emphasizes substance over form while focusing on actual physical presence and real control and management rather than mere technicalities. In a globalized era where individuals and businesses frequently cross borders, correctly determining residential status is not just a statutory requirement but a practical necessity to ensure compliance, avoid double taxation, and accurately assess the scope of total income.

References:

1) Income Tax Act, 1961.

2) Section 6, Income Tax Act, 1961 – Residential Status.

3) Annamalai Chettiar v. ITO, (1958) 34 ITR 88 (Mad).

4) CIT v. Nandlal Gandalal, (1960) 40 ITR 1 (SC).

5) Rai Bahadur Seth Teomal v. CIT, (1963) 48 ITR 170 (Cal).

6) VR. N.M. Subbayya Chettiar v. CIT, (1951) 19 ITR 168 (SC).

7) Moosa S. Madha & Azam S. Madha v. CIT, (1973) 89 ITR 65 (SC).

8) Principles of Taxation Law- Dr. Neha Pathakji

9) Taxmann’s Direct Taxes Law & Practice – Ravi Chhawchharia & A.J. Narang.