Residential Status of an Individual – Under Income Tax Act, 1961

Dear Friends, we know that, no tax can be levied or collected in India except the authority of law. Section 4 of Income Tax Act, 1961 is the charging section gives such Authority to charge income tax. Where any central Act enacts that income shall be charge for assessment year at any rate or rates, income tax at such rate or rates shall be charged accordingly on total income of any assessee earned by him in previous year.

Please note that income of the previous year of an assessee will be taxed in next year but assessee is required to pay income tax in the year in which he has earned income i.e., in the previous year before March 31^st. An assessee is required to pay Advance Tax periodically after assessing his total income during previous year. In some cases, income of am assessee is taxed in the same year in which he has earned that income.

In Indian the tax liability of an assessee is depends on his residential status. We know that total income of a resident and non-resident is differ and hence incidence of tax is also differing.

BASIC RULES FOR DETERMINING RESIDENTIAL STATUS OF AN ASSESSEE

1. The residential status of each person should be determined seperately. There are different rules to determine residential status of Individual/HUF and other persons such as Partnership /Companies etc.;

2. The residential income always determined for the previous year, whose income we are going to tax;

3. Residential Status of persons should be determined each year, since it may be possible that his/its residential status may be change in next previous year;

4. If an assessee is resident in India in previous year relevant to assessment year in respect of any source of income, he shall be deemed to be resident in India in previous year relevant to assessment year all other sources of income;

5. A person may be resident of more than one country for any previous year;

6. There is difference between residential status and citizenship. A person may be national/citizen of India in a previous year and at the same time he may not be an Indian resident or vice-versa;

RULES FOR DETERMINING THE RESIDENTIAL STATUS OF AN INDIVIDUAL [SECTION6(1)];

An individual may either be a;

1. Resident in India or;

2. Non-resident in India.

We have to further determine;

INDIVIDUAL
RESIDENT		NON-RESIDENT
ORDINARILY RESIDENT	NON-ORDINARILY RESIDENT

1. AN INDIVIDUAL IS SAID TO BE RESIDENT IN INDIA; when he satisfies any one of below mentioned conditions;

(i)	He is in India for a period or periods amounting in all to 182 or more in the relevant previous year; or
(ii)	He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during 4 ( four) previous years immediately preceding the relevant previous year.

Note:

i) Please note that continuous stay in India for 182 days or more of 60 days does not required. A person may visit India on many occasions during relevant previous year, his period of stay in India in each visit will be considered.

ii) It is also not necessary that the stay should be only at one place in India. He may stay in different cities for different periods.

iii) Please note that two dates, when a person enters India and the date when a person leaves India will be considered his stay in India for 182 days or more in India.

iv) In some cases, his stay in India shall be calculated on hourly basis.

v) The place and purpose of a person staying in India is not important. For tax purpose his presence in India is important. A person’s presence in territorial waters of India would also regard as his presence in India.

EXPLANATION 1(a): There are two exceptions to the above rules

(i)	In case of an Individual, who is a citizen of India and who leaves India in any previous year for the purpose of employment outside India, the period of 60 days in conditions NO. 2 shall be substituted with 182 days i.e., he shall be resident in India if he stays at least 182 days during the relevant previous year in which he leaves India.
(ii)	If a citizen of India leaves India as a member of crew of Indian Ship, then he shall not be resident unless he has stayed in India more than 182 days in the relevant previous year.

Note:

i) Please note that requirement of Explanation 1 is not leaving India for employment but it is for the purpose of employment outside India. It means that a person should be an employed person, while he is leaving India and he is leaving India for the purpose or in relation to his existing employment outside India.

ii) Return to India after resigning from job cannot be said as visit to India, if he stays in India after returning 182 days or more and also satisfying condition that he resides in India for more than 365 days in previous four years. He will be considered as resident of India.

iii) Section 6(1)(a) provides that where a non-resident employee of a foreign company visits India for the first time and stays for more than 182 days in the Financial year and continues to receive salary from the foreign employer outside India, subsequently takes up employment with an Indian Company and starts drawing salary in India and his period of employment with Indian Company is less than 182 days , he is not treated as resident as the period of his stay beginning with the date on which the source of Income in India comes into existence and ending of the financial year is less than 182 days although his total stay in India exceeds 182 days in the relevant financial year.

EXPLANATION 1(b):

(1)

In case of an Individual, who is a citizen of India or is a person of Indian Origin, who being outside India, comes on a visit to India in previous year the period of 60 days in above condition under Section 6(1) will be substituted for 182 days i.e., he shall not be deemed to be resident of India unless he stays in India for at least 182 days in relevant previous year.

EXPLANATION 2:

In case of an individual being citizen of India and member of the crew of foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be determined. Please Note That:  for computing the period or periods of stay in India, in respect of an eligible voyage, the period beginning on the date entered into Continuous Discharge Certificate in respect of joining of the ship by the said individual for the eligible voyage and ending on the date entered in respect of such Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage shall be excluded.

2. AN INDIVIDUAL IS SAID TO BE RESIDENT AND ORDINARILY RESIDENT OF INDIA; [ SECTION 6(6)] an individual shall be not ordinarily resident in India if he satisfies any one of the following two conditions;

(i)	He has been a non-resident in India in 9 out of 10 previous years immediately preceding the relevant previous year; OR
(ii)	He has been in India for a period of 729 days or less in 7 previous year immediately the relevant previous year.

 NOTE: TO BE CALLED AS ORDINARILY RESIDENT OF INDIA AN INDIVIDUAL HAS TO SATISFY BELOW MENTIONED TWO ADDITIONAL CONDITIONS ALSO;

(i)	He has been a resident in India at least in 2 out of 10 previous years immediately preceding the relevant previous year; and
(ii)	He has been in India for a period of 730 days or less in 7 previous year immediately the relevant previous year.

HOW TO DETERMINE THAT A PERSON IS ORDINARILY RESIDENT OF INDIA;

STEP 1:  First determined whether a person is resident of India or not by checking conditions of Section 6(1); when he satisfies any one of below mentioned conditions;

(i)	He is in India for a period or periods amounting in all to 182 or more in the relevant previous year; or
(ii)	He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during 4 ( four) previous years immediately preceding the relevant previous year.

STEP 2:  when his residential status of confirmed from one then check whether he is in compliance with below mentioned both conditions or not;

(i)	He has been a resident in India at least in 2 out of 10 previous years immediately preceding the relevant previous year; and
(ii)	He has been in India for a period of 730 days or less in 7 previous year immediately the relevant previous year.

NOTE:

1. If an individual satisfies any conditions mentioned in Section 6(1) and satisfy both conditions mentioned in Section 6(6) [ Step 2], the he will be considered as Resident and Ordinarily Resident in India in relevant previous year.

2. If an individual satisfies one of the basic conditions [ Step 1] and any one of conditions mentioned in Section 6(6) of the Income Tax Act,1961, he will be considered as Resident but not ordinarily resident of India in relevant previous year.

SUMMARY:

INDIVIDUAL
RESIDENT		NON-RESIDENT
ORDINARILY RESIDENT If he satisfies one of basic conditions under Section 6(1) [Step 1] and Two Additional conditions given in Section 6(6) [Step 2] of the Income Tax Act, 1961.	NON-ORDINARILY RESIDENT If he satisfies one of basic conditions under Section 6(1) [Step 1] and any one Additional condition given in Section 6(6) [Step 2] of the Income Tax Act, 1961.	He satisfies non-of the basic conditions of Section 6(1) [Step 1] of the Income Tax Act,1961 and additional conditions are not relevant in this case.

EXCEPTION OF ABOVE RULES

1. SECTION 6(1A): This exception is given under Section 6(1A) read with Section 6(6)(d) and applicable from AY 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following three conditions;

(i)	He is an Indian Citizen;
(ii)	His total income (other than the income from foreign sources) exceeds Rs.15,00,000/-the relevant previous year; and
(iii)	He is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

Note: This exception is not applicable to a foreign citizen even he is of Indian Origin.

2. SECTION 6(6)(d): read with Explanation 1(b) of Section 6(1) and applicable from AY 2021-22; Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following three conditions;

(i)	He is an Indian Citizen or a person of India Origin;
(ii)	His total income (other than the income from foreign sources) exceeds Rs.15,00,000/-the relevant previous year; and
(iii)	He comes to India on a visit during the relevant previous year; and
(iv)	He is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.

Note:

i) in this case the period of stay in India i.e., 182 days or more has been reduced to 120 days or more for an individual satisfying above conditions.

ii) Income from foreign source means income which accrues or arise outside India (except income derived from a business controlled in or profession set up in India).

CONCLUSION:  through above write up we understand that the residential status of an individual is important for taxation purpose in India. Whole income of a non-resident is not taxable in India but all income of a resident and ordinary resident is taxable, even though he has earned income or received income from foreign sources in relevant previous year. The presence of an individual is important for taxation purpose not his purpose and motive. A person frequently visiting abroad may schedule his travel so that he can save taxes in India. He has to plane his visit so than total period of stay in India does not exceed in any case more than 182 days (there are some exceptions provided from AY 2021-22).

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Disclaimer:  The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.