Section 5 & 6 of the Income Tax Act, 1961 are the guiding sections for the taxability of income of any taxpayer in India. Section 5 of the Income Tax Act deals with the “Scope of Income” whereas section 6 helps in determining residential status of any taxpayer in India. Determination of the residential status under the Income Tax Act plays an important role in determining whether income of any person is taxable in India or not. In this article, we shall discuss the rules for determination of residential status of an individual taxpayer and also discuss various amendments relating to residential status made by Finance Act, 2021 & 2022.
Page Contents
- Objective of determining residential status:
- SECTION 6(6): ADDITIONAL CONDITIONS FOR RNOR/ ROR:
- If the individual satisfies any of the conditions C3 or C4, then he is said to be ‘not ordinary resident’ for that previous year, otherwise, he will be regarded as ordinarily resident
- TAXABILITY OF INCOME AS PER RESIDENTIAL STATUS:
Objective of determining residential status:
Determining the residential status of any assesse is the first and foremost task for ascertaining the taxable income of such assesse in India. As per section 6, the residential status of any taxpayer can be classified into two parts:
(a) Resident
(b) Non-Resident
In the case of a person being an Individual assesses, the Resident can be further classified as “Resident and Ordinarily Resident” (ROR) or “Resident but not ordinarily resident” (RNOR). However, in case of other persons, there are only two categories i.e. Resident and Non-Resident. SECTION 6(1): BASIC CONDITIONS FOR CLASSIFICATION AS RESIDENT
An individual is said to be resident in India in any previous year, if he:
- For that year, his period of stay in India is182 days or more (say ‘C1’) or
- For that year, his period of stay in India is 60 days or more and in the 4 previous years prior to the relevant previous year his period of stay in India is 365 days or more (say ‘C2’)
For the above purpose, period of stay in India shall include the day on which the person arrives and leaves India.
In other words, an individual is said to be resident in India, if he satisfies any of the C1 or C2. C1 is a pretty simple text. An individual has to check whether he has stayed in India during the previous year for more than 182 days or not. If he has stayed, then he is resident of India. If not, he has to proceed to check C2 to decide the residential status.
C2 stipulates two conditions to be satisfied to call an individual as resident during the previous year. First, we need to check whether the period of stay in India is 60 days or more, during the year. If the first one is satisfied, then we need to check whether period of stay in India during the preceding 4 years is 365 days or more. If both these conditions hold true, he will be considered as the resident Individual.
Where both above C1 & C2 conditions are not met, he will be considered as the non-resident during that previous year.
Further, as per the explanation to Section 6, only condition C1 shall be applicable and we need not to check for the conditions as specified in C2, which are given as below:
- Citizen of India, who leaves India in a previous year as a member of crew of an Indian Ship, or
- Citizen of India leaving India for the purposes of employment outside India, (However, after the amendment made by the Finance Act, 2020; in case of an individual whose Total Income exceeds 15 Lakh Rupees, 120 days shall be considered instead of 182 days. Citizen of India or person of Indian origin, who is engaged in any employment or Business or profession outside India, and is visiting India during the previous year.
Further, Finance Act, 2020 has also provided that where an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature. Such a provision has been inserted as it was noticed that certain individuals were using the above relaxation as tax avoidance measure and planning visit and stay in India so that they do not meet the threshold of 182 days.
SECTION 6(6): ADDITIONAL CONDITIONS FOR RNOR/ ROR:
After a person is classified is resident, we need to further test as to whether such person is regarded ordinarily resident in India (ROR) or not ordinarily resident in India (NOR).
For a person to be regarded as RNOR, following additional conditions are required to be complied with, which are as stated below:
- If he was a non-resident in India in 9 out of 10 previous years, prior to the relevant previous year (say C3) or
- Has not during 7 previous years preceding relevant previous year stays in India for 729 days or more (say C4)
If the individual satisfies any of the conditions C3 or C4, then he is said to be ‘not ordinary resident’ for that previous year, otherwise, he will be regarded as ordinarily resident
TAXABILITY OF INCOME AS PER RESIDENTIAL STATUS:
| INCOME | ROR | RNOR | NR |
| INDIAN INCOME | TAXABLE | TAXABLE | TAXABLE |
| FOREIGN INCOME
A. FROM B/P CONTROLLED FROM INDIA B. OTHERS |
TAXABLE
TAXABLE |
TAXABLE
NOT-TAXABLE |
NOT-TAXABLE
NOT-TAXABLE |
Concluding the above, it is pertinent to note residential status of a person has to be checked for each previous year and before determining the tax liability of a person, we need to first evaluate his residential status, so as to properly determine the incidence of tax upon him accruing to him from various sources.
About the Author
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.
Author Bio
when i use the tax website at https://incometaxindia.gov.in/Pages/tools/residential-status-calculator.aspx
one of the first options is to select “Indian Citizen / POI visiting India” OR “Any Other Person”. In both options, one then has to choose if one is a POI. As a Non-Indian Citizen but of Indian Origin and an Indian Resident for >10 years, which option should one choose – planning to leave India permanently and want to see what is the cutoff days so that i can be treated as a Non Resident in India in the year of departure. The results vary considerably depending on the choice of initial option. It appears that the first option of “Indian Citizen/POI” is and AND and not OR which seems a little strange.