INTRODUCTION
Taxation is a crucial instrument for fostering India’s economy, as it provides the government with necessary revenue for public welfare, infrastructure development, social security, and overall economic growth. Beyond being a financial tool, taxation also plays an important role in wealth distribution and reducing economic disparity. Within this framework, income tax serves as a key source of direct tax revenue. However, in India, the levy of tax on income is not determined solely by the source of income or the nationality of the taxpayer. Instead, it is closely linked to the concept of residential status under the Income-tax Act, 1961.
The residential status of an assessee has a significant impact on the scope of total income chargeable to tax. Depending on the status, the liability may either be restricted to income generated within India or extend to global income. Hence, understanding the concept of residential status is critical, as it directly influences the tax obligations of individuals, companies, and other entities. This article discusses the legal framework for determining residential status and its impact on the incidence of taxation in India.
Firstly, we will understand the meaning of the residential Status.
RESIDENTIAL STATUS
The term residential status is not specifically defined in the Income Tax Act, 1961. Instead, Section 6 of the Act provides certain criteria to determine it. Residential status refers to the classification of a taxpayer according to the duration and nature of their stay in India during a particular financial year. The residential status of an individual is determined separately for each financial year, depending on the total number of days spent in India. In simple terms, it indicates the place where a person has been living during that period. For instance, an Indian citizen may be treated as a resident either in India or in another country where they stay. Thus, the key factor in deciding residential status is the person’s actual presence in a particular place.
Under the Income Tax Act, the concept of residential status carries different implications. A person may hold Indian citizenship but still not qualify as a resident, while another individual without Indian citizenship may still be treated as a resident of India. In both cases, tax liability arises only after the residential status is established, as it directly determines the scope and incidence of taxation.
IMPORTANCE OF RESIDENTIAL STATUS
As per Section 4 of the Income-tax Act, 1961, income tax is levied on the income of the previous year at the rate determined for the assessment year, immediately succeeding the previous year, as per the Annual Finance Act passed by the parliament every year in February. A person’s tax liability is decided by their residence in India in the preceding year. An assessee’s residence status may change year to year, ranging from resident to non-resident, that is why the clear identification of residency status is important.
CATEGORIES OF RESIDENTIAL STATUS
According to Section 5 of the Income-tax Act, the scope of a person’s total income is determined with reference to their residence in India during the previous year. On the basis of residential status, individuals and HUFs are classified into three distinct categories:
1.A resident and ordinarily resident (ROR)
2. A resident but not ordinarily resident (RNOR)
3. A non-resident (NR)
For the purpose of applying the relevant provisions, assessees are categorized into four groups:
i) Individuals
ii) Non-company plural entities such as Hindu Undivided Families (HUFs), firms, or other associations of persons
iii) Companies
iv) Every other person
Rules for Determining Residential Status
Separate rules exist for determining the residential status of each category of assessee. The tests applicable to individuals are provided under Section 6(1), those for Hindu Undivided Families, firms, or associations of persons are specified in Section 6(2), the rules for companies are contained in Section 6(3), while the determination for every other person is governed by Section 6(4).
RESIDENT AND ORDINARILY RESIDENT (ROR)
The residential status of an individual is determined under Section 6(1) and Section 6(6)(a) of the Income-tax Act. Section 6(1) lays down two basic conditions, while Section 6(6)(a) specifies two additional conditions. An individual will be regarded as a Resident in India if they satisfy at least one of the basic conditions along with both of the additional conditions.
Part I – Basic Conditions
For determining the residential status of an individual under Section 6(1), the following basic conditions apply:
i) The individual should be physically present in India for 182 days or more during the relevant previous year, or
ii) The individual should be in India for at least 60 days (182 days in certain special cases) during the relevant previous year and for a total of 365 days or more during the four years immediately preceding the relevant previous year.
Exceptions to the Basic Conditions (Section 6(1)(c))
a) In the case of an individual who is a Citizen of India, if they leave India during the previous year either as a member of the crew of an Indian ship or for employment outside India, then basic condition (ii) will apply only if they are present in India for 182 days or more, instead of 60 days.
b) In the case of an individual who is either a Citizen of India or a person of Indian Origin, if they are already residing outside India and return on a visit to India during the previous year, then basic condition (ii) will be applicable only when they are present in India for at least 182 days, instead of 60 days.
Part II – Additional Conditions [Section 6(6)(a)]
a) The individual must have been a resident in India for at least 2 out of the 10 years immediately preceding the relevant previous year, and
b) The individual must have been in India for a total period of 730 days or more during the 7 years immediately preceding the relevant previous year.
Example:
Consider Mr. Rahul Sharma, who is an Indian resident. In October 2023, he moved to a foreign country. During the financial year 2023–24, he had already spent 250 days in India, which is well above the required 182 days. Moreover, his total stay in India during the previous 7 financial years is more than 730 days. Since both conditions are fulfilled, Mr. Rahul Sharma qualifies as a Resident and Ordinarily Resident (ROR) and is eligible to pay tax in India.
Case: Arvind Singh Chauhan, Gwalior vs. ITO (ITAT Agra), I.T.A. No.: 319 and 320/Agr/2013, Dated: 14/02/2014
The assessee, an individual, was employed with Executive Ship Management Pte. Ltd., Singapore and also earned pension income from the Indian Army along with bank interest in India. His case was taken up for scrutiny, and the Assessing Officer (AO) questioned why the salary received from the Singapore company for services rendered as a ship crew member should not be taxed in India. The AO argued that under Section 6(5), if a person is considered a resident in relation to one source of income, they must be treated as a resident for all other income sources as well.
It was however held that pension and interest income are taxable in India irrespective of residential status since both accrue and are received in India. For non-residents, only income that accrues, arises, or is deemed to arise/received in India can be taxed. Hence, the AO’s assumption that the assessee’s acceptance of taxability of pension and interest income automatically made him a “resident” for all sources of income was incorrect.
DEEMED RESIDENT OF INDIA (Section 6(1A))
The Finance Act, 2020 introduced a new provision regarding the incidence of tax and residential status for Indian citizens who are not liable to pay tax in any other country. Under this amendment to the Income Tax Act, 1961, such individuals can be treated as “Deemed Residents” of India for a particular financial year, even though they would otherwise be considered non-residents.
This rule applies when:
- The individual’s total income in India exceeds ₹15,00,000 during the financial year (excluding income from foreign sources), and
- The person is not taxed in any other country because of domicile, residency, or similar reasons.
RESIDENT NOT ORDINARILY RESIDENT (Section 6(6)(a))
In Indian taxation, the category of Resident but Not Ordinarily Resident (RNOR) applies only to individuals under the Income Tax Act, 1961. This status is given to those who qualify as residents of India but do not meet the criteria to be treated as Ordinarily Resident.
Once a person is determined to be a resident, the next step is to check whether they fall under the Ordinary Resident or RNOR category. Section 6(6) provides specific rules for this classification. An individual is first considered a resident if they meet any one of the following basic conditions:
1.They stay in India for 182 days or more in a financial year; or
2. They stay in India for at least 60 days in a financial year and for 365 days or more during the 4 preceding financial years.
However, even after qualifying as a resident, a person may be treated as a Resident but Not Ordinarily Resident (RNOR) if they satisfy any one of the following conditions:
1.The individual has stayed in India for 730 days or less during the 7 preceding financial years; or
2. The individual has been a resident of India for not more than 2 out of the 10 preceding financial years.
Example:
Suppose Mr. Dushant Mehta, in the Financial Year 2023–24, stayed in India for 192 days, thereby fulfilling the first basic condition of residency. However, during the period from 1st April 2016 to 31st March 2023 (the 7 years immediately preceding FY 2023–24), he did not stay in India for more than 730 days.
In this situation, Mr. Dushant Mehta will be classified as a Resident but Not Ordinarily Resident (RNOR).
Case: Jayram Rajgopal Poduval vs Assistant Commissioner Of Income(2008) 112 TTJ (Mumbai) 923
In this case, the assessee claimed the status of ‘Resident but Not Ordinarily Resident (RNOR)’ to seek exemption on interest earned from fixed deposits under Section 10(15)(iv)(fa) of the Income Tax Act. The Court emphasized the interpretation of Section 6(6), stating that in order to qualify as an RNOR, an individual must first satisfy either of the basic conditions under Section 6(1) and then fulfill at least one of the additional conditions laid down in Section 6(6). Since the assessee satisfied both sets of conditions, the Court recognized him as a Resident but Not Ordinarily Resident (RNOR) and allowed the exemption.
NON-RESIDENT (Section 2(30))
A taxpayer who does not satisfy the conditions for being classified as a Resident or a Resident but Not Ordinarily Resident (RNOR) is treated as a Non-Resident (NR) under Indian tax laws. In the context of taxation, a non-resident is an individual or entity that is not considered a resident for tax purposes in India or any particular jurisdiction.
Determining residential status is important because it defines the scope of income liable to tax. For non-residents, only the income that is earned, accrued, or received in India is taxable. Thus, their global income is not subject to tax in India.
An individual will be regarded as a Non-Resident in India if they meet the following conditions:
1.Their stay in India during the relevant financial year is less than 181 days; and
2. Their total stay in India is less than 60 days in the financial year; or
3. Even if their stay in India is 60 days or more in a financial year, it must not exceed 365 days during the 4 preceding financial years.
In short, if an individual does not meet the residency criteria laid down under the Income Tax Act, they are classified as a Non-Resident, and their tax liability in India is limited only to income sourced within the country.
Example:
For instance, consider the case of Mr. Arjun, an Indian citizen employed in Canada, who visited India for only 90 days during the Financial Year 2023–24. In the preceding four financial years, i.e., from 2019–20 to 2022–23, his total stay in India amounted to 200 days. Since his stay in India during 2023–24 was less than 182 days and his cumulative stay in the preceding four years was also below 365 days, he does not qualify as a Resident or as a Resident but Not Ordinarily Resident (RNOR). Accordingly, Mr. Arjun is categorized as a Non-Resident (NR) for the Financial Year 2023–24.
CONCLUSION
Residential status under Indian tax law depends solely on the number of days an individual stays in India, not on citizenship, domicile, or place of birth. An Indian citizen may be a non-resident, while a foreign citizen can qualify as a resident if the prescribed conditions are met. A resident is taxed on global income, whereas a non-resident is taxed only on Indian-sourced income. Since residential status is determined each financial year, it may change annually, making it essential for taxpayers to reassess their position to understand their tax liability accurately.
CITATION
- K. Chaturvedi and S.M. Pithisaria, INCOME TAX LAW 981 (2020).
- Arvind P Datar (ed.), Kanga & Palkhivala’s THE LAW AND PRACTICE OF INCOME TAX 357 (2020).
- Circular No. 2 of 2021, Residential status of certain individuals under Income Tax Act, 1961 (CBDT, DoR, MoF, GoI 3 Mar. 2021). 74 CIT v. B.K. Dhote (1967) 66 ITR 457 (SC) (India); Moosa S. Madha & Azam S. Madha v. CIT (1973) 89 ITR 65 (SC) (India).
- Jayram Rajgopal Poduval vs Assistant Commissioner Of Income(2008) 112 TTJ (Mumbai) 923
- Arvind Singh Chauhan, Gwalior vs. ITO (ITAT Agra), I.T.A. No.: 319 and 320/Agr/2013, Dated: 14/02/2014
- TAXGURU, History and evolution of Income Tax Act in India (Aug. 9, 2020) available at https://taxguru.in/income-tax/history-evolution-income-tax-act-india.html
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