Determination of Residential Status of Individual under Income Tax Act

Introduction:

Determination of the residential status under Income Tax Act plays a vital role in to determine whether a person comes under the tax net or not. Section 6 of the Income Tax Act deals about the concept of resident for Income tax purposes. Finance Act 2020 dated 23.03.2020 amends Section 6 of the Income Tax Act. This article will throw light on the amendments to Section 6 vide Finance Act 2020 dated 23.03.2020.The said amendment will come into effect from April, 2021.

Purpose of determing the residential status

Determination of the residential status is one of the basic and important aspects to determine the nature and the scope of the income of the persons which comes under the tax net. The residential status of person can be broadly be classified into three categories such as Resident, Non Resident and Deemed Resident. The Resident is further sub classified as Resident Ordinary Resident and Non Ordinary Resident. The concept of deemed resident is introduced vide the Finance Act, 2020.For an ordinary Resident all Income is taxable in India including the income earned outside India. For a non ordinary Resident the Income earned or accrued in India is alone taxable. The resident who does not fall into the category of not ordinary resident will come under the category of resident. For Deemed Resident, income earned or accrued in India exceeding 15 lakhs is taxable. For Non- Resident income is not taxable.

When a person is Resident under Section 6 of Income Tax Act?

Residential status of an individual

An individual is said to be a resident, if, he satisfies any of the following condition:

i. If he is in India for 182 days or more vide Finance Act 2020 or

ii. If he in India for 365 days in 4 relevant previous year and 60 days or more during the relevant previous year.

Residential status of indian crew who left india

For an Indian Crew who is the Citizen of India, will be resident if he is in India for 182 days or more. This is the only condition that is needed to be satisfied.

Residential status of indian citizen/ indian origin who visits india

For Indian Citizen or Indian Origin individual who left India and visits India will be resident if the period of stay was 182 days or more. This period of 182 days is now reduced to 120 days vide Finance Act 2020 in amendment to Clause b in explanation 1 of Section 6 (1) .The second condition which must be satisfied is that the Indian Citizen /Indian Origin has income of 15 lakhs and above excluding the income from foreign source then they will fall into the category of resident .In other words Indian citizen or Person of Indian origin having income in the previous year exceeding 15 lakhs excluding the income from foreign source visits India for a period of 120days or above shall be resident as per Income Tax Act.

According to the explanation inserted by the amendment vide Finance Act 2020, “income from foreign source” means income accurse or arisen outside India except the income derived from a business controlled in or profession set up in India.

Secondary test to determine to classify the resident as ordinary resident or non ordinary resident

According to the to Section 6(6) (a) a person is said to be non ordinary resident if he is the non-resident if he 9 out of 10 in the preceding that year or during the preceding 7 year has been in India to 729 days or less. The budget proposed to change the Condition of 9 out 10 to 7 out 10 and to remove the condition of 729 days or less in preceding 7 years. However, the Finance Act passed on 23.03.2020 has not brought out any changes to implement proposed in the Finance Bill. Therefore the earlier two conditions remain the same to determine the non ordinary resident of an Individual.

Hindu Undivided Family

Any of the following conditions to be satisfied to be considered as non ordinary resident:

i. For Hindu Undivided Family whose manager has been non- resident in India in 9 out 10 years or

ii. Who is in India for a period of 729 days or less in preceding 7 years or

iii. Indian Citizen or Person of Indian origin having income exceeding 15 lakhs in the previous year excluding the foreign source of Income, who is in India for more than 120 days but less 182 days in a year is a non ordinary resident or

iv. Deemed resident is also a non ordinary resident.

Point iii and iv was brought by way of substitution to clause b of Section 6 (6) vide Finance Act, 2020.

Deemed resident

The concept of deemed resident is introduced by Finance Act 2020 by way of insertion of clause 1A to Section 6. Deemed Resident is considered to be non Ordinary Resident. According to which if all 3 conditions are satisfied then the individual is deemed to be the Resident:

i. an individual who is the citizen of India,

ii. whose income exceeds Rs 15 lakhs in the previous year other than the income from foreign source and

iii. Whose income is the not taxable in other country shall deemed to be resident in India.

Initially the budget proposal to tax the income of deemed resident whose income is not taxed in any other country gave rise to doubt that whether the tax free salary income which is earned in gulf countries or in foreign countries where no tax payable in foreign countries are subject to tax in India. CBDT clarified vide press release dated 02.02.2020 that income earned outside India by deemed resident will not be taxable unless it is derived from business or profession in India

Conclusion

The change in definition of the resident is brought to widen the tax base. The confusion which prevailed earlier when budget was announced is clarified after passing of Finance Act dated 23.03.2020.Now it has attain clarity. Indian Citizen/ Indian origin have to plan their travel stay in India limited to 120 days to not to come under the tax net. The explanation clause “income from foreign source” has clarified income earned or accrued outside India is not taxable but the income from any business or profession set up in India alone is taxable. The taxability of capital gains aspect of the income earned from sale of capital assets is not dealt for the deemed resident. Taxability of Income earned by the deemed resident

Consultant by providing online service is not dealt with. The taxability of amount exceeding 15 lakhs other than the income from foreign source is a respite to the Indian citizen/ Indian Origin visiting India as it is clarified that all their global income is not taxable in India. The amendment to Section 6 vide Finance Act 2020, has a balanced approach by giving respite to genuine Indian Citizen/Indian Origin visiting India in one hand and at the same time to bring the Persons under the tax net under the concept of deemed resident who is purposely not paying tax in any country by reason of resident domicile etc. The impact that will cause due to the changes in Section 6 can be assessed only after the implementation of amended Section 6.