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.

Tyoe of Residental Status

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.

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11 Comments

  1. vivek says:

    i am Indian origin and senior citizen and came in India on 19th Nov 2019 till date what would be my resident status for fy 2019-20 and 2020-21 ? and i am holding two property in India and i want sell one out of them. whether buyer can deduct only .75 % or they need to deduct 22.88% pl advice

  2. Priyanka says:

    A West Indian,came to India for the 1st time on 10jan 2016 and left for Australia on 15sep 2016.he again came to India on 1may 2019 to leave for south Africa on 15 July 2019.wht is his residential status for 2019-2020??

  3. Priyanka says:

    Mr.p went to west Germany for diploma course on 5th august 2019 and came back to India on 25th February 2020 .he had never been out of India before .wht is the residential status for yr ending 31st march??

  4. Saibal Mitra says:

    3rd attempt.
    I am an OCI. From your explanation, I am drawing the following conclusion: If my stay in India => 120 days AND my income from Indian sources => 15L => I am RESIDENT. If my Indian income < 15L, I am a NON-RESIDENT, no matter how long I stay in India. Something wrong somewhere! Comments, please. Thank you.

    1. Gayathrisankaran says:

      Sir,
      15 lakhs concept is applicable only for determination of deemed resident.
      The concept of deemed resident was introduced by Finance Act 2020 by way of insertion of clause 1A to Section 6.If an individual is not taxable in any other country due to the reason of residence , domicile etc, if he satisfies all 3 conditions then the individual is deemed to be the Resident and will be brought under tax net.The condition are as follows:

      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.

      Hope your doubt is cleared.

  5. Saibal K. Mitra says:

    Something got chopped off. Resending.
    I am an OCI. From your explanation, I am drawing the following conclusion:
    My stay in India => 120 days AND my income from Indian sources => 15L => I am RESIDENT.
    Otherwise, I am NON-RESIDENT.
    That means, if my Indian income < 15L, I am a NON-RESIDENT. if I live in India 120 days..
    Something wrong somewhere! Comments, please. Thank you.

  6. Saibal K. Mitra says:

    I am an OCI. From your explanation, I am drawing the following conclusion:
    My stay in India => 120 days AND my income from Indian sources => 15L => I am RESIDENT.
    Otherwise, I am NON-RESIDENT.
    That means, if my Indian income < 15L, I am a NON-RESIDENT. if I live in India 120 days.
    Something wrong somewhere! Comments, please. Thank you.

  7. Abdul Latheef says:

    A nor resident Indian, has 20 lacs in come earned in India, every year and is filing the returns for the last 5 years and paying taxes. he has stayed in india for only 50 days, last year. pl explain the tax structure
    important question – the income earned outside india – to be included while filing or not?

    1. Gayathrisankaran says:

      For the Financial year 19-20 you will be non resident and will not be liable to pay tax in the capacity of individual.
      From FY 20-21 only deemed resident concept is applicable.
      Tax Structure
      Ordinary Resident-All income including global income taxable.However can avail Double Taxation avoidance treaty benefit if India had entered the treaty with that particular country.
      Non Ordinary Resident- Income accrued or earned in India alone taxable
      Deemed Resident- income exceeding 15 lakhs from business/profession set up in India Taxable.
      Non resident- not taxable.
      Classification of the resident to which category you belong depends on facts of your case.

  8. Ganesh says:

    Hi Sir/ Madam,
    I went uk in November 2017 and came back with intention to stay permanently stay in India on 5th March 2020.(I never visited India in between)

    What will be my residential status for financial year 2019-2020?

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