How to determine residential status under Income Tax Act 1961?

This article covers Section 5 and Section 6 of Income tax Act, 1961 and discusses how to determine residential status under income Tax Act, 1961 and how to tax the income in the hands of the such assessee.

Residence in India – is determined by Section 6 of the Income Tax Act, 1961.

1. How To determine residential status of an individual:

Section 6(1) prescribes two tests.

An individual who fulfils any one of the following two tests (a or b) is called Resident under the provisions of this Act. These tests are:

Test A – RESIDENT

(a) If he is in India during the relevant previous year for a period amounting in all or in aggregate to 182 days or more.

OR

(b) If he was in India for a period or periods amounting in all to 365 days or more during the four years preceding the relevant previous year

AND

he was in India for a period or periods amounting in all to 60* days or more in that relevant previous year. (*182 days refer note ii)

An individual who is Resident u/s 6(1) can be subdivided into two categories

Ordinary Resident TEST B;  OR   Not ordinarily Resident Test C

Test B – RESIDENT (Ordinary Resident) -ROR

After fulfilling one of the above two tests, an individual becomes resident of India. Further to become, an ordinary resident of India an individual has to in addition to Test A fulfill both the following two conditions:

1. He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to the previous year in question.

AND

2. He has stayed in India for at least 730 days in 7 previous years immediately prior to the previous year in question.

Notes:

i. While calculating number of days for stay in India, day of departure was not included. But now as per decision of Authority for Advance Rulings, both, day of departure from India and day of arrival in India are to be counted as stay in India.

ii. For persons as mentioned below test (a) remains the same but in test (b) words ‘60 days’ have been replaced by 182 days.

For Indian citizen going abroad on a job or as a member of crew of an Indian ship

In case of an Indian citizen:

♦ Who is going outside India for a job and his contract for such employment outside India has been approved by the Central Government; or

♦ He is a member of crew of an Indian ship;

For Indian citizens and persons of Indian origin*

In case of an individual being a citizen of India, or a person of Indian origin, who being outside India, comes on a visit to India in any previous year’           

*A person shall be deemed to be of Indian origin if he or either of his parents or any of his grandparents was born in India or undivided India

Test C – RESIDENT (NOT Ordinary Resident) – “RNOR”

After fulfilling one of the above two tests i.e TEST A, an individual becomes resident of India. Further to become, Resident but NOT ordinary resident (‘RNOR’) an individual has to in addition to Test A fulfill ANY the following two conditions:

An individual who is resident u/s 6(1) Test A can claim the beneficial status of RNOR, if he can prove that:

1. He was a non-resident in India for 9 previous years out of 10 previous years preceding the relevant previous year.

OR

2. He was in India for a period or periods aggregating in all to 729 days or less during seven previous years preceding the relevant previous year.

 In Nutshell

Resident (Ordinary Resident) = Satisfying any one of two conditions given u/s 6(1) Test A + Satisfying both the additional conditions of Test B

Resident but Not Ordinarily Resident = Satisfying any one of the two conditions u/s 6(1) Test A + Satisfying any one of the additional conditions of Test C

NON RESIDENT

Under section 2(30) of the Income-tax Act, 1961 an assessee who does not fulfill any of the two conditions given in section 6(1) (a) or (b) i.e.  TEST A would be regarded as ‘Non-resident’ assessee during the relevant previous year for all purposes of this Act.

2. How to determine residential status of Companies?

The residential status of a company is to be determined on the basis of its incorporation or registration. Section 6(3) provides the following tests in this connection.

RESIDENT

A company is resident in India if:

a) it is an India company, or

b) Place of effective management ‘POEM’, during that year is in India.

In other words, the residential status of companies which are not incorporated under the corporate laws of India, would be determined by the concept of “POEM”.

Further, POEM has been defined in explanation to section 6(3) of the Act to mean the following:-

• Place where key management and commercial decisions are, in substance, made.
• Such decisions are necessary for the overall conduct of business.
• Where such decisions which are necessary for the overall conduct of business is made in India, tax residency maybe triggered

NON RESIDENT

A company shall be ‘non-resident’ if it is not resident in India during the relevant accounting year. It means that, a company whose POEM during that year is outside India, it will be non-resident company.

3. Extracts of Relevant Sections are as under:

Section 6: Residence in India

“6. For the purposes of this Act,—

 (1) An individual is said to be resident in India in any previous year, if he—

 (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

 (b) [***]

 (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

Explanation. 1—In the case of an individual,—

 (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

 (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.

Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a 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 prescribed.

 (2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

 (3) A company is said to be a resident in India in any previous year, if—

 (i) it is an Indian company; or

 (ii) its place of effective management, in that year, is in India.

Explanation.—For the purposes of this clause “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.

 (4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

 (5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.”

Section 5: Scope of total income.

“5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

 (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

 (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or

 (c) accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

 (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or

 (b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.”

4. Some Key Points are as under:

• If resident, global income will be taxable.
• If non-resident, the income of non-resident chargeable to tax has been provided under section 5(2) of the Act. As per said provision only the income which has been received or is deemed to be received in India or accrues or arise or is deemed to accrue or arise to him in India will be taxable in India. Accordingly, the income accrues or arise to him outside India during such period will not be taxable in India. Explanation 1 to section 5(2) provides that “Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.”

(Republished with Amendments carried out by Taxguru Team)