How to know residential status of Individual, HUF, Firm & Company under Income Tax Act

CA Aashish Ramchand

In this article I have discussed the various provisions regarding determination of the residential status of an assessee with the help of the following questions –

What is the relevance of a residential status?

There are two types of taxpayers – resident in India and non-resident in India. Indian income is taxable in India whether the person earning the income is a resident or a non-resident. Conversely, foreign income of person is taxable in India only if such person is a resident in India. Foreign income of a non-resident is not taxable in India.Residential Status & scope of total Income

Can a person be a resident in India and abroad?

It is not necessary that a person who is a resident in India cannot be a resident in any other for the same assessment year. A person may be a resident in two (or more) countries at the same time. It is therefore, not necessary that a person who is a resident in India will not be a resident in any other county for the same assessment year.

How to determine residential status of an individual? [Sec 6]

An individual may be a) resident and ordinarily resident in India (b) resident but not an ordinarily resident in India or (c) non-resident in India

To find out whether an individual is “resident and ordinarily resident” in India, the following conditions have to be satisfied:-

Basic conditions that need to be satisfied to check if an Individual is a resident in India are as follows:-

1) The person must be India in the previous year for a period of 182 days or more

2) The person is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

In the two special cases given below, residential status of an Individual shall be determined only on the basis of basic condition (1)

Special case one- It covers an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves Indian during the previous year as a member of a crew of an Indian ship. For this purpose, the requirement is not leaving India for the purpose of employment outside India but leaving India for the purpose of employment, period (employment may be in India or outside India). To put it differently the individual need not be an unemployed person. He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Alternatively he may be an unemployed person who goes outside India to take employment outside India.

Special case two- It covers an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he or either of his parents or any of his grand-parents were born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.

In these two special cases, an individual will be a resident in India only if he is in India during the relevant previous year for at least 182 days.

Additional conditions that need to be satisfied to check if a resident individual is ordinarily resident in India

1) He has been a resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year

2) He has been in India for a period of 730 days or more during the 7 years immediately preceding the relevant previous year.

In brief it can be said that an Individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions to become a resident and both the additional conditions

How do you determine if an individual is a resident but not ordinarily resident? [Sec. 6(1), (6) (a)]

An individual who satisfies at least one of the basic conditions i.e. but does not satisfy either of the two additional conditions. Please refer to the basic conditions and the additional conditions mentioned in the earlier questions. Residential Status – Am I Resident or Non-Resident?

How do you determine if an individual is a non-resident?

An individual is a non-resident in India if he satisfies none of the basic conditions. In case of non-resident, additional conditions are not relevant.

Taxability of Non Resident Indian and Benefit to Non- Residents under Income Tax Act,1961 withFAQs on Provisions useful for non-residents

How to find out the residential status of a Hindu Undivided Family [Sec. 6(2)]

A Hindu undivided family is said to be a resident in India if the control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is a non-resident in India if the control and management of its affairs is wholly situated out of India. In order to determine whether a Hindu Undivided Family is a resident or a non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is ordinarily resident.

In the above explanation “control and management” means de facto control and management and not merely the right to control or manage. Control and management is situated at a place where the head, the seat and the directing powers are situated. The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family unless the decisions concerning the affairs of the family are taken at that place. Although, it is the karta who normally has control and management of the affairs of a Hindu Undivided Family yet any other coparcener can control and manage the affairs. Therefore, the mere fact of absence of the karta does not make the family non-resident.

How do you determine if a resident Hindu Undivided Family is ordinarily resident in India?

A resident Hindu Undivided Family is an ordinarily resident in India if the karta or the manager of the family (including the successive kartas) satisfies the following two additional conditions laid down:-

1) Karta has been a resident in India in at least 2 out of the 10 previous years immediately preceding the relevant previous year.

2) The karta has been present in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

If the karta or the manager of a resident Hindu Undivided Family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.

How to determine the residential status of a firm or association of persons [Sec. 6(2)]

A partnership firm and an association of persons are said to be resident in India if the control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are however, treated as non-resident in India if the control and management of their affairs are situated wholly outside India. A firm or an association of persons cannot be ordinarily or not ordinarily resident. The residential status of the partners/ members of the firms/ association are not relevant in determining the status of the firm/ association. While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated.

How to find out the residential status of a company [Sec 6(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

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

An Indian company is always resident in India. A foreign company is resident in India only if during the previous year, place of effective management  is situated wholly in India. Conversely, a foreign company is treated as non-resident if during the previous year,place of effective management is either is wholly or partly situated out of India.  A company can never be ordinarily or not ordinarily resident in India. In case of a foreign company even the slightest place of effective management is exercised from outside India, it would be treated as a non-resident.Income Tax Benefits to Residents & Indian Companies

(Republished With Amendments)