An individual’s residential status has a direct bearing on his tax liability. Tax liabilities of two individuals whose incomes are identical but residential status are different, will not be the same. This article deals with the concept and relevance of residential status for an individual assessee in India by focusing on following two questions:
What is residential status?
Why residential status?
We will understand the above two aspects in detail here and cover determination of residential status and tax planning with respect to it in subsequent articles.
What is Residential Status?
Residential status of an assessee is used to determine the scope of his total income that will be chargeable to tax. An individual’s residential status as different from citizenship, is determined for every previous year in the relevant Assessment Year on the basis of his stay in India during the previous year. In this regard, following points should be kept in mind:
- An individual can have same residential status in more than one country.
- Citizenship and residential status are different from each other. A citizen of India may or may not be a resident of India.
- Residential status is calculated for every previous year in succeeding Assessment Year. An individual who is resident in an assessment year may not be resident in next assessment year.
- Residential status of an Individual determines chargeability of his income.
According to Sec 6(1)Amended, the residential status of an individual can be:
- Resident and Ordinarily Resident (R&OR)
- Resident and Not-Ordinarily Resident (R&NOR)
- Non- Resident (NR)
Why residential Status?
Total income of an individual assessee is determined on the basis of his residential status. This can be better understood with the help of following table:
| Source of Income | Chargeable for | ||
| Resident and Ordinarily Resident | Resident and Not Ordinarily Resident | Non Resident | |
| Income received or deemed to be received in India during the previous year – Indian income | Yes | Yes | Yes |
| Income accrued or deemed to accrue in India during the previous year – Indian Income | Yes | Yes | Yes |
| Income accrued or received outside India – Foreign Income | Yes | Yes, in following cases only:
1. Business income and business is wholly or partly controlled from India. 2. Professional income and profession is set up in India |
No |
To illustrate, we assume following information in respect of Mr. X
| Salary received from Indian employer | 11,00,000 |
| Rental income from a property in Tokyo, received there | 65,000 |
| Income from a business in Dubai, partly controlled from Bangalore | 38,000 |
| Scholarship received from Government of India | 12,000 |
We calculate total income of X for Assessment Year 2022-23 assuming his residential status as:
1. Resident and Ordinarily Resident
2. Resident and Not Ordinarily Resident
3. Non Resident
| Income | R&OR | R&NOR | NR |
| Salary received from Indian employer | 11,00,000 | 11,00,000 | 11,00,000 |
| Rental income from a property in Tokyo, received there | 65000 | – | – |
| Income from a business in Dubai partly controlled from Bangalore | 38000 | 38000 | – |
| Scholarship received from Government of India | 12000 | 12000 | 12000 |
| Total | 12,15,000 | 11,50,000 | 11,12,000 |
In every situation above, the total income of assessee is different. To summarise, an individual assessee who is Resident & Ordinarily Resident in India will pay tax on his Indian and Foreign Income. Resident and Not Ordinarily Resident will pay tax on Indian income and two exceptional foreign income. Non Resident will pay tax on Indian Income only.
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