Residential Status of An Assessee in Income Tax Act, 1961

Monika Thakur

Introduction

In India, the extent of an assessee’s taxable income is largely determined by their residence status as defined by the Income Tax Act, 1961. For persons, it is divided into three groups: non-resident (NR), resident but not ordinarily resident (RNOR), and resident. A person is deemed a resident of India if they have been there for 182 days or more in the year prior, or if they have been there for 60 days in the year prior and 365 days in the four years prior. For Indian citizens departing for work overseas or for Persons of Indian Origin (PIO) traveling to India, the 60-day limit is extended to 182 days. The person is a non-resident if neither of these requirements is satisfied. A person is regarded as RNOR if they

Determining the residence status of a tax-paying individual or business is crucial for the Income Tax Department.

The Income Tax Act of 1961: What is it?

The Income Tax Department’s methods for levying, managing, collecting, and recovering taxes are governed by the Income Tax Act of 1961. With effect from April 1, 1962, it consists of 23 chapters, 298 sections, and miscellaneous provisions.

One sort of direct tax that the taxpayer is responsible for paying on their own is income

Meaning and Importance of Residential status

An individual’s tax liability in India is determined by his or her residency status during any given fiscal year. The phrase “residential status” was created in accordance with Indian income tax regulations and should not be confused with an individual’s Indian citizenship. Even though a person is an Indian citizen, they might not really reside there for a specific year. In a similar vein, a foreign national may find themselves considered an Indian resident for the purposes of income tax in a given year. Additionally, it should be noted that different sorts of people individuals, firms, companies, etc..

How to determine Residential Status?

According to Indian income tax regulations, taxable individuals are categorized as follows:

1. A ordinarily resident (ROR) and a resident

2. A resident who does not often reside there (RNOR)

3. An outsider (NR)

Each of the aforementioned taxpayer types has a different taxability. Prior to discussing taxability, let’s examine how a taxpayer becomes a resident, RNOR, or NR.

The idea of residential status

The Income Tax Act of 1961 defines “residential status” only to determine whether or not a taxpayer lived in India during a specific fiscal year. It differs greatly from the citizenship that is bestowed upon individuals. Even if you may be an Indian citizen, you may be considered a non-resident if you did not reside in India for a minimum amount of time during a fiscal year.

Residential

If a taxpayer meets one of the two requirements listed below, he is considered a resident of India:

1. Spend at least 182 days in India within the previous year or

2. Spend 365 days or more in India during the four years prior, and 60 days or more during the relevant fiscal year.

Exceptions to Residential Status

If an Indian citizen departs the country during the fiscal year as a crew member on an Indian ship or for work, he will only be considered a resident of India if he remains in the country for 182 days or longer.

During the relevant prior year, an Indian citizen or person of Indian descent who resides outside of India visited India. However, a person will be considered a resident of India if their total income for the preceding year, excluding income from overseas sources, exceeds Rs. 15 lakhs.

He must have been in India for at least 182 days in the relevant year prior, or he must have spent 365 days or more in the preceding four years and spent at least 120 days there in the year prior.

A citizen of India who earns more than Rs 15 lakh in total income (excluding foreign sources) and has no tax obligations in other nations will be considered a “deemed resident of India,” as stated in the above-mentioned substantial modification.
The following is an additional simplification of the amendment:

Resident not Ordinarily Resident

Finding out if a person is a resident and usually resident (ROR) or a resident but not ordinarily resident (RNOR) is the next step if they meet the requirements to be considered a resident. If he satisfies both of the following requirements, he will be a ROR:

1. Has resided in India for at least two of the ten years in the immediate past and

2. Has spent at least 730 days in India over the seven years before

Consequently, there are three circumstances under which someone is considered RNOR.

if any individual does not meet any of the aforementioned requirements.

If someone is an Indian citizen or someone of Indian descent and their total income exceeds Rs. 15 lakhs (not including foreign income), who spent at least 120 days but fewer than 182 days in India in the preceding year.

By default, a person will be classified as both a resident and a non-resident if they are thought to be a resident of India.

Non -Resident

A person who does not meet the requirements to remain in India for:

For that fiscal year, a person who spent

1. 182 days or more in the previous year, 60 days or more in the previous year, and

2. 365 days in the four years prior to that year will be deemed a non-resident.

Income from India and Other Countries

Before determining how residential status and tax liabilities are related, it is necessary to comprehend the notions of Indian and foreign income. According to the Act, all revenue that originates or accrues in India, whether directly or indirectly, must be considered to have done so.

Even if some forms of income may really accrue or arise outside of India, they are considered to have done so in India. In India, the following types of revenue are considered to accrue or arise:

Any income that an assessee receives from any source outside of India, whether directly or indirectly, through or from an Indian business relationship, Indian real estate, or other asset a revenue stream in India, or by transferring a capital asset located there.

income that, if generated in India, is classified as “salaries.” revenue from “salaries” that the government pays Indian citizens for work done outside of the country.

Important Things to Remember

Staying in India entails staying within its territorial waters, which are 12 nautical miles out from the country’s coast.

The stay does not have to be ongoing or active.

When calculating the number of days spent in India, both the departure and arrival dates are taken into account.

A person’s residency has no bearing on their citizenship, place of birth, or domicile for income tax purposes. Therefore, even if a person only has one place of residence, he may be a resident of multiple countries.

What does income tax residential status mean?

In India, a person’s or business’s residential status plays a significant role in determining their tax liability. It is crucial to remember that citizenship and residential status under the Income Tax Act are not the same. For tax purposes in a given year, a person may be an Indian citizen yet still be regarded as a non-resident; on the other hand, a foreign national may be eligible to be deemed a resident of India.

Types of Residential Status

Depending on how long a person has lived in India, the Income Tax Act divides them into three primary residence status categories:

1. Ordinarily Resident (ROR) and Resident

2. RNOR stands for resident but not ordinarily resident.

3. Not a resident (NR)

Key Words to Know

You should be familiar with a few terms before moving on to the main points of Section 6 of the Income Tax Act of 1961. Below is an explanation of them:

money from foreign sources refers to money that is produced outside of India; it does not include income from businesses or professions established in India, which are not considered to accrue or arise in India.

An individual who is an Indian citizen or of Indian descent but does not reside in India is known as a non-resident Indian (NRI).

Person of Indian descent (PIO): If a person was born in undivided India, either their parents or any of their grandparents are deemed to be of Indian descent.

Taxability

Residents and normally Residents: Residents and normally residents are subject to taxation in India on their worldwide income, which includes both domestic and foreign earnings.

Resident but not normally resident: RNORs are exempt from paying taxes on incomes below a certain threshold, which separates them from RORs.

income that is received or earned outside of India.

Non-residents are only subject to taxes on income that is “received in India” or that is “received from India.” However, money that is not related to India and is obtained outside of it is not subject to taxes.

For instance:

HUF’s Residential Status

Resident: If a HUF’s management is composed of Indian members, it is deemed to be a resident of India; otherwise, it is regarded as non-resident.

Both a resident and a regular resident or a resident but not a regular resident

HUF will be recognized as a resident and ordinarily resident if Karta, the manager of the resident, meets the requirements listed below; if not, it will be a resident but not ordinarily resident.

must have lived there for at least two of the preceding ten years.

730 days or more should be spent during the last 7 years.

Note: Only persons and HUFs who are not typically residents of India may be residents. There are two types of assesses: residents and non-residents.

A company’s residential status

In the following situations, a firm would be considered to be a resident of India:

If the business is Indian

India was the location of efficient management the year before.

Note: The term “place of effective management” refers to the location where managerial and business choices that are essential to the operation of an organization or corporation are made.

Firms, LLPs, AOPs, BOIs, local governments, and artificial juridical persons’ residential status

Put simply, the residential status will once more be determined by the location from which the above individuals’ management is made; much like HUF, if it is carried out by members in India, it will be considered resident; if not, it will be considered non-resident.

Conclusion-

You should now have a better understanding of the IT Act of 1961, including its chapters, schedules, and sections. Additionally, you can get more information by downloading the Indian Tax Act 1961 PDF straight from the official website of the Income Tax Department. You can save a lot of money on taxes and make better financial decisions by reading this.

References:=

https://cleartax.in/s/residential-status

https://cleartax.in/s/income-tax-act-residential-status

https://www.lawteacher.net/free-law-essays/civil-law/residential-status-and-its-importance.php

https://www.jainam.in/glossary/residential-status-under-income-tax-act/

https://www.hdfclife.com/insurance-knowledge-centre/tax-saving-insurance/income-tax-act-1961

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This Blog is written by Monika Thakur student 4^th year at law of school lovely professional university Punjab.