We all are no stranger to the fact that Residential status is the foremost requirement to be examined for each Previous Year while computing tax. Residential Status may vary Previous Year to Previous Year. Section 6 of Income Tax Act, 1961 deals with it. Recently major amendments have been inserted by Finance Act, 2020 in this section.  In this article, I have attempted to discuss the concept of Residential Status of Individual in detail (along with very interesting case laws and amendments).

Determination of Residential Status of an Individual can be bifurcated into two steps:-

Step 1: Whether an individual is a Resident or Non- Resident?

Step 2: If Individual is Resident as per Step 1, determine whether he is Resident and ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR).

Step 1 : Whether an individual is Resident or Non- Resident?

As per Section 2(30), “Non- Resident” means a person who is not a “Resident”.

As per Section 6 (1), an individual is a resident if he during the Previous Year–

  • Is in India for period or periods in all to 182 days or more;

OR

  • Is in India for 60 days or more AND for 365 days or more in all during the 4 Previous Years preceding the relevant Previous year for which residential status is going to be determined.

Further, Section 6 (1) adds Explanation 1 to the second limb that:-

  • If a citizen of India leaves India for employment or as a member of crew of an Indian ship during any Previous Year ;
  • If a citizen of India or a Person of Indian Origin, being outside India, comes on a visit to India

Then the period of 60 days or more is to be substituted by 182 days or more.

Hence, we may conclude that the second limb becomes irrelevant for cases covered by Explanation 1.

Case Laws

The above provision seems to be quite simple. However, in practical application, it is not so. Following case laws will help you in understanding the provision more deeply.

1. Manoj Kumar Reddy V. Income Tax Officer (International Taxation), ITAT (April 3, 2009)

The case relates to AY 2005-06. The assessee was an employee of an Indian company. On 23.01.2004, the employer Indian company issued a deputation letter to the assessee and directed him to work on some specified project in USA. As per the deputation order, it was mentioned that he will remain continued to be employed under the Indian company only.

During the deputation period, he came to India and stayed in India from 18.08.2004 to 06.09.2004. After completing his work he returned back to India on 31.01.2005 at 4 A.M. Summary of his stay in India is given below:-

Previous Year No. of days in India
2000-01 365
2001-02 365
2002-03 365
2003-04 306
2004-05   78

Following contentions were observed by ITAT in this case:-

  • During PY 2004-05, total stay of assessee in India was for a period less than 182 days. Hence, first limb of Sec. 6(1) shall not apply.
  • As far as Second limb of Sec. 6(1) is concerned. It is getting applicable as stay in India during the PY is for 78 days i.e. more than 60 days and total stay in all 4 PY preceding PY 2004-05 is exceeding 365 days. However, benefit given in explanation 1 to the second limb also needs to be examined.
  • Explanation 1 clause (a) applies where assessee leaves India for employment purpose. ITAT relied on decision of Authority of Advance Ruling in case of British Gas India (P) Ltd. [2006] 285 ITR 218 (New Delhi) where it was held that for purpose of “employment outside India”, even assessee on deputation sent outside India by an Indian employer is also covered.
  • However, the clause (a) of Explanation 1 shall apply for that year only in which the assessee is leaving India for employment, i.e. PY 2003-04 in this case. Hence, Clause (a) of Explanation 1 is applicable for PY 2003-04 only NOT FOR PY 2004-05.
  • Clause (b) to Explanation 1 – The assessee was for a “visit” in India from outside India during 18.08.2004 to 06.09.2004. However, he returned back to India on 31.01.2005. The period after 31.01.2005 cannot be treated as “visit”. Hence, clause (b) to Explanation 1 cannot apply. However, to determine period of stay under second limb of Sec. 6(1) period of visit shall be excluded.

Hence, total stay during PY 2004-05 will be reckoned from 31.01.2005 to 31.03.2005. 

  • ITAT held that “Day” does not include “fraction of Day”.
  • Therefore, assessee’s total stay was for a period of 59 days only. 31.01.2005 was not included because he arrived in India at 4 A.M.
  • The residential status of assessee- Non-Resident.

2. Authority for Advance Rulings (Income Tax), New Delhi – In case of Smita Anand (April 19, 2014)

The ruling relates to AY 2011-12. The assessee was employed in a Chinese company. Her employment commenced on 01.10.2007. She used to visit to India during her employment in China. However, she came back to India on 12.02.2011 after resigning from her employment in China. Her total stay during PY 2010-11 in India was for 119 days.

  • Her overseas employment license was valid till 31.03.2012 and she could return to China to seek fresh employment. During the PY 2010-11, assessee’s stay was for a period less than 182 days. So, first limb of Section 6(1) shall not apply.
  • As far as Second limb of Section 6(1) is concerned it may apply. However, benefit of Explanation 1 to second limb also needs to be examined.
  • During PY 2010-11, assessee did not left India for employment. She had already left India for employment during PY 2007-08. So this clause (a) of Explanation 1 is applicable for PY 2007-08 NOT FOR PY 2010-11.
  • Clause (b) to Explanation 1 – The assessee contended that she was for “visit” in India from outside India during the Previous Year and hence she kept her children abroad, travelled to meet her friends and relatives, and did not request tenants of her Indian property to vacate.

However, AAR held that these acts are also being done even by an Individual residing in India. There was no proof that the assessee left India again for employment even after PY 2010-11. This shows that the assessee had returned to India permanently and was not just on visit.

  • Hence, benefit of clause (b) to Explanation 1 was denied to the assessee. AAR held that assessee was Resident during PY 2010-11

3. CIT Vs. Sri O. Abdul Razak (13.12.2010)

Hon’ble Kerela High Court in this case interpreted the meaning of “employment” for the purpose of Clause (a) of Explanation 1 to second limb of Section 6(1). “Employment means that the visit and stay abroad should not be for other purposes such as a tourist, or for medical treatment or for studies or the like. Going abroad for the purpose of employment therefore means going abroad to take up employment or any avocation, which takes in self employment like business or profession.” 

4. Shri Suresh Nanda Vs. ACIT (24.07.2012)

  • The view mentioned in Point 3 was also accepted by ITAT New Delhi in this case.
  • ITAT held that it is not necessary that the stay should be for a continuous period.
  • ITAT held that it is not necessary that stay must be at one place in India.
  • Number of Days is the only Test to determine Residential status.

Step 2 : Whether Resident is ROR or NOR?

If the Resident individual is fulfilling both the conditions then he becomes ROR:-

  • Resident for 2 or more PY out of 10 PY preceding the Relevant PY

AND

  • In India for period in total 730 days or more during 7 PY preceding the Relevant PY

Section 5: Scope of Total Income

Resident and Ordinarily Resident Global Income
Resident but NOT Ordinarily Resident in India a. Income accrue or arise in India

b. Income received or deemed to be received in India

c. Income accrue or arise outside India only to the extent it is derived from a business controlled in or a profession set up in India.

Non-Resident a. Income accrue or arise in India

b. Income received or deemed to be received in India

 Amendment in Clause b of Explanation 1 to Section 6(1)  read with Sec. 6(6)(c) by Finance Act, 2020

Often Individuals who are citizen of India or Person of Indian Origin (POI) having substantial activities in India plan their visit to India in such a way that their total stay remains less than 182 days so that they cannot become resident due to benefit of clause (b) of Explanation 1 to Sec. 6(1).

Finance act 2020 has reduced this benefit to 120 days but only for selected individuals. So, the present situation can be summarized as below:-

Category A – Individual who is citizen of India or Person of Indian Origin (POI) having total income (other than income from foreign sourcesexceeding Rs. 15 lakhs during PY

Category B – Individual who is citizen of India or POI having total income (other than income from foreign sources) equal or less than Rs. 15 lakhs

Visit in no. of days Category A Category B
0 to 119 days Non Resident Non Resident
120 to 181 days Resident But Not Ordinarily Resident Non Resident
182 days or more Resident ( then check Sec. 6(6)(a) whether ROR or RNOR) Resident ( then check Sec. 6(6)(a) whether ROR or RNOR)

It means there is one impact due to this amendment and that is Category A person’s income that accrue or arise outside India only to the extent it is derived from a business controlled in or a profession set up in India also gets taxable in PY 2020-2021 where it was not taxable during PY 2019-2020 if he stays for 120 to 181 days in India.

Concept of Income from Foreign Source

As per Explanation given in Section 6 “For the purposes of this section, the expression “income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India)”.

 Example

Particulars Mr.A Mr.B
Citizen of India

Or POI

Citizen of India

Or POI

No. of Days in India in PY 2020-2021 110 days 135 days
a. Dividend from Indian company (Taxable) 16,00,000 16,00,000
b.  Profit share from Indian Partnership firm (Exempt) 5,00,000 5,00,000
c. Income from business outside India but controlled from India 2,00,000 2,00,000
d.  Interest from debenture of Foreign Company 3,00,000 3,00,000
e. Total Income = a+c+d 21,00,000 21,00,000
f.  Income from foreign source = c 3,00,000 3,00,000
g.  Income to check whether amended Explanation 1 clause b to Sec. 6(1) applies = (e-f) NA 18,00,000
h. Residential Status Non resident RNOR
i. Taxable Income in India 16,00,000 18,00,000

Section 6(1A) read with Sec. 6(6)(d)

This provision is anti-tax avoidance measure. The memorandum of explanation states that “The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn.”

As per Sec. 6(1A) “Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.”

Further as per Sec. 6(6)(d) “a citizen of India who is deemed to be resident in India under clause (1A) shall be deemed to be Not Ordinarily Resident”

The above amendments can be explained with the help of the following example:-

Particulars Mr. A Mr. B Mr. C
Citizenship Citizen of India Citizen of India Citizen of India
Tax Residency in other country No Yes Yes
No. of Days in India during PY 20-21 Nil 160 days 182 days
a. Dividend from Indian company (Taxable) 16,00,000 16,00,000 16,00,000
b.Profit share from Indian Partnership firm (exempt) 5,00,000 5,00,000 5,00,000
c. Income from business outside India but controlled from India 2,00,000 2,00,000 2,00,000
d. Interest from debenture of Foreign Company 3,00,000 3,00,000 3,00,000
e.  Total Income = a+c+d 21,00,000 21,00,000 21,00,000
f.  Income from foreign source = c 3,00,000 3,00,000 3,00,000
g.  Income to check whether amended Section 6(1A) or Explanation 1 clause b to Sec. 6(1) applies = (e-f) 18,00,000 [Sec. 6(1A)] 18,00,000 [Amendment in Exp. 1 to Clause (b) of Sec. 6(1) ] NA
h. Residential Status RNOR RNOR Resident (check 6(6)  whether ROR or RNOR)

It is noteworthy that Sec. 6(1A) covers only Citizen of India NOT Person of Indian Origin. Also, where the citizen of India is not liable to tax in any other country i.e. he is not tax resident of any other country or territory and his total income (other than from foreign sources) exceeds Rs. 15 lakhs then, he shall become RNOR in India irrespective of his no. of days stay in India.

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