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–
Further, Section 6 (1) adds Explanation 1 to the second limb that:-
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.
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|
Following contentions were observed by ITAT in this case:-
Hence, total stay during PY 2004-05 will be reckoned from 31.01.2005 to 31.03.2005.
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.
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.
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)
Step 2 : Whether Resident is ROR or NOR?
If the Resident individual is fulfilling both the conditions then he becomes ROR:-
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 sources) exceeding 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)”.
|Citizen of India
|Citizen of India
|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.