Different countries adopt different principles to tax the Income of an Individual. There are three main principles adopted globally to tax the Income of an Individual – Residence principles, Source principles, and Citizenship principles. In India, An individual’s income is taxed based on its residential status for any particular financial year, not based on citizenship. A person can be a resident of India even if he is not a citizen of India.
In this article, we will converse in detail how to determine the residential status of an Individual in India, Circular No. 11/2020 dated 08th May 2020, the amendment made in section 6 (applicable from F.Y. 2020-21), and how residential status affect taxability?
Residential Status
As per Section 6, In India, an individual’s residential status is categorized into two parts based on the number of days he stays in India for any particular financial year.
1. Resident
2. Non- Resident
Resident
Lets first talk about when a person is said to be a resident of India:
A person is said to be a resident of India for a particular financial year if he fulfills one of the two basic conditions:
i) stay in India for a period of 182 days or more in that year, or
ii) stays in India for a period of 60 days or more in that year and stays for a total of 365 days or more in four years immediately preceding that year.
An individual satisfying any of the above two basic conditions are classified as a Resident of India.
An exception to Second basic Condition
Only the first basic condition mentioned in the above section is applicable to determine the residential status of the below individuals
1. An Indian citizen who leaves India:
i) as a crew member of an Indian ship
ii) for the employment purpose
2. A person of Indian Origin or Indian Citizen who resides outside India and comes to India for a visit.
An Individual shall be deemed to be a Person of Indian origin if he, or any of his parents or any of his grandparents, were born in undivided India.
If an individual is classified as a resident of India, he is further categorized into two parts :
a) Resident and Ordinarily Resident (ROR)
b) Resident but Not-Ordinarily Resident (RNOR)
A Resident named as a Resident and Ordinarily Resident(ROR) for a particular financial year if he satisfied both of the additional conditions mentioned below :
i) If He/She has been a resident of India for at least 2 years out of the 10 years immediately preceding of that year, and
ii) He had stayed in India for a period of at least 730 days in 7 years immediately preceding that year.
If an individual satisfies one of the basic conditions but failed to satisfy both of the additional conditions, he is treated as a Resident but Not Ordinarily Resident (RNOR).
Non- Resident
An individual who fails to satisfy any of the basic conditions is called a Non-Resident.
Circular Applicable for F.Y.2019-20
Circular No. 11/2020 dated 08th May 2020
For the previous year 2019-20
In case of an individual who has come to India on a visit before 22nd March, 2020 and:
(a) has been unable to leave India on or before 31st March, 2020, his period of stay in India from 22nd March, 2020 to 31st March, 2020 shall not be taken into account; or
(b) has been quarantined in India on account of Novel Corona Virus (Covid-19) on or after 1st March, 2020 and has departed on an evacuation flight on or before 31st March, 2020 or has been unable to leave India on or before 31st March, 2020, his period of stay from the beginning of his quarantine to his date of departure or 31st March, 2020, as the case may be, shall not be taken into account; or
(c) has departed on an evacuation flight on or before 31st March, 2020, his period of stay in India from 22nd March, 2020 to his date of departure shall not be taken into account.”
We can summarize the same as:
For the Previous year 2019-20
| Individual who has come to India | Arrival | Departure | Period of Stay in India shall not be taken into account while determining Residential Status |
| On a visit | before 22nd March 2020 | unable to leave India on or before 31st March 2020 | from 22nd March 2020 to 31st March 2020 |
| before 22nd March 2020 | departed on an evacuation Flight on or before 31st March 2020 | From 22nd March 2020 to 31st March 2020 | |
| On a visit but Quarantined in India due to COVID-2019 | On or after 1st March 2020 but before 22nd March 2020 | departed on an evacuation Flight on or before 31st March 2020 | the date on which he was Quarantined to the date of his departure |
| On or after 1st March 2020 but before 22nd March 2020 | unable to leave India on or before 31st March 2020 | the date on which he was Quarantined to 31st March 2020 |
Changes in residential rule applicable from F.Y 2020-21
1.Amendment in Section 6(1)
A Person of Indian Origin or Indian citizen (who resides outside India and come to India for a visit) shall be treated as a Resident of India if He/she
i) has total income, excluding income from foreign sources, exceeding 15 Lakh Rupees, and
ii) stays in India for a period of 120 days or more.
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).
As per amended section 6(6), In addition to the above conditions, if such person stays for a period of 120 days or more but stays for less than 182 days, he shall be treated as Resident but Non-Ordinarily Resident.
2.Insertion of new Section 6(1A)
Section 6(1A) introduces a new concept of Deemed Resident:
An Indian citizen shall be deemed to be a resident of India If his total income, excluding income from foreign sources, exceeds 15 Lakh Rupees, and he is not liable to pay tax anywhere in the world because of his domicile or residence or any other criteria of similar nature.
Deemed Resident shall be treated as a Resident but Non-Ordinarily Resident (RNOR).
Taxation of income based on Residential status
If an individual falls under the Resident and Ordinarily Resident (ROR) category, he has to pay taxes on his global income.
If an individual falls under the Resident but Non-Ordinarily Resident (ROR) category, he has to pay taxes on income which is earned in India and income accruing outside India from a business controlled from India or from a profession set up in India.
If an individual falls under the Non-Resident category, he has to pay taxes only on the income which is earned in India.
| Particulars | Residential status | ||
| Nature of Income | Resident and Ordinarily Resident (ROR) | Resident but Non- Ordinarily Resident (RNOR) | Non Resident |
| Income which accrues or arises or deemed to accrue or arise in India | Taxable | Taxable | Taxable |
| Income which received or deemed to be received in India | Taxable | Taxable | Taxable |
| Income accruing outside India from a business controlled from India or from a profession set up in India | Taxable | Taxable | Non- Taxable |
| Income other than above (Income which has no relation with India) | Taxable | Non- Taxable | Non- Taxable |
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