Introduction
The Income Tax Department must determine the residential status of tax payers, regardless of whether they are individuals or companies. This information becomes pertinent during tax filing season. This is actually one of the main factors that determine a person’s taxability.
Meaning and importance of residential status
Taxability of an individual is dependent on his Indian residential status for a particular financial year. Indian income tax laws explain what the term residential status means. Both citizenship and residential status are distinct aspects. A person may be Indian citizen, but it does not necessarily mean that they must be resident in India for a specific year. Section 6 of Income-tax Act 1961 (the Act), contains provisions that relate to determination Residency of a person.
In the case of an individual, determination of residential status
Section 6(1) of the Income Tax Act (1961) states that whether an individual considers themselves to be resident or not is determined by the length of time they have been in India over the preceding year.
If a person meets any of the following conditions, then he is considered to have been resident in India for any year prior.
- For a total of 182 days, he was in India the year before OR
- He has been in India in the four years immediately preceding the current year for a total of 365 days or longer and has been there for at least 60 consecutive days during the relevant year.
A resident is someone who meets all of the above conditions. Non-residents are those who do not meet both of the conditions.
Both the date of departure and the date of arrival can be used to count the days spent in India.
Exceptions to the General Condition
If the duration of their stay in India during the previous year is 182 days or longer, the following individuals will be considered resident.
(1) Indian citizen who leaves India as a crew member or passenger on an Indian ship during the preceding year
(2) Indian citizen who has left India in the preceding year to seek employment outside India
(3) An Indian citizen or person of Indian descent who visits India for the purpose of earning income that is not from abroad during the relevant year. 15 lakhs in the preceding year.
Notice: A person is considered Indian if either his parents or grandparents were born in undivided India.
After being classified as an Indian resident, he is divided into two parts:
a) Resident and Ordinarily Resident
b) Resident but not-Ordinarily Resident
If he meets both the additional conditions below, a Resident can be designated as a Resident and Ordinarily Reside (ROR), for a specific financial year.
- If He has been a resident of India for at least 2 years out of the 10 years immediately preceding of that year, and
- He had stayed in India for a period of at least 730 days in 7 years immediately preceding that year.
A person who meets all the conditions except the two additional ones will be considered Resident but not Ordinarily Resident if he or she fails to meet any of them.
Non-Resident
An individual who fails to satisfy any of the basic conditions is called a Non-Resident.
Insertion of a new Section 6(1A).
Section 6(1A). Deemed Resident. An Indian citizen is deemed to be a resident if his total income (excluding foreign income) exceeds 15 Lakh Rupees. He is not subject to tax in any country due to his domicile, residence, or any other similar criteria. A Resident, but not ordinarily resident, shall be considered.
| 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 professional setup in India | Taxable | Taxable | Non- Taxable |
| Income other than above (Income which has no relation with India) | Taxable | Non- Taxable | Non- Taxable |
Residential status of a Hindu Undivided family [Sec. 6(2)
A Hindu undivided family is said to be a resident in India.Only if its control and management is wholly or partially situated in India. The residential status of the karta in the previous years will be taken into consideration when determining whether a resident family has been ordinarily residence.
NOTE:
The term “control and management” is used to refer to be facto control over and management, not just the ability to manage. The place where control and management are located is the location of the head, seat, and the directing powers.
If the karta meets two additional conditions, a resident Hindu Undivided family is considered an ordinarily resident Indian citizen.
- In the 7 years immediately preceding, the relevant year, 730 days or more have elapsed since the Karta was present in India.
- Karta was a resident of India at least twice in the 10 years immediately preceding the current year.
Status of a resident company [Sec 6(3)]
If a company has been a resident of India for at least one year prior to this year, it is considered to have done so.
- It is an Indian company.
- India is the country that has been able to provide effective management in this year.
NOTE:- place of effective management” means a place where key management & commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made
Points to be consider
- Indian companies are always present in India.
- Only a foreign company can be considered Indian resident if it has been managed effectively in India during the preceding year.
- A foreign company is considered non-resident if its place of effective management was not in India during the preceding year.
- An Indian company cannot be either ordinarily or not ordinarily located in India.
- If a foreign company has even the smallest chance of being managed effectively from outside India, it will be considered a non-resident.
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