Section 5 & 6 of the Income Tax Act, 1961 are the guiding sections for the taxability of income of any taxpayer in India. Section 5 of the Income Tax Act deals with the “Scope of Income” whereas section 6 helps in determining residential status of any taxpayer in India. Determination of the residential status under the Income Tax Act plays an important role in determining whether income of any person is taxable in India or not. In this article, we shall discuss the rules for determination of residential status of an individual taxpayer and also discuss various amendments relating to residential status made by Finance Act, 2021 & 2022.
Determining the residential status of any assesse is the first and foremost task for ascertaining the taxable income of such assesse in India. As per section 6, the residential status of any taxpayer can be classified into two parts:
In the case of a person being an Individual assesses, the Resident can be further classified as “Resident and Ordinarily Resident” (ROR) or “Resident but not ordinarily resident” (RNOR). However, in case of other persons, there are only two categories i.e. Resident and Non-Resident. SECTION 6(1): BASIC CONDITIONS FOR CLASSIFICATION AS RESIDENT
An individual is said to be resident in India in any previous year, if he:
For the above purpose, period of stay in India shall include the day on which the person arrives and leaves India.
In other words, an individual is said to be resident in India, if he satisfies any of the C1 or C2. C1 is a pretty simple text. An individual has to check whether he has stayed in India during the previous year for more than 182 days or not. If he has stayed, then he is resident of India. If not, he has to proceed to check C2 to decide the residential status.
C2 stipulates two conditions to be satisfied to call an individual as resident during the previous year. First, we need to check whether the period of stay in India is 60 days or more, during the year. If the first one is satisfied, then we need to check whether period of stay in India during the preceding 4 years is 365 days or more. If both these conditions hold true, he will be considered as the resident Individual.
Where both above C1 & C2 conditions are not met, he will be considered as the non-resident during that previous year.
Further, as per the explanation to Section 6, only condition C1 shall be applicable and we need not to check for the conditions as specified in C2, which are given as below:
Further, Finance Act, 2020 has also provided that where an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature. Such a provision has been inserted as it was noticed that certain individuals were using the above relaxation as tax avoidance measure and planning visit and stay in India so that they do not meet the threshold of 182 days.
After a person is classified is resident, we need to further test as to whether such person is regarded ordinarily resident in India (ROR) or not ordinarily resident in India (NOR).
For a person to be regarded as RNOR, following additional conditions are required to be complied with, which are as stated below:
A. FROM B/P CONTROLLED FROM INDIA
Concluding the above, it is pertinent to note residential status of a person has to be checked for each previous year and before determining the tax liability of a person, we need to first evaluate his residential status, so as to properly determine the incidence of tax upon him accruing to him from various sources.
About the Author
The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.