The Income Tax Act, 1961, (Act) to consolidate and amend the law relating to income tax. However, not everyone is liable to pay taxes on income under the Act. The Act makes certain exceptions and exempts certain kind and extent of income from taxation. As per Section 2(3 1) of the Act, defines the term “Person” for whom we will assess the income. Further, those who are liable to pay tax and whose incomes are assessed under the Act are known as “Assessees” and the same has been defined under section 2(7) of the Act. Also for determining the tax liability of the Assessees, the same has been further categorise on the basis of Residential Status.
Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.
Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we have discussed about how the residential status of an individual taxpayer can be determined for the Previous Year i.e 2019-2020 or Assessment Year 2020-2021.
Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.
As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfy any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-
i. Is in India in previous year for 182 days or more; or
ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.
Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:
a. Citizen of India who leaves India for taking up employment outside India;
b. Indian Citizen who leaves India as a member of the crew of Indian Ship;
c. Citizen of India or to a person of Indian origin who visit India ;
Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfy all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if
i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and
ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.
Amendment have also been made vide Finance Act, 2020, From F.Y. 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakhs.
The Finance Act, 2020, has also introduced the concept of “Deemed Resident” whereby all such citizen of India who are not taxable in any other country by reason of residence or domicile or any other criteria of similar nature and such individuals have income exceeding Rs. 15 lakhs from sources in India and from business controlled from India or Profession set up in India. With effect From F.Y. 2020-202 1 deemed resident will be a resident and ordinarily resident in India.
A Resident Ordinary Resident is subject to tax on his global income in India. Resident Not Ordinary Resident and Non-Residents are generally subject to tax in India only in respect of India source income that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India.
Salary received in India or for services provided in India, rental income from a house property in India, capital gains on sale of assets in India — be it shares or house property, income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also Resident Not Ordinary Resident and Non-Residents.
In order to enjoy tax benefits through Non-Resident Status, individuals visiting India on a business trip should not stay for more than 181 days during one previous business year and their total stay in the previous four years should not exceed more than 364 days.
If individuals, having been in India for more than 365 days during four years preceding the relevant previous year, and stay for more than 60 days in the previous year, they should plan their visit to India in such a manner that their total stay in India falls under two previous years. Such persons can come to India any time in the first week of February and stay till May 29.