Residential status is no of doubt great relevance since the entire taxability under the Income Tax Act, 1961 revolves around the fact whether a person is a resident or a non-resident. However, in recent years, section 6 which prescribes the computation mechanism of residential status has undergone a significant change. An attempt has been made through this article to simplify it and analysis as per the Act and DTAA.
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Determination of Residential Status under Income Tax Act, 1961
Individuals are treated as residents under the Act if they satisfy any of the conditions:
A. If stay in India is for a period of 182 days or more during the previous year,
Or,
B. Dual conditions as –
1) If stay in India is for a period of 60 days or more during the previous year, and
2) If stay in India is for a period of 365 days or more during the 4 preceding previous years,
Or,
C. If an individual being an Indian citizen earning income from Indian sources exceeding Rs. 15 Lakhs, is not liable to tax in any country by reason of his domicile or residence. An important point to note here is that no stay in India required under this condition. Hence, even if a person does not visits India during the previous year but earns significant income from Indian sources, he will be assessed as a resident and taxed on world-wide income if he is not taxed as a resident in any other countries.
Exceptions to Condition B:
i. For an Indian citizen leaving India during the previous year for the purpose of employment outside India or as a member of the crew of Indian ship, the limit of 60 days gets substituted by 182 days. Hence, in substance, condition B gets waived off and such a person would be a tax resident in India if he/she stays in India for 182 days or more.
ii. For an Indian citizen or a person of Indian origin who comes to India on a visit during the previous year:
a. Earning income from Indian sources exceeding Rs. 15 Lakhs, the limit of 60 days gets substituted by 120 days. Therefore, such a person staying in India for less than 182 days but 120 days or more, will also be considered as a tax resident.
b. In any other case, the limit will be 182 days instead of 60 days. Again, condition B gets waived in such a scenario.
It is pertinent to note that, such exceptions are applicable only for the previous year in which the individual leaves India or comes to India. From the succeeding year onwards, such exceptions would not apply and normal provisions will hold good.
After determining whether an individual is a resident or not, it is further relevant to delve into the second step of residential status. Following residents are treated as Not Ordinarily Resident (‘RNOR’):
1. Who does not satisfy ANY/BOTH of the following twin conditions –
a. Resident in atleast 2 out of 10 preceding previous years, and
b. Stays in India for a period of 730 days or more in 7 preceding previous years.
2. An Indian citizen or a person of Indian origin coming to India on a visit during the previous year, earning income from Indian sources exceeding Rs. 15 Lakhs and who stays in India for a period of 120 days or more but less than 182 days.
3. An Indian citizen earning income from Indian sources exceeding Rs. 15 Lakhs and not liable to tax in any other country by virtue of domicile or residence. A person liable to tax means that there is an income tax liability on such person under the law of that country and also includes a person who has been subsequently exempted from such liability under that laws itself.
Tax implications of different categories of residents under Income Tax Act, 1961
| Source of Income | Resident and Ordinarily Resident | Resident but Not Ordinarily Resident | Non-Resident |
| Income actually received or deemed to be received in India | Taxable | Taxable | Taxable |
| Income actually accrued or deemed to be accrued in India | Taxable | Taxable | Taxable |
| Income accruing outside India from a business/profession controlled/set-up in India | Taxable | Taxable | Taxable |
| Income accruing in India from a business/profession controlled/set-up outside India | Taxable | Taxable |
Taxable, only to the extent attributable to operations in India |
| Any other income accruing outside India from a foreign source | Taxable | Not Taxable |
Not Taxable |
Determination of Residential Status under the Tax Treaties
From the perspective of residential status of an individual, Article 4 of the UN and OECD Model Tax Convention prescribes that an individual will be a resident of one of the contracting states when it is liable to tax under the domestic laws of that state by virtue of its domicile or residence or any other criteria of a similar nature. The respective commentaries to Article 4 of UN and OECD Model Tax Conventions further state that, such inclusion however, does not includes individuals who are liable to tax in that state only in respect of income from sources in that state or capital situated therein.
Residential status as per DTAA impacts significantly since the benefit under the DTAA entered into between two contracting states can be claimed only by such persons who are resident of either or both of the contracting states. It is also possible that a person becomes a resident under both the states. Under such a situation, the tie-breaker rule in the following sequence should be applied to determine his residential status :
1. Place of permanent home
2. Place where personal & economic interests lies (Centre of vital interests)
3. Place of habitual abode
4. Country of Nationality
5. By mutual agreement between competent authorities of both contracting states.
Note on calculation of period of stay in India
Section 6 does not explicitly mention whether the day of arrival or departure has to be included or excluded for the purpose of calculating stay in India. However, various benches of the Tribunals have held that either the day of arrival or day of departure (or a part of the day) should be excluded for the purpose of counting days for stay in India. The decisions in which the above view has been held are as follows –
- Manoj Kumar Reddy v. ITO [2011] 201 Taxman 30 (Karnataka HC)
- ITO v. Shri Sharad Mishra (ITA No 559 of 2012) (Lucknow Trib.)
- ITO v. Fausta C. Cordeiro [2012] 53 SOT 522 (Mumbai Trib.)
However, both the OECD & UN Model Tax Conventions prescribes that following days are to be included for the purpose of calculating days of ‘Physical presence’ in a state under Article 14 – Dependent Personal Services –
- Part of day
- Day of arrival
- Day of departure
- Saturdays and Sundays spent inside the state[…,] etc.
Author Bio
What is the residential status of an individual for IT purposes, in India who is a Gallantry Award Winner & who’s Pension is exempt from Income tax. She has no other income in India & lives overseas in a country with no Double Taxation agreement. She also visits India for more than 60 days every year. Kindly let me know please. Regards. Manian