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Introduction: Determining residential status is pivotal in Indian income tax law as it governs the taxation of an individual’s income. With categories like Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RBNOR), and Non-Resident (NR), understanding these statuses is essential for tax compliance.

Residential Status of Individuals

  • Why is it important to determine residential status?

An individual’s residential status is important as it determines the taxability of his or her income in India. The Income Tax Act categorizes residential status into three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RBNOR), and Non-Resident (NR).

  • How does residential status affect income tax of a person?

A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India. NR and RBNOR: Their tax liability in India is primarily restricted to the income they earn in India. They need not pay any tax in India on their foreign income.

 Residency test

Residential status for individual.

Under section 6(1),

1. Individual is said to be resident in India in any previous year, if he satisfies any one of the BASIC CONDITION:

BASIC CONDITION:

(i) He has been in India during the previous year for a total period of 182 days or more, or

(ii) He has been in India during the 4 years immediately preceding the previous year for a total period of 365 days or more and has been in India for at least 60 days in the relevant previous year.

If the individual satisfies any one of the conditions mentioned above, he is a resident. If both the above conditions are not satisfied, the individual is a non-resident

Additional conditions:

Resident and ordinarily resident/Resident but not ordinarily resident

Only individuals and HUF can be “resident but not ordinarily resident” in India. All other classes of assessee can be either a  resident  or  non-resident.  A not- ordinarily resident person is one who satisfies any one of the conditions specified u/s 6(6).

(i) If such individual has been non-resident in India in any 9 out of the 10 previous years preceding the relevant previous year, or

(ii)If such individual has, during the 7 previous years preceding the relevant previous year, been in India for a period of 729 days or less, or

residential status

Legends:

RPY=Relevant previous year

TI=Taxable income

RBNOR=Resident but not ordinarily resident.

♦ Residential status of HUF, Firms, AOP, BOI, LA, AJP.

Resident: A HUF, Firms, AOP, BOI, LA, AJP would be resident in India if the Scontrol and management of its affairs is situated wholly or partly in India.

Non-resident: If the control and management of the affairs is situated wholly outside India, it would become a non-resident.

♦ Note: For determining whether HUF is R&OR or RBNOR, both additional conditions needs to be satisfied by KARTA.

♦ Residential status of companies

A company would be resident in India in any previous year, if-

(1) It is an Indian company; or

(2) Its place of effective management, in that year, is in India.

Conclusion: The concept of residential status in Indian income tax law has evolved overtime. Initially, it was determined based on the individual’s physical presence in India during a financial year.

In conclusion, the determination of residential status in Indian income tax law is crucial as it determines the taxability of an individual’s global income in India. It’s important for individuals to understand the criteria and implications of their residential status to ensure compliance with tax regulations.

Authors:
Shreyans Dedhia | Partner
Dwarkesh Shah | Associate Consultant |
Smit Fofani | Associate Consultant |
For Inquiries: Email: blogs@masd.co.in

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