RESIDENTIAL STATUS
We already know, tax is charged on Total Income. The computation of this total income further depends upon the residential status. The followings are the importance of residential status;
Importance of Residential Status:
1. Total Income of an assessee cannot be determined without knowing his residential Status.
2. Residential Status shall be determined for every person for each previous year
3. The onus of responsibility to prove the Residential Status is on the Assessee.
A. Residential Status of Individual [ sec. 6]:
From the above chart we see that there are two primary classifications: Resident and Non-Resident. Again, Resident is classified into: Ordinarily Resident and Not-ordinarily Resident. For the purpose of determination of Residential status we need to satisfy some conditions, as follows;
1. The Primary/Basic Conditions [sec. 6(1)]:
An individual is said to be resident in India in any previous year, if he/she satisfies at least one of the basic condition;
(a) If the Individual stayed in India for a period of 182 days or more during the relevant previous year [ie. 182 days during 2019-20]. (OR)
(b) If he stayed in India for a period of 60 days or more during the previous year and 365 days or more during the four preceding previous years. [ie. 60 days during 2019-20- and 365 days or more during 2015-16 to 2019-2020]
Note: The day in which he/she enters India, as well as the day on which he/she leaves India, shall be taken into account.
Exceptions: In the following cases the condition No- (b) above becomes in operative. Here an Individual will be Resident in India, only if he is in India during the previous year for at least 182 days. (ie. 60days shall not be applicable);
> When an Indian Citizen leaves India during the previous year for employment outside India.
> When an Indian citizen leaves India during thr previous year as a member of Crew of an Indian Ship.
> When an Indian Citizen or a person if Indian origin comes to visit India.
2. The Secondary Conditions [sec. 6(6)]:
If, after applying the basic conditions, it is determined that the Individual is a ‘Non-Resident’, then nothing is to be done further. On the other hand, if it is determined that the individual is a ‘Resident’ then it remains further to be decided, whether he/she is an ‘Ordinarily Resident” or ‘Not- ordinarily resident’. For this purpose he/she has to satisfy the following conditions;
i. He/ she has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year
ii. He/ She has been in India for a period of 730 days or more during 7 years immediately preceding the previous year.
Rules of Residential status for individuals
| Resident | Resident and Ordinarily Resident | Resident but Not-ordinarily Resident | Non- Resident |
| He/ She must satisfy at least one of the basic condition.
[ie. (a) or (b)] |
He/ She must satisfy at least one of the basic condition [ie. (a) or (b)]
And at the same time he/ she should satisfy Two secondary condition. [ie.(i) and (ii)]. In short; [(a) or (b)] + [(i) and (ii)] |
He/ She must satisfy at least one of the basic condition [ie. (a) or (b)]
And at the same time he/ she should satisfy one or none of the secondary condition. [ie.(i) or (ii) or none]. In short; [(a) or (b)] + [(i) or (ii) or none] |
If he/she satisfies none of the basic conditions.
In short; [ None of (a) or (b)] |
SOME IMPORTANT PONTS TO BE NOTED:
1. Residential Status for each previous year: The Residential Status is determined for each previous year separately, because the Residential Status may change from year to year.
2. Different Residential Status for different Previous years in the same Assessment Year is not possible.
3. Different Residential Status for different Assessment Years.
4. A person may be Resident of more than one country for any previous year.
5. Continuity not required : it is not required that the stay should be for a continuous period or at any one place in India.
6. Citizenship ≠ Residential status: Citizenship of a country and Residential Status of that country are separate concepts. A person is also an Indian national/ citizen, but might not be a Resident in India and vice- versa. Because an Individual shall be considered resident in India as per IT Act, if he satisfies the specific conditions U/s 6(1) & 6(6), but the Citizenship emerge after birth.
7. A stay by an Individual on a Yatch moored in the Territorial water of India would be treated as presence in India.
8. Indian origin: A person is said to be Indian Origin if he/ She or either of his/her parents or any of the grand parents are born in Undivided India.
9. Resident for one source = Resident for all sources
B. Residential Status of a Hindu undivided family [ sec. 6(2)]:
There are two steps involved in determination of Residential Status of a HUF. In Step-1 we will determine, whether it is ‘Resident’ or ‘Non-Resident’ and then in Step-2 we will determine whether it is ‘Ordinarily resident’ or Not-ordinarily resident. These steps are as follows;
Step -1: Resident or Non-Resident:
| If Control and Management of it’s affairs is – | Residential Status |
| (a) Wholly or partly from India
(b) Wholly Outside India |
Resident
Non-Resident
|
Step-2: Ordinary or Not-Ordinary Resident:
If in the Step-1 it is concluded that the HUF is ‘Resident’, then we will have to know ,whether such ‘Resident HUF’ is ‘ordinarily or not-ordinarily resident, otherwise the Step-2 will not apply.
Conditions of Step-2: the Resident HUF is ‘Resident and Ordinarily Resident’ if the Karta/Manager of the HUF satisfy both of the following condition;
i. He is a Resident in India in at least 2 years out of previous 10 years preceding the relevant previous year.
ii. he is India for at least 730 days during 7 years immediately preceding the relevant previous year.
___***If the Resident HUF satisfies one or none of the above conditions, then HUF is called as ‘Resident but not- ordinarily resident’.
C. Residential Status of Firm/AOP/Other Person [ sec. 6(2)/6(4)]:
Determination of Residential Status of Firm/AOP/Other Person:
| If Control and Management of it’s affairs is – | Residential Status |
| (a) Wholly or partly from India
(b) Wholly Outside India |
Resident
Non-Resident |
Note: There is no concept of ‘Ordinarily or Not-ordinarily resident in this case.
D. Residential Status of Company [ sec. 6(3)]:
Determination of Residential Status of Company
| Conditions | Residential Status |
| 1. Indian Company | Always resident |
| 2. Other Company: If Control and Management is –
(a) Wholly in India (b) Wholly or partly Outside India |
Resident
Non-resident |
Note: 1. There is no concept of ‘Ordinarily or Not-ordinarily resident in this case.
2. Control an Management u/s 6(2) or 6(3) or 6(4): It means only-
(a) De facto control and management means where the decision regarding affairs is being taken, ie. Where the directive power or head and brain are situated, and not
(b) De jure right to control and manage the affairs.
SCOPE OF TOTAL INCOME:
Under Section 5 of Income Tax Act, Incidence of tax on a tax payer depends on his/ her Residential Status as well as the Place of accrual or receipts of Income. The followings are the criteria for the Scope of Taxability;
(A) For Individuals and HUF:
| Sl. No. | Sources of Income | ROR | R-NOR | NR |
| (I) | Indian Income:
The Income Received or Deemed to be received in India during the current financial year. |
T | T | T |
| The Income Accruing or Arising or Deemed to accrue or arise in India, during the current financial year. | T | T | T | |
| The Income Accruing or Arising or Deemed to accrue or arise outside India, but first receipt in India’, during the current financial year. | T | T | T | |
| (II) | Foreign Income:
The Income Accruing or Arising or Deemed to accrue or arise outside India, but first receipt is outside India, during the current financial year. |
T | NT | NT |
| The Income Accruing or Arising outside India from business or profession controlled from India, during the current financial year. | T | T | NT | |
| Income Accruing or Arising outside India from any source other than business or profession controlled from India, during the current financial year. |
T |
NT |
NT |
Note: ROR: Resident and ordinarily resident, R-NOR: Resident bur not-ordinarily resident, NR; Non-resident, T– Taxable, NT- Not Taxable.
(B) For others (Company, firm, AOP, BOI, etc) :
| Sl. No. | Sources of Income | Resident | Non-Resident |
| I. | Indian income | T | T |
| II | Foreign Income | T | NT |
Points to be noted:
1. No Tax on Remittance: Any income already taxed on accrual basis, consequently remitted to India is not chargeable to tax at the time of remittance irrespective of residential status.
2. Past un-taxed profit can not be taxed on remittance.
3. Considering Income in accounts: For Accounting purpose, if any income accrues or arise outside India and is included in a balance sheet prepared in India, it shall not be deemed to be received in India.
4. No Double Taxation: If the Income is included in the Total Income on accrual basis, that shall not be once again taxed on receipt basis.
5. Year of Taxability: The income should be related to the previous year.
6. Manner of Income: Income may be in Cash or in Kind.
7. Computation: Income should be taxable as per provision of the act and computed accordingly.
8. Income Deemed to accrue or arise in India(Sec. 9) :
(a) Income accruing or arising, whether directly or indirectly, through or from any business connection in India.
(b) Income through or from any property in India, or through or from any assets or source of income India, or through the transfer of a capital asset situated in India.
(c) Income from salary, if service rendered in India.
(d) Dividend paid by an Indian company at a place outside India.
(e) Salaries paid by Government of India to an Indian citizen for services rendered outside India.
Explanation 4 & 5 have been included in section 9(1)(i) with retrospective effect of 1st April 1962 to provide that :
1. The expression ‘through’ shall mean and include and shall be deemed to have always meant and include “by means of”, “in consequence of” or “by reason of ”DIRECT TAXATION.
2. An asset or any capital asset being any share or interest in a company / entity registered or incorporated outside India shall mean and shall be deemed to be and shall always be deemed to have been situated in India if the shares or interest derives, directly or indirectly, it’s value substantially from the assets located in India.
Note: Business Connection in India:
The expression Business connection has not been defined under Income Tax Act, but is used in Section 9(1) to deemed income arising through Business Connection to arise in India. A Business connection includes a professional connection. It includes a person acting on behalf of a non-resident and who performs any one or more of the following Activities: –
(a) He exercises in India an authority to contract on behalf of the non-resident.
(b) He has no authority however routinely maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident.
(c) He habitually secures order in India (mainly or wholly) for the non-resident or for non-resident under same management.
Where a business is carried on in India through a person referred to in above three activities only so much of income as is attributable to the operations executed in India shall be treated as the income deemed to accrue or arise in India.
Exclusions: Business Connection shall not Include-
(a) Any business activity executed through a general commission agent, broker, or any other agent, who have an Independent status, if such general commission agent, broker or any other agent having an Independent status is acting in the Ordinary course of his business operation.
(b) Non-Resident News agencies for collecting News or views in India for transmission outside India.
(c) Purchase of goods for export.
(d) Shooting of cinematograph film in India.
9. SPECIAL PROVISIONS RELATING INTEREST INCOME/ROYALTY INCOME AND FEES FOR TECHNICAL SERVICE
Certain income is deemed to accrue or arises in India under section 9 of the Income Tax Act, even though it may actually accrue or arise outside India and this section applies to all assesses irrespective of their residential status and place of business. The categories of income which are deemed to accrue or arise in India under section 9 are explained as under:
A. Interest Income [Section 9(1)(v)]– Interest shall be deemed to accrue or arise in India if:
| PAYER | CONDITIONS |
| Indian Government | No condition |
| Resident in India | The amount borrowed must not be untiled for the purpose of business or profession carried on by such person from a place outside India or for the purpose of making or earning some income from any source from a place outside India |
| Non Resident in India | The amount borrowed should be used for the purpose of business or profession carried on by such person within India |
B. Royalty Income [Section 9(1)(vi)]– Royalty income shall be deemed to accrue or arise in India if:
| PAYER | CONDITIONS |
| Indian Government | No condition |
| Resident in India | The amount of royalty must not be paid in respect of any property, right or information used or services utilized for the purpose of business or profession executed on by such person at a place outside India or for the purpose of making or earning an income from any source outside India. |
| Non Resident in India | The royalty amount must be paid in respect of any property, right or information used or services utilized for the purpose of business or profession executed on by such person in India or for the purpose of making or earning some income from any source within India. |
Amended provisions of section 9(1)(vi) provides to include explanation 4 to clarify that the transfer in respect of any right, property or information includes transfer of all rights for the use or right to use a computer software including issuance of a license irrespective of the medium through which such right is transferred.
Explanation 5 also has been included to clarify that the Royalty income includes consideration in respect of any right or property or information whether or not:-
(a) the possession or control of such right / property/ information is with the payer
(b) such right/property/information is used directly by the payer
(c) the location such right/property/information is located in India.
C. Taxability for ‘Fees for Technical Services’ [Section 9(1)(vii)] – The fees for technical services shall be deemed to accrue or arise in India if:
| PAYER | CONDITIONS |
| Indian Government | No condition |
| Resident in India | The fees for technical services should not be paid towards any services utilized for the purpose of business or profession carried on by such person located outside India or for the purpose of earning an income from any source outside India. |
| Non Resident in India | The fees for technical services should be paid towards any services utilized for the purpose of business or profession carried on by such person in India or for the purpose of earning an income from any source in India. |
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