Determining an individual’s residential status holds immense significance within the framework of the Income Tax Act. The tax liability of a person hinges on their residential status in India during a given financial year.
It is crucial to understand that the term “Residential Status” is not synonymous with Citizenship, as it is possible for an Indian citizen to be a non-resident or a resident but not an ordinary resident. Conversely, a foreign citizen can qualify as a resident for tax purposes.
Consequently, it becomes imperative to ascertain the residential status rather than solely relying on citizenship when considering tax implications and obligations.
Let’s delve into the captivating world of “Residential Status”
A Resident Taxpayer is an individual who meets either of the following criteria:
1. Resides in India for at least 182 days in a year.
2. Has resided in India for a total of at least 365 days during the previous four years and a minimum of 60 days in the current financial year.
Within the realm of resident status, there exists a more meticulous classification known as Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).
In addition to the fundamental conditions mentioned above, an individual qualifies as ROR if both of the following criteria are met (otherwise considered as RNOR)
1. The person has resided in India for a minimum of 2 out of the 10 immediately preceding years.
2. The person has spent at least 730 days residing in India within the 7 immediately preceding years.
An individual who does not satisfy the basic conditions of residency can be considered as a non-resident.
Deemed Residential Status
Irrespective of the conditions mentioned above, an individual who is a citizen of India and has total income (from other than foreign sources) in excess of INR 15 lakhs during a financial year, shall be deemed to be resident in India in that financial year.
Exceptions to the Fundamental Criteria for Determining Residential Status
The residential status will be determined based on stay in India for a duration of 182 days or more for the following cases:
1. Individuals who are citizens of India and leave India during the previous year as crew members of an Indian ship.
2. Individuals who are citizens of India and leave India during the previous year for employment purposes outside of India.
3. Individuals who are either citizens of India or persons of Indian origin and visit India during the previous year.
A) Individuals who are citizens of India and leave India during the previous year as crew members of an Indian ship.
If you are an Indian citizen working abroad or a crew member on an Indian ship, only the first condition is applicable to you – which means you are a resident when you spend at least 182 days in India.
The period or periods of stay in India shall, in respect of an eligible voyage shall be computed as follows:
1. The number of days of stay in India for such a person shall not include the days – from the start date of the Continuous Discharge Certificate and ending on the end date of this document, as signed off on the Discharge certificate.
2. Continuous Discharge Certificate must be as per the Merchant Shipping (Continuous Discharge Certificate-cum-seafarer’s Identity Document) Rules, 2001 made under the merchant shipping act, 1958
3. This Continuous Discharge Certificate must be for a voyage, which originates from any port in India and has its destination at any port outside India OR which originates from any port outside India and has its destination at any port in India.
For sailing on foreign ships
Indian crew serving on foreign ships for 182 days or more are treated as non-resident in India, irrespective of where the ship trades (including Indian waters).
For sailing on Indian ships
A seafarer serving on Indian ships outside India for 182 days or more in a year is considered to be a non-resident. However, the time spent by a ship in Indian territorial waters is considered a period of service in India, according to tax rules framed in 1990. The number of days outside India of Indian crew working on such Indian ships gets counted only from the date when the Indian ship crosses the coastal boundaries of India.
B) Individuals who are citizens of India and leave India during the previous year for employment purposes outside of India.
In the event an individual who is a citizen of India or person of Indian origin leaves India for employment during an FY, he will qualify as a resident of India only if he stays in India for 182 days or more.
However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds Rs 15 lakh and the individual will be considered as RNOR.
C) Individuals who are either citizens of India or persons of Indian origin and visit India during the previous year.
If an individual who is an Indian citizen or a person of Indian origin visits India and earns income from Indian sources (excluding income earned outside India), and if that income exceeds Rs.15 lakhs in the relevant previous year (PY), they will be classified as a Resident but Not Ordinarily Resident if the following conditions are met:
1. The individual stays in India for a minimum of 120 days during the relevant PY.
2. The individual stays in India for 365 days or more during the four preceding previous years, starting from April 1, 2021.
But there’s more to it. The taxability in cases of Resident, Non-Resident and Resident but Not Ordinary Resident.
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.
Non-Resident and Resident but Not Ordinary Resident:
NR and RNOR, Individuals are only required to pay taxes on the income they generate within the country, sparing them from any taxation on their foreign earnings. It’s important to note that in situations where the same income is subject to taxation in both India and another country, individuals can turn to the Double Taxation Avoidance Agreement (DTAA) established by India with that particular country. This agreement serves as a safeguard, ensuring that individuals are not burdened with the prospect of paying taxes twice. By leveraging the DTAA, they can effectively eliminate the possibility of double taxation and enjoy the full benefits of their hard-earned income without any undue financial strain.
In Conclusion, understanding one’s residential status is vital when it comes to tax obligations in India. It’s crucial to remember that residential status is not solely determined by citizenship but rather by specific criteria outlined in the Income Tax Act. By accurately ascertaining one’s residential status, individuals can navigate the tax landscape effectively, ensuring they meet their obligations while maximizing their financial benefits. Additionally, the Double Taxation Avoidance Agreements (DTAA) provide a shield against double taxation, allowing individuals to enjoy their hard-earned income without the burden of paying taxes twice.