Test of Residency for Individuals

Basic Condition for a person to be Resident

Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any previous year if he:

(a) is in India in the previous year for a period or periods amounting in all to one hundred and eighty-two days or more i.e., he has been in India for at least 182 days during the previous year; or,

(b) has been in India for at least three hundred and sixty-five days (365 days) during the four years preceding the previous year and has been in India for at least sixty days (60 days) during the previous year.

Test of residency for Individuals for taxation

Exception to the basic condition

In the case of following individual –

(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India,

Rule 126 Computation of period of stay in India in certain cases

An individual, being a citizen of India and a member of the crew of a ship, the period of stay in India in respect of an eligible voyage shall not include the period beginning from the date of joining till the date of signing off as mentioned in the Continuous Discharge Certificate under the Merchant Shipping Act, 1958.

“eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers or

freight in international traffic where –

(I) for the voyage having originated from any port in India, has as its destination any port outside India; and

(ii) for the voyage having originated from any port outside India, has as its destination any port in India.

(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year,

The provisions of the second condition shall apply in relation to that year as if for the words “sixty days (60days)”, occurring therein, the words “one hundred and eighty-two days (182 days) “had been substituted. However, for the purpose of clause (b) as mentioned above, in case of the citizen or person of Indian origin having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted. [Amendment vide Finance Act, 2020]

A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in Undivided India. It may be noted that grandparents include both maternal and paternal grandparents.

Note: Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. [Amendment vide Finance Act, 2020].

 Non-Resident

If an individual does not satisfy any of the above basic condition then, he will be treated as Non-Resident. It must be noted that the fulfilment of any one of the above conditions (a) or (b) as applicable will make an individual resident in India for tax purposes. Further it is to be noted that these conditions are alternative and not cumulative in their application.

Steps to solve the residential status of an Individual: 

Step 1:  Determine whether the individual falls under exception to basic condition;

Step 2If yes, apply only first basic condition, if satisfied, then he will be resident otherwise non- resident. If no, then apply both basic conditions and Individual becomes Resident on satisfaction of any one of the conditions.

Step 3: Check if satisfy the test of Ordinarily Residents, if yes, then he will be called ROR, otherwise he will be called RNOR. 

Condition 1: If individual is in India in the previous year for a total period of 182 days or more.

Condition 2: If he has been in India for at least 365 days during the 4 years preceding the previous year and has been in India for at least 60 days during the previous year. However, this 60 day shall be read as 182 days if he is a:

– Citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship, or for the purpose of employment outside India or

– Citizen of India or of Indian origin engaged outside India (whether for rendering service outside or not) and who comes on a visit to India in the any previous year.

Condition 3:

An individual who has been a non-resident in India in at least nine out of the ten previous years preceding that year, and has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to 729 days or less.

A citizen of India, or a person of Indian origin, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, who has been in India for a period or periods amounting in all to one hundred and twenty days or more but less than one hundred and eighty two days; or [Amendment vide Finance Act, 2020] Or

An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. [Amendment vide Finance Act, 2020]

TAXABILITY ON THE BASIS OF RESIDENTIAL STATUS

Taxability on The Basis of Residential Status

Applicability of Tax Audit 

To determine whether Tax Audit is applicable to an assesses, various parameters should be evaluated, such as whether the assesses has opted for a presumptive taxation scheme, the turnover of the assesses and question of whether the assesses total income exceeds the basic exemption limit. The following table can be used to determine whether Tax Audit is applicable to an assesses:

Category of Taxpayer Is Tax Audit necessary?
The assesses is carrying on a business but has not opted for the presumptive income scheme under the Act. Tax Audit is necessary if the total sales, turnover or gross receipts exceed one crore rupees.
The assesses is carrying on a business and has opted for the presumptive taxation scheme under Sections 44AE, 44BB or 44BBB. Tax Audit is necessary if the assesses claims profits which are lower than the prescribed limit under the presumptive taxation scheme.
The assesses is carrying on a business and has opted for the presumptive taxation scheme under Section 44AD. Tax Audit is necessary if the assesses claims profits which are lower than the prescribed limit under the presumptive taxation scheme and has a total income which is in excess of the basic exemption limit. Further, Tax Audit is necessary if the sales, turnover or gross receipts of the business is greater than two crore rupees.
The assesses is carrying on a business but the assesses not eligible to claim presumptive taxation under Section 44AD since the assesses has opted out of the presumptive taxation facility during the five-year lock-in period commencing from the year in which the scheme was initially opted for. Tax Audit is necessary if the assesses has a total income which is in excess of the basic exemption limit.
The assesses is carrying on a profession but has not opted for the presumptive income scheme under the Act. Tax Audit is necessary in case the total gross receipts of the business exceed fifty lakh rupees.
The assesses is carrying on a profession and has opted for the presumptive taxation scheme under Section 44AD. Tax Audit is necessary if the assesses claims profits which are lower than the prescribed limit under the presumptive taxation scheme and has a total income which is in excess of the basic exemption limit.
The assesses has incurred a loss from business, and the assesses wishes to carry forward the loss to future assessment years. Also, the assesses has not opted for any presumptive scheme under the Act. Tax Audit is necessary if the total sales, turnover or gross receipts exceed one crore rupees and the taxable income of the assesses exceeds the basic exemption limit.
The assesses has incurred a loss from business, and the assesses wishes to carry forward the loss to future assessment years. However, the assesses has opted for a presumptive scheme under the Act under Sections 44AD, 44ADA, or 44AE. Tax Audit is necessary if the total income of the assesses exceeds the basic exemption limit.

Section 44AB does not make any distinction between a resident or a nonresident. Therefore, a nonresident assessed is also required to get his accounts audited, and to furnish such report under section 44AB if his turnover/sales/gross receipts exceeds the prescribed thresholds.

PROBLEM-:

Taxability on income earned by an Indian residing abroad (in a whole financial year) through foreign employer.

SOLUTION-

As the above person has not resided for a single day in India in the previous year, he fails to fulfil the condition 1 which requires stay of 182 days in the previous year.

As the person has been engaged outside India for purpose of rendering the service Outside India, he falls under the exception so he is required to stay in India for a period of at least 182 days to fulfil condition 2 which also remains unfulfilled.

As his prime source of income is foreign source and the interest income from India do not exceed 15 lakh rupees- Condition 3 also not satisfied.

Hence, the person residential status is NON-RESIDENT. 

TAXABILITY-:

Income received by the above person (Non-Resident) by the foreign employer

It falls under point 6 i.e. Income received and accrued outside India from a business controlled from outside India or a profession set up outside India hence it remains non-taxable in India. 

Interest income in India through Indian Banks

This income will fall in point 3 of the above table i.e. Income accruing or arising in India (Whether received in India or outside India).

This income will be taxable in India.

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