Determination of residential status of a tax-payer individual or company is very essential as it is one of important factor to determine a person’s taxability of income in India. Taxability of an income in the hands of a person primarily depends on the following:
- Residential status of the person
- Nature of income earned by him
Readers may note that the term “residential status” is used here for the purpose of defining taxability of income in India, and it should not be construed in relation to citizenship in India. An individual may be a citizen of India but may not be resident for a particular year for tax purposes. Similarly, a foreign citizen may also become resident of India for income tax purposes for a particular year.
Residential status is classified in following Categories:
- Resident: Residents are further classified in following categories in case of Individuals and HUF
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
We are summarizing below criteria for determination of residential status in different cases:
- Determination of Residential status of Individuals
To determine residential status of Individuals, following steps are followed:
- Determine if person is a resident in India
- If yes, then to identify if he is ordinarily resident or not ordinarily resident in India
- If criteria for residency if not fulfilled he will be considered as non-resident
A.1 Determination of Resident Individual
As per Section 6(1) of Income tax act, an individual is said to be resident in India in any particular year, if he
- is in India in that year for a period of 182 days or more; or
- has been in India for 365 days or more in immediately 4 preceding years AND 60 days (refer note 1 and note 2) or more in that year
- In above condition the period of 182 days shall be considered instead of 60 days in following cases:
- An Indian citizen who leaves India for the purposes of employment outside India and his contract for such employment outside India has been approved by central government; OR
- An Indian citizen who leaves India in any previous year as a member of the crew of an Indian ship; OR
- An Indian citizen or a person of Indian origin who, being outside India, comes on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grand-parents (maternal or paternal) were born in undivided India.
Further from financial year 2020-21, In case of Indian citizen or a person of Indian origin whose total income (other than foreign sources) exceeds Rs 15 lakh during the year, the period of 120 days shall be considered instead of 60 days.
- While computing the period of stay in India, stay is not required for a continuous period and aggregate period of stay even in breaks need to be considered. Further stay can be at any place such as place of residence, business etc.
- Further as per decision of Authority for Advance Rulings, both, day of departure from India and day of arrival in India are to be counted as stay in India.
- Deemed Resident: In another significant change from FY 2020-21, any Indian citizen having total income (other than the income from foreign sources) exceeding fifteen lakh rupees during that year will be deemed to be resident in India in that 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.
A.2 Determination of Ordinarily Resident (ROR) or Not Ordinarily Resident (RNOR)
If an individual qualifies as a resident in terms of above definition , the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a RNOR if he meets any of the following conditions:
- If he has been a non-resident in India in 9 (nine) out of the 10 (ten) previous years preceding that year, OR
- Has stayed in India for 729 days or less in immediately preceding 7 (seven) years, OR
- If he is an Indian citizen or a person of Indian origin having total income (other than foreign sources) exceeding Rs 15 lakh during the year and he has been in India for a period of 120 days (one hundred and twenty days or more) but less than 182 days (one hundred and eighty-two days) (Applicable from financial year 2020-21), OR
- Deemed resident as defined above (Applicable from financial year 2020-21)
Therefore, if any resident individual not meeting any of the above conditions will become Resident and Ordinarily Resident (ROR).
An individual who is not satisfying any of residential condition will be considered as Non-Resident for that year.
- Residential Status for HUF, firms or other association of persons
A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India. In other words, these persons shall be considered as resident if the control and management of its affairs is situated wholly or partly in India.
Further if HUF is resident then residential status of KARTA determines whether the HUF is ROR or RNOR.
- Residential status of companies
A company is said to be a resident in India in any financial year, if—
- it is an Indian company; or
- its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause "place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.
Other points to consider:
- Every other person is said to be resident in India in any particular year in every case, except where during that year the control and management of his affairs is situated wholly outside India. (Section 6(4) of Income tax act)
- If a person is resident in India in a particular year in respect of any source of income, he shall be deemed to be resident in India in that year in respect of each of his other sources of income (Section 6(5) of Income tax act)
Taxability of Income for different residential status
Ordinarily Resident: Global income i.e. income earned in India as well outside India, is taxable in India for a person who is an ordinarily resident in India.
Non-Resident and RNOR: Only Income earned in India is taxable in India. Foreign income is not taxable in India.
Taxability of different type of income for different residential status is summarized below:
|Source of Income
||Resident and Ordinarily Resident (ROR)
||Resident but not ordinarily resident (RNOR)
|Income received or is deemed to be received in India
|Income accrues or deemed to accrue in India
|Income accrues or arises outside India
||Taxable if derived from a business controlled from India or from a profession setup in India.
Readers may also note that India has entered in Double Taxation Avoidance Agreement (DTAA) with various countries to avoid the possibility of paying double tax in different countries on a particular income.