residential status.pptxSsSsSsSsSSsSSSSSS

TAXATION
3r d SEMESTER
T O P I C :
RESIDENTIAL STATUS

RESIDENTIAL STATUS AS PER
INCOME TAX ACT
According to the Income Tax Act, 1961, taxation
depends on the resident status of an
individual/company. Although you have read
about the different categories classified under the
income tax rules, there is a possibility that you are
unsure of how they vary. It is recommended to
understand it with the following examples:
Resident
Resident Not Ordinarily Resident
Non-Resident

Residential Status of a n
'Individual' (Section-6) - u n d e r
Income Tax Act

1. Resident
A resident taxpayer is an individual who satisfies
one of the following conditions:
 Resides in India for a minimum of 182 days in a
year.
 Has resided in India for a minimum of 365 days in the
immediately preceding four years. In addition, he
must reside in India for a minimum of 60 days in the
current financial year.
Consider the case of Mr D, Business Head for Asia
Pacific regions for a private firm. Mr D was born
and brought up in India. He has to travel to various
locations of the continent for business purposes.

He has spent 200 days travelling in the
current financial year. Also, he has been
travelling abroad from the past two years and
has stayed out of India for about 400 days in
this period.
When you consider this information to figure
out the resident status of Mr. D, you will
understand that he has only spent 165 days
in India during the current financial year.
That proves the first condition wrong. It is
given that Mr. D has been travelling only
from the past two years.

Also, it is said that he has travelled for 400
days in the past two years. That means, in
the past four years, Mr. D has stayed in India
for more than 365 days (1061 days). You
must remember that he has stayed for 165
days in the current year. Therefore, the
second condition holds good. Mr. D is a
resident taxpayer.

2. Resident Not Ordinarily Resident
There is a further classification under the resident
status – Resident Ordinarily Resident (ROR) and
Resident Not Ordinarily Resident (RNOR). If both the
conditions below are met, he will be a ROR:
 He has resided in India for at least 2 out of
10 immediate previous years.
 He has resided in India for at least 730 days in
seven immediately previous years.
Considering the example of Mr D, both the
conditions are satisfied. Therefore, he can be
considered as Resident Ordinarily Resident.

Alternatively, consider that he had to work
from the headquarters of his firm, located in
Kota Kinabalu, Malaysia for the past six years.
He has only visited his parents for a week,
twice a year during this time. That means, he
has resided in India for 449 days in the past
six years and the same applies for the current
financial year too. In this case, one condition
is not met. Therefore, Mr D is RNOR.

3. Non-Resident
An individual who does not fall under either
of the above categories can be considered as a
non-resident. For example, Ms G went to
London to join a reputed university for a
graduation course (three years). While
studying there, her professor suggested her to
join a post-graduate course at the same
university (two years).

She had to get an internship certificate to
complete the course. Upon completion, the
firm offered her a permanent position. She
has been an employee there for the past four
years. That is, Ms G has stayed out of India for
nine years now. She receives rental income
from the property that she inherited from her
parents. Both the conditions applicable for
ROR are not satisfied. That makes Ms G a
non- resident.

It is important to determine the residential
status of a person since the taxability of income
of a person depends on his residential status
during that financial year. For example, a person
resident in India is liable to pay tax in India on
his global income.
As per section 6 of the Income-tax Act, 1961, all
the assessees are divided in the following
categories for the purpose of determining their
residential status:

I. Individual,
II. Hindu undivided family,
III. Company, and
IV. Every other person
Types of Residential Status:
An assessee can be categorized into
following residential status during the
previous year:
A) Resident in India
B) Non-Resident in India

A resident individual and HUF are further sub-
categorized in to following status:
A) Resident and Ordinarily Resident
B) Resident but Not-ordinarily Resident
I. Individual:
The residential status of individual for the
purpose of taxation is determined on the basis of
his physical presence in India during the
previous year (April 1 to March 31) and
preceding previous years. An individual is said
to be a resident of India if he is:

1)Physically present in India for a period
of 182 days or more in the previous year, or
2)Physically present in India for a period
of 60 days or more during the relevant
previous year and 365 days or more in
aggregate in four preceding previous years.
If a person doesn’t meet any of the above
two conditions then he is said to be a non-
resident in India for the purpose of taxation in
India.

A resident individual is further classified into
‘Resident but not Ordinarily Resident’ if:
1) His stay in India is of 729 days or less
in previous 7 years; and
2) He was considered as ‘non-resident’ in
9 out
of previous 10 years.

II. HUF:
An HUF is said to be resident in India if the
control and management of HUF is in India.
A resident HUF is further classified into
‘Resident but not Ordinarily Resident’ if:
a)Stay of Karta in India is 729 days or less
in previous 7 years; and
b) Karta was considered as ‘non-resident’ in
9
out of previous 10 years.

If control and management of HUF is situated
wholly outside India then HUF shall be treated as
non-resident.
III. Company:
An Indian Co. is always treated as resident in
India. However, in the case of a Foreign Co., it
shall be treated as resident in India if the Place of
Effective Management (POEM) of Foreign Co. is
in India. If POEM of Foreign Co. is outside India
then it shall be treated as non-resident in India.

IV. Every other person:
In case of every other person, i.e.,
Firm/BOI/AOP, they will be treated as resident in
India if control and management of person is
situated in India. If it is situated outside India then
status will be non-resident.
It must be noted that if a person is resident in
India in a previous year in respect of any source
of income, he is deemed to be resident in India in
respect of all other sources of income.

An assessee is not allowed to claim different
residential status for his different sources of
income. So, before calculating income
during the year, it is most important to
calculate the residential status of the assessee
during the previous year.
Taxability of income in case of ordinary
resident person:
A resident assessee shall be liable to pay tax
in India on the following incomes:

1. Income received or is deemed to be received
by him in India in the previous year.
2. Income accrues or arises or is deemed to
accrue or arise to him in India during such year.
3. Income accrues or arises to him outside
India during such year.
Taxability of income in case of non-ordinary
resident person:
A resident but not ordinarily resident individual
and HUF shall be liable to pay tax in India on the
following incomes:

1. Income received or is deemed to be
received by him in India in the previous year.
2. Income accrues or arises or is deemed
to accrue or arise to him in India during
such year.
3. Income accrues or arises to him outside
India during such year if it is derived from
a business controlled from India or from a
profession setup in India.

Taxability of income in case of non-resident
person:
In case of a non-resident assessee, being an
individual, HUF, partnership firm, company or
other person, following incomes shall be
taxable in India:
1.Income received or is deemed to be received
in India by such person in the previous year.
2.Income accrues or arises or is deemed
to accrue or arise to such person in India
during such year.

Income Tax Act - Determining
the Residential Status of an
Individual
Determining the residential status is essential
during the time of income tax filing. There are
different taxable incomes and some exceptions
regarding the residential status in India.
Section 6 (1) of the Income Tax Act, 1961, offers
two sets of parameters to determine whether a
particular person is an Indian citizen or not. If the
said individual falls under any one of the
following criterias, he/she will be a resident of the
country. These are:

If the individual has resided in India during the
relevant financial year that amounts to a total of
182 days or more.
If the individual has resided in India for four
consecutive years before the relevant financial
year that amounts to a total of 365 days or
more.
Meeting with the above mentioned parameters
qualifies an individual as a resident of the country,
however, in order to become an ordinary citizen
of the country, one has to meet with the following
standards:

If the individual has been an Indian citizen
for two consecutive financial years out of ten
financial years, that falls immediately before
the relevant financial year.
If the individual has resided in India for seven
consecutive financial years immediately
before the financial year in question.
Why is the residential status of a person
important for Income Tax?

Any salaried or self-employed individual
residing in India will be subjected to the age-
old Income Tax based on their residential
status. At the time of Income Tax return filing,
it is very important to determine the
residential status of a person, since it is the
most important component in the realm of
taxation.

Multiple taxpayers are subjected to a wide range of taxable
incomes. Let us look at them in detail with the help of the
following table:
Details and Particulars
Ordinary
Resident
and
Resident
A non-
ordinary
resident
NRI
If the income is received in India, irrespective
of whether it has its source in India or not
Yes Yes Yes
Income ensuing in India or is expected to
ensue in India during the relevant financial
year, irrespective of whether it has its source
in India or not
Yes Yes Yes
If an individual is receiving his income
anywhere outside India, but the business is
being handled from India
Yes Yes No
Income ensuing outside India and received
in the same place in the relevant financial
year from other sources
Yes No No

Residential Status in India:
Things to Keep in Mind
1.Income Receipt: To levy Income Tax, it is of
utmost importance that you save the first
receipt. If a certain amount of money received
outside India is subsequently dispatched to India,
it will be considered a foreign receipt. Merely
because there is an issue of remittance involved,
does not make the amount an income received
in India.
2.Citizenship Vs Residential Status: There is
an enormous difference between the two
notions

A citizen may not be a resident in the same country.
In comparison with this, an individual being a citizen
of a foreign country may still be an Indian citizen.
3.Stay Period Calculation: Calculating an individual’s
period of stay is essential to the concept of residential
status. It is important to note here that the stay does
not necessarily have to be ongoing in nature. Elements
such as the total number of days spent at a time are
important for computation. The individual’s stay can be
at any location, and not necessarily in the same place

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