It is important for Income Tax Department to determine the residential status of a tax paying individual or company. It becomes particularly relevant during the tax filing season. In fact, this is one of the factors based on which a person’s taxability is decided. Let us explore the residential status and taxability in detail.
Meaning and importance of residential status
The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year.
Also to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently.
How to determine residential status?
For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:
a. A resident
b. A resident not ordinarily resident (RNOR)
c. A non-resident (NR)
Resident Situation/Define Status
A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :
1. Stay in India for a year is 182 days or more or
2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the relevant financial year
In the event an individual who is a citizen of India 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. Such individuals are allowed a longer time greater than 60 days and less than 182 days to stay in India. 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.
In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature.
Resident Not Ordinarily Resident
If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:
1. Has been a resident of India in at least 2 out of 10 years immediately previous years and
2. Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.
An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year.
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.
NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not pay any tax in India on their foreign income.
Also note that in a case of double taxation of income where the same income is getting taxed in India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country in order to eliminate the possibility of paying taxes twice.
HINDU UNDIVIDED FAMILY (HUF)
An HUF can be either a resident or non-resident in India. Again, a resident HUF can further be classified as ‘Ordinarily resident’ and ‘Not ordinarily resident’.
Resident HUF: When the control & management1 of affairs of HUF is wholly or partly situated in India during the relevant previous year, then it is treated as resident in India.
Control & management means –
• controlling & directive power;
• actual control & management (mere right to control & manage is not enough);
• central control & management and not the carrying out of day to day affairs.
The place of central control & management is situated where the head, the seat & the directing power is situated.
Non-resident HUF: An HUF is non-resident in India if the control & management1 of its affairs is wholly situated
Resident Company: An Indian company is always a resident in India. A non-Indian company is said to be a resident in India, if its place of effective management, in that year, is in India.
“Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole, are in substance made.’
Non-Resident Company: If place of effective management, in that year, is not in India, the said company is nonresident in India for the relevant previous year. Taxpoint: In case of company, there is no sub-division like ‘Ordinarily resident’ or ‘Not ordinarily resident’.