Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

‘Residential Status’ under Income Tax Act. 1956

‘Residential Status’ under Income Tax Act. 1956
‘Residential Status’ under Income Tax Act. 1956

Table of Contents

1.   Residential Status of an Individual [Section 6(1)]

According to the residential status, the assessee can either be:

(i) Resident in India; or

(ii) Non-Resident in India.

However, individual and HUF cannot be simply called resident in India. If individual is a resident in India he  will be either:

(a) Resident and Ordinarily resident in India; or

(b) Resident but not Ordinarily resident in India.

Other categories of persons shall either be Resident in India or Non-Resident in India. There is no further  classification into ordinarily resident or not ordinarily resident in their case.

[Image]

1.     Resident In India

An individual is said to be resident in India if he satisfies any one of the following two conditions:

(1)          He is in India for a period or periods amounting  in all to 182 days or more in the relevant previous  year;

Or

(2)          He is in India for 60 days or more during the  relevant previous year and has been in India for 365  days or more during 4 previous years immediately  preceding the relevant previous year.

Modification of Residency Provisions [Section 6] [ W.e.f. 2021-22]

A citizen of India or person of Indian origin, who had been in India for 365 days or  more in the 4 preceding previous years and who undertakes a visit to India in any previous year,  and

(a) whose total income other than income from foreign source does not exceed Rs. 15 lakh shall  not be a resident in India if he stays in India upto 181 days in the relevant previous year; or

(b) whose total income other than income from foreign source exceeds Rs. 15 lakh shall not be a  resident in India if he stays in India upto 119 days in the relevant previous year.

The moment he stays in India for 182 days or 120 days as the case may be, he shall be treated as  resident in India.

Exceptions/Concession:

There are two exceptions/concession to the above rule:

(a)           In case of an individual, who is a citizen of India and who leaves India in any previous year for the  purposes of employment outside India, the condition No. 2 supra (mentioned above) shall not be  applicable for the relevant previous year in which he leaves India. In other words, for that particular  previous year in which he leaves India for the purposes of employment outside India he shall be called  resident only when he satisfies the condition No. 1 mentioned above.

Similarly in case of an individual who is a citizen of India and who leaves India in any previous year as a  member of the crew of an Indian ship, the condition No. 2 supra shall not be applicable.

(b)          In case of an individual, who is a citizen of India, or is a person of Indian origin, who, being outside  India, comes on a visit to India in any previous year, the condition No. 2 mentioned above in his case also  shall not be applicable. In other words, he shall not be a resident in India unless his stay in India is at least  182 days during the relevant previous year in which he visits India.

Note :

1. The above conditions, with exceptions/concessions may be called as category ‘A’ conditions. 

2. A person is said to be of Indian origin if he, or either of his parents or any of his grandparents was born in  undivided India i.e. before India was partitioned. [Explanation to section 115C(e)]. 

3. In case of an individual, bring a citizen of India a member of the crew of a foreign bound ship leaving  India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner  and subject to such conditions as may be prescribed. 

Important explanations

  • Relevant previous year means the previous year for which the residential status is being determined.
  • In computing the period of stay in India, it is not necessary that the stay should be for a continuous What is to be seen is the total number of days’ stay in India during the relevant previous year.
  • It is also not necessary that the stay should be only at one place. e.g., he may stay at Bombay for 90 days and then go out of India. On return in the same previous year, he may stay at Delhi for 120 days during  the same previous year. His total stay in India will be 210 days for that previous year.
  • In computing the period of 182 days, the day the individual enters India and the day he leaves India should both be treated as stay in India.
  • Place and purpose of stay in India is immaterial. Presence in territorial waters of India would also be regarded as presence in India.

Meaning of employment :             The term employment is not defined in the Income-tax Act.

A man may employ himself so as to earn profits in many ways. Thus he can set up an independent practice  abroad or businessman can shift his business activities to a foreign country. A person merely undertaking tours  abroad in connection

2.     Resident and Ordinary Resident In India

An individual who is resident in India, shall be resident and ordinarily resident in India if he satisfies both the  following conditions—

(1)          He has been resident in India for at least 2 out of  10 previous years immediately preceding the  relevant previous year.

This means that he must have satisfied any one of  the conditions, with exceptions/concession (given  above) for being a resident for at least 2 out of 10  previous years immediately preceding the relevant  previous year. 

And

(2)          He has been in India for 730 days or more, during seven previous years immediately preceding the relevant previous year.

3. Resident but Not Ordinarily Resident in India? [Section 6(6)(a)]

An individual who is resident in India is said to be “not ordinarily resident in India” if he does not satisfy any or both of the conditions as mentioned –

(1)          He has been resident in India for at least 2 out of 10 previous years immediately preceding the relevant previous year.

This means that he must have satisfied any one of the conditions, with exceptions/concession (given above) for being a resident for at least 2 out of 10 previous years immediately preceding the relevant previous year. 

And

(2)          He has been in India for 730 days or more, during seven previous years immediately preceding the relevant previous year.

Modification of provisions of “Not Ordinarily Resident” [Section 6(6)] [W.e.f. A.Y. 2021-  22] 

Section 6(6) provides for situations in which an individual who is resident in India shall be “not  ordinarily resident” in a previous year.

Section 6(6)(a) provides that if the person is an individual who has been non-resident in 9 out of the  10 previous years preceding that year,

or

has during the 7 previous years preceding that year been in India for an overall period of 729 days  or less,

he shall be deemed to be not ordinarily resident in India.

The above Section 6(6) has been further enlarged to include the following individuals also as not  ordinarily resident in India:-

(i)            a citizen of India, or a person of Indian origin, having total income, other than the income from  foreign sources, exceeding Rs. 15 lakh during the previous year, as referred to in clause (b) of  Explanation 1 to Section 6(1), who has been in India for a period or periods amounting in all  to 120 days or more but less than 182 days; or

(ii)           a citizen of India who is deemed to be resident in India under Section 6(1A)

4.     Non-Resident in India [Section 2(30)]

An individual is said to be a non-resident, if he is not a resident in India i.e., none of the conditions (with exception/concession) mentioned –

(1)          He is in India for a period or periods amounting in all to 182 days or more in the relevant previous year;

Or

(2)          He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during 4 previous years immediately preceding the relevant previous year.

Basic Rules for determining Residential Status of an Assessee

The following basic rules must be kept in mind while determining the residential status:

  • Residential status is determined for each category of persons separately e.g. there are separate set of rules for determining the residential status of an individual and separate rules for companies, etc.
  • Residential status is always determined for the previous year because we have to determine the total income of the previous year only.
  • Residential status of a person is to be determined for every previous year because it may change from year to year. For example A, who is resident of India in the previous year 2019-20, may become a nonresident in previous year 2020-21.
  • If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in  respect of each of his other source of income. [Section 6(5)]
  • A person may be a resident of more than one country for any previous year. If Y is a resident in India for previous year 2019-20, it does not mean that he cannot be a resident of any other country for that previous
  • Citizenship of a country and residential status of that country are separate concepts. A person may be an Indian national/citizen, but may not be a resident in India. On the other hand, a person may be a foreign  national/citizen, but may be a resident in India.
  • It is the duty of the assessee to place all material facts before the assessing officer to enable him to determine his correct residential status.

2.   Residential Status of Hindu Undivided Family (HUF) [Section 6(2)]

1.     When is HUF said to be a Resident in India?

A HUF 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.

2.     When is HUF said to be a Non-Resident?

A HUF is said to be non-resident in India if during the  previous year, the control and management of its affairs is situated wholly outside India.

In other words it will be non-resident in India if no part of the control and management of its affairs is  situated in India.

Control and management refers to the decisions taken regarding affairs of the HUF. The control and  management lies at the place where decisions regarding the affairs of the HUF are taken. 

Once the HUF is a resident in India, it is to be further determined whether it is:

(a)           resident and ordinarily resident in India; or

(b)          resident but not ordinarily resident in India.

3.     When is HUF said to be a Resident and Ordinarily Resident in India?

The HUF shall be said to be resident and ordinarily resident in India if the karta of the HUF satisfies both the  following conditions:

(a) He (Karta) must be resident in at least 2 out of 10 previous years immediately preceding the relevant  previous year;  and

(b) He must be in India for at least 730 days during 7 previous years immediately preceding the relevant  previous year.

4.   When is HUF said to be Resident but Not Ordinarily Resident in India? [Section 6(6)(b)]:

A HUF,  which is resident in India, is said to be resident but not ordinarily resident in India during the relevant previous  year, if the manager (Karta) of the HUF does not satisfy any one, or both, of the conditions mentioned in clauses  (a) and (b) above.

For determining whether HUF is a Resident or not, the residential status of its ‘Karta’ for the relevant previous  year is of no relevance. But for determining whether HUF is ordinarily Resident in India or not, Karta’s status  for the preceding years becomes relevant. 

Excepting individual and HUF, all other persons are classified either as resident or non-resident. They are not  to be further classified as ordinarily resident or as not ordinarily resident. 

3.   Residential Status of Firm, Association of Persons (AOP), Body of Individuals (BOI) and of  other persons (except companies) [Sections 6(2) and 6(4)]

These entities may either be resident or non-resident in India for any previous year.

1.     When is a Firm, AOP, BOI, etc. said to be resident in India?

A firm, AOP, etc. is said to be resident  in India in any previous year in all cases except where during that year the control and management of its affairs  is situated wholly outside India.

In the case of a firm, the control and management is in the hands of the partners and therefore, if the partners  generally meet in India regarding the affairs of the firm, then the firm is said to be resident in India.

2.     When is a Firm, AOP, BOI, etc. said to be Non-Resident in India?

If the control and management of  the affairs of these entities is wholly out of India during the relevant previous year then they are said to be nonresident.

In other words, to be Non-Resident, no part of the control and management should be in India.

For purpose of determining the residential status of a firm or a HUF, the residential status of the partner of the  firm or the members of the HUF, is immaterial except in cases where the residence of the partners or the  members of the family affects its control and management. 

4.   Residential Status of a Company [Section 6(3)]

1.     When is a company said to be Resident in India?

A company is said to be resident in India in any  previous year, if—

(i) it is an Indian company; or

(ii) its place of effective management, in that year, is in India.

2.     When is a company said to be Non-Resident in India?

A Company will be a non-resident in any previous  year if:

(a) it is not an Indian company

and

(b) its place of effective management, in that year, is not in India.

Meaning of “place of effective management”: “Place of effective management” (POEM) 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.

5.   Scope of Total Income according to Residential Status

1.     Resident in India (Resident and Ordinarily Resident in case of individual or HUF)  [Section 5(1)]:

The following incomes from whatever source derived form part of Total Income in case of  resident in India/ordinarily resident in India:

(a)           any income which is received  or is deemed to be received in  India in the relevant previous year  by or on behalf of such person;

(b)          any income which accrues or  arises or is deemed to accrue or  arise in India during the relevant  previous year;

(c)           any income which accrues or  arises outside India during the  relevant previous year.

2.     In the case of a Resident but not Ordinarily Resident in India (In the case of individuals and HUF  only) [Section 5(1) and its proviso]:

The following incomes from whatever source derived form part of Total  Income in the case of resident but not ordinarily resident in India:

(a) any income which is received  or is deemed to be received in  India in the relevant previous year  by or on behalf of such person;

(b) any income which accrues or  arises or is deemed to accrue or  arise to him during the relevant  previous year;

(c) any income which accrues or  arises to him outside India during  the relevant previous year if it is  derived from a business controlled  in or a profession set up in India.

3.     In the case of Non-Resident [Section 5(2)]:

The following incomes from whatever source derived form  part of Total Income in the case of Non-Residents in India:

(a) any income which is received or is deemed to be  received in India during the relevant previous year by  or on behalf of such person;

(b) any income which accrues or arises or is deemed  to accrue or arise to him in India during the relevant  previous year.

Thus it may be noted that income described in items (a) and (b) in all the three cases above are to be included  in total income of all the three categories of the assessees in the same manner.

The income described in item (c)  i.e. income which accrue or arise outside India is:

  • not includible in the total income at all in case the assessee is non-resident in India.
  • includible in the total income in the case of resident but not ordinarily resident in India only when it is derived from a business controlled in or profession set up in India

Therefore, the incidence of tax is likely to be more in case of an assessee who is resident and ordinarily  resident in India, a little less in case of a resident but not ordinarily resident in India and the least in case of nonresident in India if the assessee has various incomes both inside and outside India.

See also  Time and Mode of TCS payment to Government Account U/s 206C [Section 206C(3) and Rule 37CA]
%d bloggers like this: