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A Guide on Residential Status for Income Tax

Updated: May 20


A Guide on Residential Status for Income Tax

Determining a tax-paying individual's or company's residence status is crucial for the Income Tax Department. It becomes more important when tax returns are due. In actuality, this is one of the elements that determine a person's taxability.  According to an important change effective FY 2020–21, A person who is an Indian citizen and is not subject to taxation in any other nation will only be considered an Indian resident if their total income (excluding income from overseas sources) surpasses Rs 15 lakh and they have no outstanding tax obligations in other nations. In this article, we will explain the meaning and significance of residential status for income tax. 

 

Table of Contents

 

Understanding the Meaning of Residential Status for Income Tax

According to the Indian Income Tax Act, a person's residential status is determined by whether or not they physically dwell in India over a financial year. The residence status of an individual holds significance since it establishes whether or not their income is subject to taxation in India. Residential status is divided into three categories under the Income Tax Act: 

  • Resident and Ordinarily Resident (ROR)

  • Resident but Not Ordinarily Resident (RNOR)

  • Non-Resident (NR)

The Income Tax Act specifies some factors, such as the number of days spent in India during the financial year and the number of days spent in India in the previous financial years, that are used to determine one's residence status. Individuals must understand their residential status  to comply with tax rules and regulations, as each category of residential status has different tax repercussions.


Significance of Residential Status

It is crucial to ascertain a person's residence status for several reasons. The following justifies the need to know one's residential status: 

  • An individual's tax liability in India is based on their residency status. While non-residents are only subject to taxation on their income originating in India, residents are subject to taxation on their entire income. To compute the accurate tax liability, it is imperative to ascertain the accurate residence status.

  • Individuals are subject to varying criteria depending on their residency status. For instance, residents of India must file their tax returns, but non-residents are exempt from filing if their income is below a certain threshold. Determining the residential status is therefore crucial to adhere to tax rules and regulations. 

  • A person who lives in many countries may be subject to double taxation, which is the imposition of two taxes on the same income in the two nations. Individuals can obtain tax savings under the Double Taxation Avoidance Agreements (DTAA) that India has signed with foreign nations by being aware of their residential status.


Classification of Residential Status under Income Tax

Based on the duration of a person's stay in India, the Income Tax Law has classified them into one of three resident status categories. A person's residential status will encompass both their current fiscal year and prior years of residence. The residence status of an individual is classified into the following categories.


Resident and Ordinarily Resident (ROR)

The most prevalent type is that of resident and ordinarily resident (ROR) individuals. In terms of taxes, you are regarded as an Indian resident if you satisfy any of the following criteria:

  • During a financial year, you spend a minimum of 182 days in India physically. It's referred to as the 182-day rule. 

  • You have been in India for a minimum of 60 days during the current financial year and for a total of 365 days or longer during the four fiscal years prior. This is referred to as the sixty-day rule.


Resident but Not Ordinarily Resident (RNOR)

A person with strong ties to India is considered an ordinary resident. This may depend on things like your citizenship, birthplace, or location of permanent residence. But according to the Income Tax Act, you will be deemed to be a regular resident if you fulfill one of these requirements: 

  • You have lived in India for at least two of the ten previous financial years before the current year. 

  • You have traveled to India for at least 730 days in the seven years prior to the current year. 


Non-Resident (NR)

If you don't fit the requirements to be a resident or an ordinarily resident, that is, if you don't meet these requirements to remain in India

  • 182 days or longer in the year prior, or 

  • For the purposes of that fiscal year, someone who was absent for 60 days or more of the year prior and 365 days or more of the four previous years,

These individuals shall be classified as non-residents.


Exceptions to Residential Status

If a citizen of India departs India during the fiscal year to work abroad or as a member of a ship operated by an Indian company, he will only be considered an Indian resident if he remains in the country for a minimum of 182 days. An Indian citizen or a person of Indian descent who resides outside of India visits the country in the relevant prior year. However, a person shall be considered an Indian resident if their total income for the preceding year, excluding income from overseas sources, exceeds Rs. 15 lakhs. 

  • He spends 182 days or more in India in the preceding year that applies, or 

  • He stays 365 days or more in India throughout the course of the preceding four years and spends at least 120 days there in the year prior

An important modification states that an individual who is an Indian citizen and whose total income (excluding income from overseas sources) exceeds Rs 15 lakh and who has no outstanding tax liabilities in other countries will be considered a "deemed resident of India." 


Calculation of Residential Status of an Individual

An individual's residence status can be ascertained using the following criteria: 

  • The total number of days the person spent in India during the applicable fiscal year

  • The total number of days that the person spent in India in the four years before the relevant fiscal year

  • Whether the person is an Indian citizen or a person of Indian descent

  • The person's employment position with the Indian government or a public sector company


Tax Applicability for Different Residential Statuses

Residents: In India, a resident's whole income—which comprises money earned within and outside of the country—will be subject to taxation.


RNOR: The amount of taxes they owe in India is determined by their total income. They are exempt from paying taxes in India on their foreign earnings. 


Non-Residents: Only income "received in India" or income "sourced from India" will be subject to taxation for non-residents. On the other hand, money received outside of India and unrelated to India is not subject to taxes.

Interest on fixed deposits held with Indian banks is "received in India." officially known as Indian-generated income.  Also, "received from India" refers to payment made to a foreign bank account for services rendered by an Indian individual or business, officially known as "Income Received from India." For RNORs and NRs, one may rely on the Double Taxation Avoidance Agreement (DTAA) that India would have signed with the other country to avoid paying taxes twice in the event of double taxation of income, which occurs when the same income is taxed in India and elsewhere.


Residential Status of HUFs (Hindu Undivided Families)

  • If a HUF's management and control are entirely or primarily located in India, it is deemed to be a resident of India. This includes the locations from which the HUF members oversee it in India. It is a non-resident HUF otherwise.

  • If a HUF's Karta (manager) meets the following requirements, it is categorized as a resident and ordinarily resident. In the past seven years, the Karta has spent at least seventy-two days in India, and in the past ten years, the Karta has resided in India for at least two of those years.

  • The HUF is categorized as residents but not usually residents if its Karta does not match the aforementioned requirements.


Residential Status of Companies

  • A company is said to be resident in India if one of the following criteria is met: either it is an Indian firm, or its place of effective management (POEM) was situated in India during the preceding year. 

  • The term "place of effective management," or POEM, describes the setting where important business-related management and commercial choices, like those pertaining to strategy and policy, are made.


Residential Status of Firms, LLPs, BOIs, AOPs, Artificial Juridical Persons, and Local Authorities

  • If these entities predominantly exercise their control and management from India, they are said to be residents.

  • An entity is deemed non-resident if its management and control are predominantly exercised from locations outside of India. 


Conclusion 

A person can be categorized as a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR) based on the aforementioned standards. The determination of an individual's residence status is a critical factor for tax purposes, as it impacts their tax liability. As a result, it is advised to consult an expert to ascertain a person's residence status.


FAQ

Q1. What is my residential status if I live in India?

If a person spends 182 days or more in India in the previous year or 60 days in the year prior and 365 days in the four years prior, they are considered a resident of India.


Q2. What are the basic conditions to be fulfilled to become a resident?

One or both of the following two prerequisites must be met for an individual to be considered an Indian resident for tax purposes: 

  • Physical Presence: Spend at least 182 days in India the year prior. 

  • Historical Physical Presence: Reside in India for at least 60 days in the pertinent fiscal year and for at least 365 days over the four years immediately before the year in question. 

These regulations have an exception for Indian citizens travelling abroad for work or serving as crew members on Indian ships, as well as for those of Indian descent who are in India for a visit.


Q3. Who is a deemed resident?

If a citizen of India is not subject to taxation in any other country due to his residency or domicile, he will be judged to be a resident of India if his total income during the previous year—other than income from foreign sources—exceeds 15 lakhs. By default, a presumed resident will be regarded as a resident even though they are not typically a resident. 


Q4. What is the difference between citizenship and residential status?

The two ideas are very different from one another. It is not permitted for a citizen to live in the same nation. In contrast, a person who holds the citizenship of another nation may still be considered an Indian citizen.


Q5. In which year is residential status determined?

Any assessee's tax liability is determined by the Act's definition of residency. The residential status of an assessee must be ascertained with respect to each prior year.


Q6. How long is RNOR status?

RNORs are permitted to maintain their RNOR designation for a maximum of three years following their return to India. Accordingly, like NRIs, they would be subject to taxation on any income received in India and would not be subject to taxation on any income received outside for three years after their return.


Q7. Can a foreign company be recognised as a Resident in India?

A foreign business will automatically be regarded as non-resident in India. If it is considered an Indian resident, it must satisfy the following requirements, which the management of the company must also be able to demonstrate with documentary evidence, such as minutes from board meetings and significant decisions that have the potential to affect the company's operations. Further, the company should have been effectively managed in India for the entire previous year, meaning that it has an Indian place of effective management. A foreign corporation shall be considered a non-resident even if there is a remote chance that it may be operated efficiently from a location outside of India at any point throughout the year. 


Q8. How is the period of stay in India for an Indian citizen who is a crew member calculated?

If a person is both an Indian citizen and a member of the ship's crew, the period or periods of stay in India for an eligible voyage shall not include the following time frame. Period beginning on the date the Continuous Discharge Certificate was entered regarding the said individual's joining the ship for the eligible voyage and ending on the date the Continuous Discharge Certificate was entered regarding the said individual's signing off from the ship for the relevant voyage. 



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