Basic Concepts of Income Tax-IV—Residential Status

RESIDENTIAL STATUS

The computation of income of an assessee starts with the determination of Residential Status of the assesse so first we should know

• what is residential status
• how it is determined
• why it is determined

What is residential status: – We should understand that Citizenship and Residential Status are two different things and a person may be citizen of India but he may not be resident of India (which includes its territorial water as well). Section 6 of the Income Tax Act, 1961 deals with the residential status (it is to be determined for each financial year separately) of any assessee and its mechanism, which is reproduced here-in-below for brief understanding: –

For the purposes of this Act,—

(1)  An individual is said to be resident in India in any previous year, if he—

(a)  is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

(b)  [***]

(c)  having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

Explanation. 1—In the case of an individual,—

(a)  being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

(b)  being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted.

Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and 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.

(2)  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. HUF can be ordinary or not ordinary resident and the status of the KARTA decides the residential status of the HUF viz.

• If the Karta is ordinarily resident then HUF is also Ordinarily Resident,
• If the Karta is not ordinarily resident then HUF is also Not Ordinarily Resident.

(3)  A company is said to be a resident in India in any previous year, if—

(i)  it is an Indian company; or

(ii)  its Place of Effective Management (POEM), 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.

(4)  Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

NOT ORDINARILY RESIDENT: –

A person is said to be “not ordinarily resident” in India in any previous year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose Karta/manager has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.

So from the above it is clear that there are three types of individual resident for the purpose of taxation viz.

• Ordinary Resident
• Not Ordinary Resident
• Non Resident

Residential status is being determined on the basis of stay (physical stay any where in India and in any number of visit to India but total should be in the limit defined here in below) in India and rules as defined above in the section is again outline below for the sake of understanding: –

A person is said to be resident in India if

1. He is in India for 182 (day of entry and day of exit, both will be considered, in case of border line calculation hours will also be checked and 24 hours will be considered as one day) days or more during that financial year OR
2. He is in India for 60 days during that financial year and he is India for 365 days or more during 4 years immediately preceding the relevant financial year

2nd condition of 60 days does not apply in the following two cases: –

• In case of  an Indian Citizen who leaves for employment or as crew member of a ship the first condition of 182 days is applicable only
• In case of an Indian Citizen or Person of Indian Origin (PIO means any person who himself, or his parents or his grand-parents were born in undivided India before 15th August 1947), who stays outside India, and comes on a visit to India then also first condition of stay of 182 days applies

A person is said to be Non-Resident if he does not satisfy any of the conditions mentioned above.

Regarding Not Ordinary Residential Status Clause (6) of the Section defines the criteria, which is as follows: –

• an individual who has been a non-resident in India in nine out of the ten previous years preceding that year or
• has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less

Till now we have discussed what and how of question relating to residential status and now we will discuss about the question why we determine the residential status. It is being decided because the tax-ability of income is dependent on the residential status of the assessee and the same can be understood from incidence of tax defined u/s 5 of the Income Tax Act, 1961, which is reproduced below for better understanding: –

5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which—

(a)  is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year ; or

(c)  accrues or arises to him outside India during such year :

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—

(a)  is received or is deemed to be received in India in such year by or on behalf of such person ; or

(b)  accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation 2.—For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

So in simple sense we can say that global income is taxable in case of ordinary resident while foreign income is not taxable in case of Non-Resident. Foreign income is taxable in case of Not Ordinary Resident if it is from Business Controlled from India or profession set up in India.  For ease of understanding the detailed discussion is being reproduced in table given below: –

 

S. No.	Source of Income	Taxability in India
		ROR	NOR	NR
1	Income Received or Deemed to be received in India	Yes	Yes	Yes
2	Income Accrue or Arise or Deemed to Accrue or Arise in India	Yes	Yes	Yes
3	Income accrues or arises to him or received outside India from 1.      From a business controlled from India; or 2.      Profession Set up in India	Yes	Yes	No
4	Income Accrues or Arises or Received outside India	Yes	No	No

 

Notes: –

• 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 sources of income {Section 6(5)}.
• Physical stay any-where in India and in any number of visit to India but total should be in the limit defined here in above.