Income Tax

Residential Status and Scope of Total Income

Residential status is vital to determine the taxability of an individual in India for any particular financial year. The term residential status has been provided under the Indian taxation laws and should not be confused with an individual’s citizenship in India. An individual can be a citizen of India but can be considered a non-resident in a particular yr. Similarly, a foreign citizen may become an Indian citizen for income tax purposes for a particular year. The various conditions regarding the residential status can be quite confusing for the assessee, which can lead to mistakes in filing the return of Income, attracting punitive actions. The present article discusses the residential status and its scope in total income to simplify the concept.   

What is Residential Status?

Residential Status can be defined as the status of the assessee with regard to the time period the assessee has stayed in India for the past 5 yrs. The assessee’s income tax liability is calculated on the basis of the residential status in the financial year and four previous years of the relevant financial year.

Sec- 6 of the Income Tax Act 1961^[1] classifies the assessee into 3 broad categories based on their residential status, which is given below.

• Resident
• Resident but not ordinarily resident
• Non-resident

Resident

An assessee shall be considered an Indian resident upon satisfying one of the following-

• A minimum of 182 days or more stay in India.
• Stay in India for immediately 4 preceding years is 365 days or more and a minimum of 60 days or more than that in the relevant FY.
• If an individual having a citizenship origin from India leaves the country for employment during an FY, such an individual will qualify as a resident of India only upon staying in India for at least 182 days or more than that.
• Such individuals are permitted a longer time < 60 days and > 182 days to stay in India. However, from the FY 2020-21, the period is reduced to 120 days or more than that for such an individual with a total income (other than foreign sources) of more than Rs 15 lakh.
• In another major amendment from FY 2020-21, an individual being a citizen of India and not liable to be taxed in any other country shall be considered to be an Indian resident. The condition is applicable only if the total income (other than foreign sources) is more than Rs 15 lakh and there is nil tax liability in other countries or territories due to his residence or domicile or any other criteria having a similar nature.

RNOR

Upon being qualified as a resident of India, the assessee must determine if he falls under the category of Resident ordinarily resident (ROR) or Resident not ordinarily Resident (RNOR). The eligibility shall be met as ROR if both of the below-mentioned conditions are met by the assessee.

• Indian Resident in a minimum of 2 out of 10 years immediately previous years and
• The period of stay in India is a minimum of 730 days in 7 immediately preceding years.

Exceptions

The following categories of individuals will be considered as residents only if the duration of their stay during the relevant previous year is a minimum of 182 days or more. i.e. only the 1st condition of Section 6(1) should be checked.

(1) If the Indian citizen left the country during the PY as a member of the crew of an Indian ship.

(2) If he is leaving the country for employment (job) outside the country, or

(3) For a person having origin or citizenship of India (i.e. born in undivided India) involved outside India in a job or a business /profession or in any other vocation, who came for a visit to India in any previous year.

Residential Status of HUF

The particulars regarding the residential status of HUF are enumerated below- 

• A (HUF) is considered a resident in India if the control and management of affairs of the HUF are wholly or partly situated in India.
• It is treated as Resident and ordinarily resident in India upon the satisfaction of the below-mentioned conditions by Karta (successive inclusive Karta).
• Indian resident for 2 / 10 years immediately preceding the relevant year.
• Stayed in India for a span of 730 days or more than that during 7 years immediately preceding the relevant year.
• If Karta doesn’t satisfy any of the above conditions, then HUF is treated as a Resident but not ordinarily resident.
• If the management and control of HUF are located wholly outside India, then it is considered a non-resident.

Residential Status of a Firm or (AOP)

The conditions for determining the residential status of a partnership firm or an AOP are the same as those provided for a HUF, i.e. the management and control of the affairs must be managed wholly or partly in the country; otherwise, it shall be considered a non-resident.

Residential Status of Company

An Indian company shall always be considered a resident of India.

Residential Status of Foreign Company from AY 2016-17

A foreign company to be considered as a resident of India must have (POEM) an acronym for the place of effective management during the relevant previous year in India. The place of effective management refers to the place wherein the key management and commercial decisions as deemed necessary for conducting the business of a company as a whole are in substance made. For this, a set of guiding principles to be followed in the determination of POEM may be issued by the Board for the benefit of the taxpayers as well as the tax administration.

Income Received in India

The income of the assessee is said to be earned in India if the place where the money is earned (on the first occasion) under his control is in India. Remittance to India will not be taxable if it is received outside India.

Income received as a salary, by non-resident seafarers, for rendering services outside India on a foreign going ship (with an Indian flag or foreign flag) and received into the NRE bank account maintained with an Indian bank won’t be included in the total income.

Sec- 7: Income Deemed to be received in India

The below-mentioned incomes shall be deemed to be received in the PY.

• The contribution made to the Recognised provident fund in excess of 12% of salary or interest credited in excess of 9.5% p.a.
• Contribution under a pension scheme referred u/s 80CCD by the Central Govt. or other employers.
• Amount transferred from URPF to RPF (being employer’s contribution & interest thereon).

Income Accruing or Arising in India

• The term Accrue can be defined as the right to receive income, whereas due can be described as the right to enforce payment of the same.
• It must be noted that income which has been taxed on an accrual basis cannot be assessed again on a receipt basis, as it will amount to double taxation.

Sec- 9: Income deemed to accrued or arose in India

1. Income earned from business connections in India.
2. Income earned through or from any asset, property, or source of income in India.
3. Income through the transfer of capital assets located in India.
4. Income chargeable under the head Salaries if such income is payable for the services rendered in India & the rest period or leaves period which is preceded and succeeded by services provided in the country and forms part of the service contract of employment.
5. Salary paid by the Government to a citizen of India for services outside India. However, perquisites and allowances paid outside India by the Government are exempt u/s 10 (7). 
6. Pension payable outside India by the Govt to its officials and judges permanently residing outside India won’t be deemed to accrue or arise in India.

Income from Business Connection in India

As per Sec 9(1)(i), Business connections’ shall be inclusive of any business activity carried out through a person acting on behalf of the non-resident [Explanation 2 to section 9(1)(i)]. For a business connection to be established, the person acting on behalf of the non-resident –

• Must have a habitually exercised authority to conclude contracts on behalf of the non-resident or. But, if his activities are limited to the purchasing of goods or merchandising for the non-resident, this provision will not apply.
• In the absence of such authority but habitual maintenance of a stock of merchandise or goods in India from which he regularly delivers goods or merchandise on behalf of the NR.
• Habitually receives orders in India, mainly or wholly, for the non-resident. Further, there may be situations when the person is acting on behalf of the non-resident secure order for other non-residents. In such a situation, business connection for other non-residents is established if,
• Such other non-resident controls the non-resident or
• Such other non-resident is controlled by the non-resident or
• Such other non-resident is subject to the same control as that of non-resident. In all three situations, the business connection is established, where a person habitually secures orders in India, mainly or wholly for such non-residents.

Exceptions:-

1. If all the operations of the business aren’t carried out in the country, the income of the business considered under this clause to be accrued or arising in India should be only that part of the income which is reasonably attributable to the operations carried out in India.
2. No income of a non-resident shall be deemed to have been accrued or arose in India to him via or from operations which are confined to purchasing the goods in India for export purposes.
3. The NRI is engaged in the business of a news agency or publication, and the income is earned from or through the collection of news and views in the country for transmission out of India.
4. In the case of a non-resident is  an individual not being a citizen of India or

• A firm which not has any partner with the citizenship of India.
• A company devoid of any shareholders have earned income from operations from shooting any cinematograph film in India;
• Income shall not be deemed to have accrued or arisen in India to such individual, firm or company through or from.
• For a foreign company being engaged in the business of mining diamonds, the income from the activities which are restricted to the display of uncut and un-assorted diamonds in any special zone, as notified by the Central Govt. in the Official Gazette on this behalf, won’t be considered to be to accrued or arisen in India to it through or from the business is operated through a broker, general commission agent, or any other agent having independent status and a person acts in the ordinary course of business; the act shall not come under the purview of business connection in India.

Conclusion

A thorough knowledge of the concept of residential status can be beneficial for the assessee to avoid any irregularities in respect of the payment of tax, especially in cases of RNOR and non-resident, thereby protecting them from any penalties due to delay or default in income tax filing.

Read Our Article: Residential Status under FEMA and Finance Law