Know your Residential Status under the Income-tax Act

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At the time of filling Income Tax Return, every assessee need to check residence status to apply provisions of Income Tax and to determine tax liability for that assessment year.

There are two types of taxpayers—resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India. 

Assessee are either :

(a) resident in India, or

(b) non-resident in India.

As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessee (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident.

It is not necessary that a person who is resident in India, cannot become resident in any other country for the same assessment year. A person may be resident in more than one country at the same time for tax purposes, though he cannot have two domiciles simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be non-resident for all other countries for the same assessment year.

The two main laws that govern and prescribe the rules for NRIs in India are as follows:

  • Income Tax Act – Governs the tax liabilities of NRIs
  • Foreign Exchange and Management Act (FEMA) – Governs all transactions and investments, the opening of bank accounts, etc., of NRIs

Filling of Income Tax Return by NRIs

It shall not be necessary for a non-resident Indian to furnish under sub-section (1) of section 139 a return of his income if:

(a) his total income in respect of which he is assessable under this Act during the previous year consisted only of investment income or income by way of long-term capital gains or both; and 

(b) the tax deductible at source under the provisions of Chapter XVII-B has been deducted from such income.

At the time of filling Income Tax Return, every assessee need to check residence status to apply provisions of Income Tax and to determine tax liability for that assessment year.

There are two types of taxpayers—resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India. 

Assessee are either :

(a) resident in India, or

(b) non-resident in India.

As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessee (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident.

It is not necessary that a person who is resident in India, cannot become resident in any other country for the same assessment year. A person may be resident in more than one country at the same time for tax purposes, though he cannot have two domiciles simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be non-resident for all other countries for the same assessment year.

Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities—Rai Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.).

In the case of V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168, the Supreme Court held that section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them. However, the burden of proving that an individual or a company is resident in India lies on the department—Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC).

The two main laws that govern and prescribe the rules for NRIs in India are as follows:

  • Income Tax Act – Governs the tax liabilities of NRIs
  • Foreign Exchange and Management Act (FEMA) – Governs all transactions and investments, the opening of bank accounts, etc., of NRIs
  •  

Resident and ordinarily resident [Sec. 6(1), 6(6)(a)] of Income Tax Act

To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows 

Step 1First find out whether such individual is “resident” in India.
Step 2If such individual is “resident” in India, then find out whether he is “ordinarily resident” in India. However, if such individual is a “non-resident” in India, then no further investigation is necessary.

Basic conditions to test as to when an individual is resident in India

Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions—

Basic condition (a)He is in India in the previous year for a period of 182 days or more.
Basic condition (b)He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

Even if an individual satisfies none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the cases given below –

  • First exception – This exception is given under section 6(1A) read with section 6(6)(d) and applicable from the assessment year 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions –

a. he is an Indian citizen;

b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year, and

c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.

This exception is not applicable in the case of a foreign citizen, even if he is a person of Indian origin.

  • Second exception – This exception is given by section 6(6)(c) read with Explanation 1(bto section 6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions –

a. he is an Indian citizen or a person of Indian origin;

b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year;

c. he comes to India on a visit during the relevant previous year, and

d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.

Additional conditions to test when a resident individual is ordinarily resident in India

Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions—

Additional condition (i)He has been resident† in India in at least 2 out of 10 previous years immediately preceding the relevant previous year.
Additional condition (ii)He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.

The Table given below summarises the rule of residence for the assessment year 2021-22— Rule of Residence

Who is resident and ordinarily resident in IndiaHe must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same

 

time, he should also satisfy the two additional conditions. 

Who is resident but not ordinarily resident in IndiaHe must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may satisfy one or none of the additional conditions.
Who is non-resident resident in IndiaHe satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) and basic condition (b)*]. Additional conditions are not relevant in the case of a non-resident.

Exceptions

The aforesaid rule of residence is subject to the following exceptions—

  • Exception one the period of “60 days” referred to in (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, exception one is available in the case of an Indian citizen who leaves India during the previous year for the purpose of: 

       –  employment outside India or

       – an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship‡.

For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or may be outside India). To put it differently, the individual need not be an unemployed person—British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR – New Delhi). He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Travelling abroad on business visa to take up any employment or for any business carried outside India, is sufficient to prove this condition—K. Sambasiva Rao v. ITO [2014] 42 taxmann.com 115 (Hyd.). Alternatively, he may be an unemployed person who goes outside India to take an employment outside India.

In Exception 1, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days.

  • Exception two- , the period of “60 days” referred to in (b) above has been extended to 182 days# by virtue of Explanation 1(b) to section 6(1). However, Exception 2 covers an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.

In Exception 2, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days#.

  • Exception three – Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22. i.e. an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

Basic Conditions at a Glance

In the case of an Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian shipIn the case of an Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous yearIn the case of an individual [other than that mentioned in columns (1) and (2)]
(1)(2)(3)
a. Presence for at least 182 days in India during the previous year 2020-21

 

b. Not functional

a. Presence for at least 182 days in India during the previous year 2020-21.

 

b. Not functional†

a. Presence for at least 182 days in India during the previous year 2020-21.

 

b. Presence in India for at least 60 days during the previous year 2020-21 and 365 days during 4 years immediately preceding the previous year (i.e., during April 1, 2016 and March 31, 2020).

Additional conditions at a Glance

i. Resident in India in at least 2 out of 10 years immediately preceding the previous year [i.e., h must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., during previous years 2009-10 and 2018-19)].

 

ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year (i.e., during April 1, 2012 and March 31, 2019).

The Finance Act 2020 has amended the residency provisions to include Indian Citizen/Person of Indian Origin, who comes to visit India and shall now be considered as RNOR subject to the following conditions:

  • Total income other than foreign income is Rs 15 lakh or more. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
  • The individual has stayed in India for more than 120 days but less than 182 days in the previous year
  • The individual has stayed in India for 365 days or more in four years preceding the previous year

Before this amendment, such individuals were classified as non-residents. Due to the amendment mentioned above, the individual’s residential status may be classified as RNOR, which will lead to loss of DTAA benefits, increased scope of total income for taxability, loss of various exemptions allowed, etc.

It is to be further noted that in the above amendment, an individual staying for more than 182 days shall be classified as a resident irrespective of the level of income in the previous year.

Deemed residency status introduced in Finance Act 2020

Finance Act 2020 introduced the concept of ‘Deemed residency’. According to this, Citizens of India earning more than Rs 15 lakh from Indian sources shall be deemed a resident of India if they are not liable for payment of taxes in any other country.

The deemed residents shall be classified as RNOR with effect from the financial year 2020-21. This amendment was brought into force to tax the incomes of Indian citizens who are not liable to pay tax in any country.

 

 

 

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