RESIDENCE AND SCOPE OF TOTAL INCOME
What is relevance of residential status?
-> Income Tax Act 1962 has defined 3 different types of residential status for taxable persons who are broadly classified as:-
- Resident
- Resident but Ordinary Resident
- Non resident
1) Resident Individual
As per Income Tax Act 1961 amended in 2020
An individual is said to be resident in India during relevant previous year if he
1. Is in India in that year for a period of 182 days or more
2. During 4 preceding years, is in India for a period of 365 days or more and is in India for a period of 60 days or more during that year.
Exceptions
1. In case of an Individual being a citizen of India who leaves India as a member of crew of an Indian Ship OR for the purpose of employment outside India OR being a citizen of India or a person of Indian origin, who being outside India comes on a visit to India in relevant previous year the period of 60 days above in (b) will be substituted for 182 days.
2. In case of an individual being a citizen of India or a person of Indian origin having total income other than income from foreign resources exceeding Rs 15 lacs during the previous year the period of 60 days above in (b) will be substituted for 120 days.
As per clause (1A) an Individual being a citizen of India having total Income , other than Income from Foreign sources exceeding Rs 15 lakhs during the previous year shall be Deemed to be resident in India in that previous year if he is not liable to tax in any other country or territory by reason of his domicile or residence .
2) A HUF, Partnership firm or AOP is said to be Resident in India during the relevant previous year if the control and management of its affairs is situated wholly or partially in India.
3) A company is said to be Resident in India during relevant previous year if
a) It is an Indian Company and
b) Effective management is in India in that year.
4) If a person is said to be Resident in India in respect of relevant previous year and in respect of any particular source of income, he is deemed to be resident in India in the previous year in respect of all his other sources of Income.
Resident and ordinary Resident
An individual is said to be a Resident and ordinary resident during relevant previous year if
- He is a resident in India for at least 2 out of 10 previous preceding years AND
- Has been in India for a period amounting to 730 days during 7 years preceding that year
Resident and Not ordinary Resident
An individual is said to be a Resident and Not ordinary resident during relevant previous year if
- He is a non-resident in India during 9 out of 10 previous preceding years OR
- Has been in India for a period amounting to 729 days or less during 7 years preceding that year OR
- e.f 1st April 2021, citizen of India or a Person of Indian origin having total income other than Income from Foreign Resources exceeding Rs 15 lacs during the previous year having
- stayed in India for a period or periods amounting to 120 days or more but less than 182 days as per clause (b) of exceptions OR
- e.f 1st April 2021, citizen of India who is deemed to be resident in India under clause (1A)
An HUF is said to be Resident and Not ordinary resident during relevant previous year if
- Manager of HUF is a non-resident in India during 9 out of 10 previous years OR
- Manager of HUF Has been in India for a period amounting to 729 days or less during 7 years
Preceding that year.
Non Resident
Any individual who is not satisfying any of the basic conditions for being Resident will be treated as Non Resident for that previous year.
Taxability
Resident and ROR: A Person who is treated as Resident for a previous year will be taxable on his global income i.e. income earned in India and income earned outside India.
RNOR & Non Resident: RNOR & NR are taxable on the income received, accrued or arising in India. Income earned by them outside India is excluded from the taxable income while computing tax liability in India.
What one must know for deciding residential status?
-> All taxable entities are divided in the following categories for the purpose of determining residential status:
1. An individual;
2. A Hindu undivided family;
3. A firm or an association of persons;
4. A joint stock company; and
5. Every other person.
How to determine the residential status of an individual [Sec. 6]?
-> As an individual, it is important for you to assess your residential status. And the same goes for the income tax department as well. The rationale being, understanding the residential status is the first step towards a hassle-free tax filing season ahead.
As a matter of fact, most of the other steps of assessing taxes and filing returns are heavily dependent on the residential status of an individual. Without the proper residential status, you might end up paying more taxes or even get into some unchartered territory that you don’t necessarily want to be a part of.
How can I find my residential status is a question that would definitely crop up. The income tax department has outlined a few categories of residential status based on the amount of time that an individual spends in the country.
If you want an answer to the question of how to check residential status, the following detailed steps will help you to determine your residential status. Once you determine what your residential status is, understanding the tax code and your tax liability becomes that much easier. Of course, depending on your residential status, the tax liability will also change.
If an individual qualifies as a resident of India, he/she will be taxed on their total global income in the country. This includes their income in the country as well as different sources of income abroad. However, if you have paid taxes in the respective countries, you might want to look for DTAA between India and the country in question.
However, if you qualify as a non-resident you would only need to pay taxes on your Indian income. Any source of income that you have outside the country does not affect your tax liability. Here is how you can find out your residential status.
Original Content
To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.
Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.
Step 1: Determining whether resident or non-resident
Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e.may satisfy any one or may satisfy both the conditions):
(1) He is in India for a period of 182 days or more during the previous year ; or
(2) He is in India for a period of 60 days or more during the previous year and for a period of 365 days or more in 4 years immediately preceding the relevant previous year.
If an individual does not satisfy any of the above conditions he will be treated as non-resident in India.
Note : Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grandparents (maternal or paternal) were born in undivided India.
Note: With effect from Assessment Year 2015-16, 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.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
In short, following test will determine the residential status of an individual:
If the individual satisfy any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.
If the individual satisfy any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.
If the individual satisfy no conditions satisfied at step one, then he will become non-resident.
The above steps should help you identify how to determine residential status. And determining the residential status is the first step. You are then liable to pay taxes as per the income tax slab. If income in India of an NRI is less than 2, 50,000 he is not required to file return in India. For an Indian resident it is compulsory to file return of income if his global income has exceeded 2, 50,000.
You can avail various exceptions and deductions to reduce your tax liability. These include short term and long term investments, tax credits, health insurance etc. Your tax liability is then calculated on the net taxable income and you must pay the same for the fiscal year in question. You can pay taxes either as TDS (Tax Deducted at Source, Advance Tax or Self Assessment Tax).
At the end of a fiscal year, you are required to file a tax return for the fiscal year, which essentially documents all the details such as the source of income, deductions, taxes paid etc.
How to find out Residential status of a Hindu undivided family [Sec. 6(2)]?
-> A Hindu undivided family is said to be a resident in India if the control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is a non-resident in India if the control and management of its affairs is wholly situated out of India. In order to determine whether a Hindu Undivided Family is a resident or a non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is ordinarily resident.
In the above explanation “control and management” means de facto control and management and not merely the right to control or manage. Control and management is situated at a place where the head, the seat and the directing powers are situated. The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family unless the decisions concerning the affairs of the family are taken at that place. Although, it is the karta who normally has control and management of the affairs of a Hindu Undivided Family yet any other coparcener can control and manage the affairs. Therefore, the mere fact of absence of the karta does not make the family non-resident.
A resident Hindu Undivided Family is an ordinarily resident in India if the karta or the manager of the family (including the successive kartas) satisfies the following two additional conditions laid down:-
1) Karta has been a resident in India in at least 2 out of the 10 previous years immediately proceeding the relevant previous year.
2) The karta has been present in India for a period of 730 days or more during 7 years immediately proceeding the relevant previous year.
If the karta or the manager of a resident Hindu Undivided Family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
How to determine Residential Status of Firm and Association of persons [Sec. 6(2)]?
-> A partnership firm and an association of persons are said to be resident in India if the control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are however, treated as non-resident in India if the control and management of their affairs are situated wholly outside India. A firm or an association of persons cannot be ordinarily or not ordinarily resident. The residential status of the partners/ members of the firms/ association are not relevant in determining the status of the firm/ association. While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated.
How to find out residential status of a Company [Sec. 6(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, in that year, is in India
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
An Indian company is always resident in India. A foreign company is resident in India only if during the previous year, place of effective management is situated wholly in India. Conversely, a foreign company is treated as non-resident if during the previous year, place of effective management is either is wholly or partly situated out of India. A company can never be ordinarily or not ordinarily resident in India. In case of a foreign company even the slightest place of effective management is exercised from outside India, it would be treated as a non-resident. Income Tax Benefits to Residents & Indian Companies.
How to determine Residential Status of every other person [Sec. 6(4)]?
-> Every other person is resident in India if control and management of its affairs is, wholly or partly, situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.
Connotation of Receipt of Income- How is it understood?
-> Income received in India is taxable in all cases irrespective of residential status of assessee. The following points are worth mentioning in this respect:
1. Receipts vs. Remittance- The “receipts” of income to the first occasion when the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in “receipt” at the other place.
2. Cash vs. Kind- It is not necessary that income should be received in cash. Income may be received in cash or in kind. For instance, value of a free residential house provided to an employee is taxable as salary in the hands of the employee though the income is not received in cash.
3. Receipt vs. Accrual- Receipt I not the sole test of chargeability to tax. If an income is not taxable on receipt basis, it may be taxable on accrual basis.
4. Actual receipt vs. Deemed receipt- It is not necessary that an income should be actually received in India in order to attract tax liability. An income deemed to be received in India in the previous year is also included in the taxable income of the assessee. The Act the following as income deemed to be received in India:
- Interest credited to recognized provident fund account of an employee is excess of 9.5 per cent.
- Excess contribution of employer in the case of recognized provident fund (i.e., the amount contributed in excess of 12 per cent of salary),
- Transfer balance.
- Contribution by the Central Government or any other employer to the account of an employee under a notified pension scheme referred to in section 80CCD.
- Tax deducted at source.
What is Accrual of Income?
-> Accrued profit has been obtained but is not yet receivable. By definition, mutual funds or other pooled assets which accumulate income over some time but only payout to shareholders once a year accrue their income. Personal companies can also receive revenue without necessarily earning it, which is the basis for accrual accounting.
Many companies are using accrual accounting. This is the alternative to a cash accounting system, and businesses that sell goods or offer credit services to consumers need to do so.
What is income deemed to accrue or arise in India?
-> The following incomes shall be deemed to accrue or arise in India:
(a) Income from a Business Connection in India:
Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non-resident which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India.
(b) Income from any Property, Asset or Source of Income situated in India:
Any income which arises from any property movable or immovable, tangible or intangible which is situated in India is deemed to accrue or arise in India. Example: Kuldeep who lives in America, has a house property situated in India which has been given by him on rent. Rent derived by Kuldeep shall be taxable in India whether such rent is received by him in India or outside India as the house property is situated in India.
(c) Income from the Transfer of any Capital Asset situated in India:
Where the capital asset is situate in India, regardless of the residential status of the transferor or the transferee, capital gain, arising on its transfer, would be deemed to be income accruing or arising in India and hence would be taxable.
Apportionment of profits [Explanation (d) to Section 9(1)(i)]
In the case of a business of which all the operations are not carried in India, only that part of income shall be deemed to accrue or arise in India which is reasonably attributable to the operations carried on in India.
Where the goods are manufactured in India and were sold outside India, the profit will be apportioned in two parts—one for manufacturing operations and another for selling operations. The profits which could be reasonably attributed to selling operations will not be deemed to accrue in India.
In cases where the income attributable to operations carried out in India cannot be ascertained, Rule 10 of Income-tax Rules 1962 provides
- such percentage of the turnover so accruing or arising as the Assessing Officer may consider to be reasonable having regard to the facts and circumstances of the case; or
- any amount which bears the same proportion to the total profits and gains of the business of the assessee computed in accordance with the provisions of the Act as the receipts so- accruing or arising bear to the total receipts of the business; or
- in such other manner as the Assessing Officer may deem suitable.
(d) Any income which falls under the head ‘Salaries’ if it is earned in India:
This explanation provides an artificial place of accrual for income taxable under th head ‘Salaries’. According to it the incomes chargeable to tax as salaries shall be deemed to accrue or arise in India if they are earned in India. The place of receipt and actual accrual of the salary is immaterial. Any income payable for
- service rendered in India, and
- the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment,
Any income payable for services rendered in India shall be regarded as income earned in India though it may be paid in India or outside.
(e) Income by way of Salary Payable by the Government to an Indian citizen/national for services rendered outside India:
The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India:
- Income should be chargeable under the head ‘Salaries’;
- The payer should be Government of India;
- The recipient should be an Indian citizen — whether Resident or Non-Resident;
- The services should be rendered outside India.
While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all allowances or perquisites paid outside India by the Government to the above Indian citizens for their rendering services outside India are exempt under section 10(7).
(f) Income by way of Interest payable by:
- Government; or
- A person who is a resident in India, except where interest is payable in respect of money borrowed and used for the purpose of business or profession carried on outside India or earning any income from any source outside India; or
- A person who is a non-resident in India provided interest is payable in respect of money borrowed and used for a business or profession carried on in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient.
(g) Income by way of Royalty payable by:
- Government; or
- A person who is a resident in India except where it is payable in respect of any right/information/property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India; or
- A person who is a non-resident provided royalty is payable in respect of any right/information/property used for the purpose of the business or profession carried on in India or earning any income from any source in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient.
(h) Income by way of Fees for Technical Services payable by:
- Government; or
- A person who is a resident in India, except where services are utilised for a business or profession carried on outside India or earning any income from any source outside India; or
- A person who is a non-resident provided fee is payable in respect of services for a business or profession carried on in India or earning any income from any source in India, shall be income which is deemed to accrue or arise in India in the hands of the recipient.
