Residential Status for Income Tax – Individuals & Residents
The residential status of taxpayers is crucial for the income tax department because the amount of tax to be paid will be decided based on an individual’s residential status.
We will learn more about residential status and why it is so essential for income tax, in this blog.
Meaning
The term ‘residential status’ has been defined in the Income Tax Act, 1961, solely for the purpose of establishing whether a person has resided in India during the financial year or not.
Residential status is often confused with citizenship status, but they are very distinct concepts. An individual can be a citizen of India, but if they do not live in India for a certain number of days of a financial year, they will be considered non-residents. Similarly, a foreign citizen may be considered a resident of India for income tax purposes for a particular year.
Importance of Residential Status
The concept of residential status is vital in computing the tax liability of taxpayers for several reasons. Here are a few reasons why residential status is essential:
Tax Liability:
The tax liability of an individual in India depends on their residential status. A resident will be taxed in India on his global income, i.e., income earned in India as well as income earned outside India. While non-residents and RBNORs are primarily restricted to the income they earn in India, it is crucial to determine the correct residential status to calculate the correct tax liability.
Compliance requirements:
Different compliances are applicable to individuals based on their residential status. For example, resident individuals are required to file their tax returns in India, while non-residents are not required to file tax returns if their income is below a specified limit.
Double Taxation:
An individual who is a resident of more than one country may be subject to double taxation, i.e., being taxed twice on the same income in both countries. Having a good understanding of residential status can help individuals claim tax relief under the Double Taxation Avoidance Agreements (DTAA) that India has entered into with other countries.
How is residential status determined?
The Income Tax Act categorises residential status into three categories:
Resident
A taxpayer would be considered an Indian resident if he fulfilled one of the following conditions:
- Has lived in India for 182 days or more in a financial year. (aka the 182-day rule)
- You have stayed in India for at least 60 days in the current financial year and for a total of 365 days or more in the four preceding financial years. (AKA the 60-day rule)
Exceptions to residential status
The second condition (60 days and 365 days) doesn’t apply in the case of
An Indian citizen who has left India for the purpose of employment in a foreign country or is a crew member of an Indian ship,
An Indian citizen or person of Indian origin who is visiting India
So, in these cases, you are said to be a resident Indian only if you stay in India for a period of 182 days or more in the financial year.
Resident But Not Ordinarily Resident
He will be an RNOR if he meets both of the following conditions:
- Has been a resident of India for at least 2 out of 10 immediately previous years and
- Has stayed in India for at least 730 days in the last 7 immediately preceding years.
There are three situations in which an individual is said to be a resident, not an ordinary resident.
- if any individual fails to fulfil either or none of the above-mentioned conditions.
- An individual is an Indian citizen or person of Indian origin with a total income exceeding Rs. 15 lakhs (excluding foreign income) who has been in India for 120 days or more and less than 182 days during the previous year.
- If an individual is considered to be a resident in India, by default, he will be considered a resident and not ordinarily resident.
Non resident
An individual failing to satisfy the following conditions will be considered a non-resident for that financial year.
- staying in India for 182 days or more in the previous year or
- Staying in India for 60 days or more in the previous year and a total of 365 days in the four preceding previous years.
Taxability
Resident and Ordinarily Resident:
A resident in India will be taxed on his global income, i.e., income earned in India as well as income earned outside India.
Resident but not ordinarily resident:
There is a thin line in the taxability of income between Resident Ordinary Resident and Resident Ordinarily Resident; on below-average incomes, RNORs are not required to pay taxes.
Non-Resident
A non-resident will be charged tax only on the income received in India or source of income received from India’. However, income earned outside India, having no connection with India, is not taxable.
Examples:
Received in India: interest on fixed deposits from banks in India. It is technically called income earned in India.
Received from India: payment from an Indian person or company in a foreign bank account for the services provided to such person. It is technically called income accrued from India.
Residential status of Hindu Undivided Families (HUF)
An HUF is considered to be a resident of India if the majority or its entire management is made up of members of India; if not, it will be considered a non-resident HUF.
If Karta (the manager) of resident HUF satisfies the below conditions, then HUF will be treated as resident and ordinarily resident; otherwise, it will be considered resident but not ordinarily resident.
- If the Karta has been a resident of India for at least 2 previous years out of the last 10 years,.
- If the karta has stayed in India for 730 days or more out of the last 7 years,.
Residential status of companies
A company is considered resident in India if it meets the following conditions:
It is an Indian company, or
Its place of effective management, or POEM, is located in India for the previous year.
Place of Effective Management (POEM) refers to the location where key management and commercial decisions for the business are made, such as strategic planning and policy decisions.
Conclusion
Having a good understanding of your residential status smooths the income tax process and reduces confusion. The residential status is used to determine your tax liability and file your returns. If you’re unsure of your residential status, it is recommended that you seek professional guidance from a consultant.