In common parlance, a residence is a place where a person resides, but in Income Tax the word has a wider meaning. In order to determine the taxable income of a person, it is important to know the residential status of the person. Residential status forms the basis of total income. According to a residential status, taxpayers are broadly classified into two categories;
i. Resident in India
ii. Non-resident in India
Features Vis-A-Vis Clarification
1. No importance of Nationality, origin, place of birth, domicile
For the purpose of Income Tax in India, the word like nationality, origin, place of birth or domicile of a person is of no importance. It is also possible that, for instance, on one hand, a person living in India, being an Indian citizen, can be non-resident for the purpose of income tax; and on the other hand, a person living outside India, not being an Indian citizen, can be a resident of India for the purpose of Income Tax. Income tax is levied on the taxable income of a person.
2. Source of Income is Important
According to Income Tax in India, the source of income is considered necessary while computing the liability. Whether the liability would arise or not it will depend on the residential status of a person? For instance, a person earning in India, or earning from Indian source is taxable in India and it will be immaterial whether the person earning is resident or non-resident. Whereas, for example, the foreign sourced income of a person is not taxable in India if such person is non-resident. Therefore, residential status becomes significant in computing tax liability.
3. Residential Status varies
The residential status varies from person to person. The word “person” is defined under section 2 (31) of the Income Tax Act, 1961. For instance, while computing residential status of an individual, it will be the person’s physical stay in India that will be looked upon in the previous years; whereas, for computing the residential status of a company it is the place of effective management that will be looked upon.
4. The base is Previous Year
The residential status of the taxpayer is to be determined by taking a reference to the “previous year”. It would not be the “assessment year” which will be taken as a base while computing the same. However, this clause has a certain exception in certain situations.
5. Residential status is not constant every year
It will not necessary that a taxpayer will remain a taxpayer every year. The residential status of the taxpayer is to be determined every year. It is possible that a person may become assessee in one year and not in the next year. Every year the residential status of a person may vary.
Residential Status and Tax Liability
Residential status and tax liability are defined under section 6 of the Act. As discussed earlier, as far as residential status is considered, taxpayers are broadly classified into two categories;
i. Resident in India
ii. Non-resident in India
However, resident in India can either be:
a. Resident and Ordinary resident in India (ROR)
b. Resident but not Ordinary resident in India (NOR)
Important points to remember:
i. Individuals and Hindu Undivided Family’s (HUF) residential status depends upon the physical stay in India.
ii. For Individual and HUF, cannot be not simply called the resident in India, it shall be further classified in ROR or NOR.
iii. For persons other than Individual and HUF, it will be either resident in India or non-resident in India.
As per section 6 of the Act, a few tests are needed to be applied in order to determine the residential status of all taxpayers.
Test for Residence of Individual
Resident in India
For an individual to be a resident of India, there are the basic conditions which need to be fulfilled;
a. A person must be in India for a period of one hundred and eighty-two days (182 days) or more during the previous year; or
b. A person must be in India for a period of sixty days (60 days) or more during the previous year and three hundred and sixty-five days (365 days) or more during the previous four years immediately preceding the relevant previous year.
Exceptions to the basic condition
There is a certain exception to the basic condition. Below mentioned categories of Individual shall be a resident in India only after satisfying the first basic condition, i.e. (A person must be in India for a period of one hundred and eighty-two days (182 days) or more during the previous year). In other words, the period of 60 days and 365 days is substituted by 182 days in case of an individual.
a. An Indian citizen leaves India during the previous year for the purpose of Employment outside India.
b. An Indian citizen, being a crew member of an Indian ship leaving India during the previous year.
c. An Indian citizen or a person of Indian origin[1], who being outside India, comes to a visit to India in the previous year.
d. An Indian citizen, being a crew member of a foreign-bound ship leaving India during the previous year.
Non – Resident in India
In order to become resident in India, it is necessary to fulfil any of the basic conditions, whereas if an individual does not satisfy any of the above mentioned basic conditions, then he will be treated as Non-Resident for the purpose of Income Tax.
Resident and Ordinary Resident (ROR)
As discussed earlier, resident in India further classified into two categories, i.e. ROR and NOR. In order to become a resident and ordinary resident in India, an individual need to satisfy both below-mentioned conditions;
i. he must be a resident in at least any two years out of the ten previous years immediately preceding the relevant previous year, and
ii. he has been in India for seven hundred and thirty days (730 days) during the seven previous years immediately preceding the relevant previous year.
Resident and Not Ordinary Resident (NOR)
For an individual to be a not ordinarily resident in the previous year, any of the conditions need to satisfy;
i. he must be a non-resident in any of the nine years out of the total ten previous years immediately preceding the relevant previous year; or
ii. he must be in India for a period of seven hundred and twenty-nine days (729 days) or less during the seven years immediately preceding the relevant previous year.
Important points to remember:
a. Residential status may vary from year to year and it should be determined for each year separately.
b. The stay in India means stay anywhere in India.
c. India means the territory of India, including its territorial water, Economic Zone, continental shelf, airspace up to twelve nautical miles.
d. Where the exact time of departure and arrival is not available, then the day an individual comes to India and the day an individual leaves India, is counted as stay in India.
Steps to calculate the residential status of an individual:
Step 1
Firstly, check the exceptions to the basic condition, whether the individual falls under those exceptions or not;
Step 2
Secondly, if the answer to the above question is Yes, then in order to determine, apply only the first basic condition of 182 days or more. If satisfied, then he will be resident otherwise non-resident;
If the answer to the above question is No, then apply both the condition and individual is said to be a resident if he satisfies any of the basic conditions.
Step 3
Lastly, check the test of Ordinary Resident, if yes, then he will be called ROR, otherwise NOR.
Illustrations
Illustration No. 1 –
Determine the residential status of Ms Lisa a person of Indian origin who came for visiting India on 15th April 2016 and left India on 30th April 2016?
Step 1: Yes, Ms Lisa falls under the exceptions to the basic condition;
Step 2: As per the second step there is a need to check only the first basic condition.
Conclusion: As Ms Lisa left India in 16 days hence she is not fulfilling the basic condition. Therefore, she is non-resident for the purpose of Income Tax.
Illustration No. 2 –
Mr John, he has never gone out of India previously, left India for employment in France on 15th October 2017. Determine the residential status of Mr John for the assessment year 2018-19?
Step 1: Yes, Mr John falls under the exception to the basic condition because he left India for employment;
Step 2: As per the second step there is a need to check only the first basic condition.
Conclusion: Counting from 1st April 2017 (beginning of the financial year) to 15th October 2017, the total number of days will be 198. Therefore, Mr John said to be a resident for the assessment year 2018-19.
Test of Residence for Hindu Undivided Families, Firms and Other Associates of Persons (AOP)
As specified earlier, tests to determine residential status of HUF, Firms and AOP vary. However, in the case of HUF, there are certain similarities. The residential status of the persons mentioned above is based upon the control and effective management of its affairs, is situated wholly or partly in India during the relevant previous year.
Meaning of place of control and effective management:
The expression refers to a place where crucial decisions related to business are carried from, where decision-making power exercised, where directions issued. In other words, the Control and Effective Management means taking policy decisions. Decisions concerning finance, human resource, production, etc. all such important decisions related to business are termed as a policy decision. It does not mean day to day operation of an assessee.
a. In case of HUF, the control and management are with the Karta or its Manager.
b. In case of a Firm and AOP, the control and management are with Partners or Members.
A HUF, firm or AOP is said to be a resident in India in any previous year if during that year the control and management of its affairs are situated wholly or partly in India.
If the place of control and effective management of its affairs is situated wholly outside India during the relevant previous year, it is considered as non-resident.
A HUF can be “not ordinary resident.”
After being a resident, a HUF can either be ROR or NOR. A resident HUF can become a ‘not ordinary resident,’ if Karta/Manager satisfy the test applicable to individuals and vice versa. In other words, if Karta/Manager satisfies any of the two conditions as specified in case of NOR.
Conditions are as follows;
i. he must be a non-resident in any of the nine years out of the total ten previous years immediately preceding the relevant previous year; or
ii. he must be in India for a period of seven hundred and twenty-nine days (729 days) or less during the seven years immediately preceding the relevant previous year.
Illustration:
Determine the residential status of HUF whose control and management are partly in India and the Karta stays in India for the period of 360 days during the period of 7 years?
- The place of control and management of affairs of HUF is partly in India and hence, HUF is resident. In order to determine whether HUF is ROR or NOR, there is a need to satisfy the respective conditions. In this case. Karta stays in India only for a period of 360 days in the 7 years and therefore, HUF is ‘not-ordinary resident’.
Tests of Residence for Companies
A company can either be an Indian company or a foreign company. All Indian companies are always resident in India regardless of the place of control and management of its affairs within the meaning of Section 2 (26) of the Act. A foreign company is said to be a resident of India if the place of control and management of its affairs is wholly situated in India.
However, it must be noted that a company can be either resident or non-resident in India, but cannot be not ordinary resident for all the purpose of Income Tax.
Frequently Asked Questions (FAQs):
1. What is the residential status as per Companies Act, 2013?
Sub-section (3) of section 149 of the Companies Act, 2013 states that “Every company shall have at least one director who has stayed in India for a period not less than 182 days in the previous calendar year”. This section has been enforced with effect from April 1st, 2014.
2. What is the residential status under ‘Foreign Exchange Management Act, 1999’?
Ans. The person resident in India is defined under Section 2(v)[2] of the Act whereby, it states that
1. ‘a person residing in India for more 182 days during the preceding financial year’. However, it does not include the following categories of person;
I. A person who has gone outside India or stays outside India, in either of the following cases-
a. for employment outside India, or
b. for the purpose of caring out business or vocation outside India, or
c. for other purposes, which would indicate his intention to stay outside India for an uncertain period.
II. A person who has come to India or stays in India, in either of the following cases, otherwise than-
a. for employment in India, or
b. for the purpose of caring out business or vocation in India, or
c. for other purposes, which would indicate his intention to stay in India for an uncertain period.
2. any person or body corporate registered or incorporated in India.
3. an office, branch or agency in India owned or controlled by a person resident outside India.
4. an office, branch or agency outside India owned or controlled by a person resident in India.[3]
3. What is the residential status of students studying abroad?
Ans. As per the Section 2 (v) of the FEMA (as mentioned in the above answer), the person who has gone outside India and stays outside India for more than 182 days for other purposes, which would indicate his intention to stay outside India for an uncertain period when they go outside India for studies can be treated as Non-Resident.
Under the Indian Foreign Exchange Regulations, the students went abroad for their studies are treated as NRI’s and are eligible for all facilities available to NRI’s.
However, the Indian tax laws determine the residential status as per the physical presence of an individual in India.
Bibliography:
- https://www.charteredclub.com/residential-status/
- The Companies Act, 2013
- https://rbi.org.in/Scripts/NotificationUser.aspx?Id=2763&Mode=0
- Foreign Exchange Management Act, 1999
- The Income Tax Act, 1961
References:
[1]For the purpose of Income-tax, a person is said to be a person of Indian origin if he, or either of his parents or any of its grandparents (include both maternal and paternal), was born in Undivided India i.e., before Partition.
[2]Foreign Exchange Management Act, 1999.
[3]Section 2 (v) of the FEMA.
