Residential Status as per Income Tax
Act, 1961
Residential Status, why it is
important to have knowledge about? Why it is required to be determined? The
reason to determine residential status is taxability of income of assessee (in income tax, whose income is going to tax
is termed as assessee) which may be generated in India or from outside
India. Based on the residential status of assessee one can determine the
taxable income in India. For example, if an assessee is resident in India then
they are liable to pay tax in India on their global income. Here, we are going
to discuss the residential status of all kinds of assessee as categorised under
the Act. Now let’s understand how the residential status can be determined.
·
Section 6
of the Income Tax Act, 1961 contains various provisions related to the
Residential Status of the assessee, Extract from the Act is as follows;
Residence
in India.
6.
For the purposes of this Act,—
(1) An individual is said to be resident in
India in any previous year, if he—
(a) is in India in that year for a period or
periods amounting in all to one hundred and eightytwo days or more ; or
(b) [***]
(c) having within the four years preceding
that year been in India for a period or periods
amounting in all to three hundred and
sixty-five days or more, is in India for a period or
periods amounting in all to sixty days or
more in that year.
Explanation.
1—In the case of an individual,—
(a) being a citizen of India, who leaves
India in any previous year as a member of the crew of an Indian ship as defined
in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or
for the purposes of employment outside India, the provisions of sub-clause (c) shall
apply in relation to that year as if for the words "sixty days",
occurring therein, the words "one hundred and eighty-two days" had
been substituted ;
(b) being a citizen of India, or a person of
Indian origin within the meaning of Explanation to clause (e) of section 115C,
who, being outside India, comes on a visit to India in any previous year, the
provisions of sub-clause (c) shall apply in relation to that year as if for the
words sixty days", occurring therein, the words "one hundred and
eighty-two days" had been substituted.
Explanation
2.—For the purposes of this
clause, 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.
(2) A Hindu undivided family, firm or other
association of persons is said to be resident in India in any previous year in
every case except where during that year the control and management of its
affairs is situated wholly outside India.
(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.
Explanation.—For the purposes of this clause "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.
(4) Every other person is said to be resident
in India in any previous year in every case, except where during that year the
control and management of his affairs is situated wholly outside India.
(5) If a person is resident in India in a
previous year relevant to an assessment year in respect of any source of
income, he shall be deemed to be resident in India in the previous year
relevant to the assessment year in respect of each of his other sources of
income.
(6) A person is said to be "not ordinarily
resident" in India in any previous year if such person is—
(a) an individual who has been a
non-resident in India in nine out of the ten previous years preceding that
year, or has during the seven previous years preceding that year been in India for
a period of, or periods amounting in all to, seven hundred and twenty-nine days
or less;
or
(b) a Hindu undivided family whose manager
has been a non-resident in India in nine out of the ten previous years
preceding that year, or has during the seven previous years preceding that year
been in India for a period of, or periods amounting in all to, seven hundred
and twenty nine days or less.
Now, let’s interpret it one by one.
As per section 6 of the Income-tax Act, 1961, all the assessees are divided in
the following categories for the purpose of determining their residential
status:
I.
Individual,
II.
Hindu undivided family (HUF),
III.
Company, and
IV.
Every other person
Above mentioned each category is
explained in detail hereunder:
Residential
Status of an Individual in India
For the purpose of Income Tax Act, a person who qualifies as
Resident in India their global income is taxable in India and on the other hand
a person who is Non- Resident, only income accrued or received in India is
Taxable. Therefore, for the purpose of taxing the Income of a person their
Residential Status in India plays a major role. It is the first step to compute
the taxable income in India. Let’s know when an individual can be qualified as
Resident or Non Resident.
Section 6(1) of the Income Tax Act, 1961 provides the rules
to determine Resident Status of an Individual, the same are as follows;
·
Resident
An individual is said to be resident in India if a person satisfies
any of the following two conditions:
a.
A person is in India for a period or periods amounting in all to 182 days or more in the relevant previous
year;
OR
b. A person is in India for 60 days or more during the relevant
previous year and has been in India for 365 days or more during 4 previous
years immediately preceding the relevant previous year.
But there are two exceptions/
concession to the above rule:
1. In case of an individual, who is a
citizen of India and who leaves India in
any previous year for the purposes of employment outside India, the condition
No. 2 supra (mentioned above) shall not be applicable for the relevant previous
year in which s/he leaves India. In other words, for that particular
previous year in which a person leaves India for the purposes of employment
outside India person shall be called
resident only when s/he satisfies the condition No. 1 mentioned above. Similarly
in case of an individual who is a citizen of India and who leaves India in any
previous year as a member of the crew of an Indian ship, the condition No. 2
supra shall not be applicable.
2. In case of an individual, who is a
citizen of India, or is a person of Indian origin, who, being outside India,
comes on a visit to India in any previous year, the condition No. 2 mentioned
above in his/her case also shall not be applicable. In other words, s/he shall
not be a resident in India unless they stay in India for at least 182 days
during the relevant previous year in which person visits India.
A person
who leaves India for taking up a job abroad needs to ensure that s/he is in
India for less than 182 days during the year, so that her overseas salary is
not taxed in India. There is, however, no benefit of such extended period
requirement for a person who quits his/her overseas job and returns to India
for good. Therefore, if a person leaves his/her overseas job after a few years
and returns to India, s/he needs to ensure that s/he is in India for less than
60 days during the year, particularly if s/he has been on visits to India
during the preceding four years for extended periods totalling more than 365
days, or has left India within that period of four years by virtue of which his/her
stay during the past four years exceeded 365 days.
On some
occasions, employers prefer to give a per diem allowance for meeting the
expenditure on lodging and boarding rather than making payments on actual
basis. The per diem allowance is exempt from tax under section 10(14).
·
Resident and Ordinarily Resident in
India or Resident but not ordinarily resident
If an
individual qualifies as a resident, the next step is to determine if s/he is a
Resident and ordinarily resident (R & OR) or Resident but not ordinarily
resident (RNOR). S/he will be a R & OR if he meets both of the following
conditions:
1.
Resident in India
in at least 2 years out of 10
immediately preceding previous years.
2.
Presence of at least 730 days in India during the past 7 years.
Therefore,
if any individual fails to satisfy even one of the above conditions, he would
be an RNOR.
·
Taxability
Based upon
the status of an Individual income is taxed in India. If the status is of R
& OR his/ her global income would get taxed in India on the other hand if
the status is NR/ R but NOR then only income which accrues and arises in India
will get taxed in India.
Also note
that in a case of double taxation of income where the same income is getting
taxed in India as well as abroad, one may resort to the Double Taxation
Avoidance Agreement (DTAA) that India would have entered into with the other
country in order to eliminate the possibility of paying taxes twice.
So, after all this long explanation let’s epitomize
the same through the following: 
Residential status of Every Other
Person in India
Section 6(2) of the Income Tax Act, 1961 provides the rules
to determine Resident Status of an HUF, Partnership Firm, AOP/ BOI (Every other
person), the same are as follows;
1. Hindu Undivided Family (HUF)
in India
The residential status of HUF is determined on the basis of where
it’s Control and Management is situated. An HUF is said to be a resident in
India if the control and management of its affairs
is wholly or partly situated in India in relevant previous year. If control and management is wholly outside
of India than it is said to be non-resident in India.
Control and management mean to the
decisions taken regarding activities of the HUF. The control and management lies
at the place where decisions regarding the activities of the HUF are taken. Normally
in HUF, Karta is the one who is having the control and management but any other
coparcener can also have the control and management of the HUF. Therefore, if
the Karta is non-resident then it does not mean that HUF is a
non-resident.
Further, by fulfilling the
following two conditions by Karta or Manager of a resident Hindu Undivided
Family, HUF is considered as ordinary resident (R&OR).
1. Karta or
Manager has been a resident in India in at least 2 out of the 10 previous
years immediately preceding the relevant previous year.
AND
2. Karta or
Manager has been present in India for a period of 730 days or more during 7
years immediately preceding the relevant previous year.
If above two conditions are not
satisfied by the Karta or the Manager (managing person) of resident HUF, the
HUF is treated as a resident but not ordinary resident of India (R But NOR).
2. Residential status of
Partnership Firm, AOP/ BOI
The residential status of this
category is also to be determined, same as determined in case of HUF, i.e., on
the basis of their Control & Management and further on the basis of their
managing person. 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. If control
and management of affairs are situated wholly outside India then it is said to
be non-resident in India.
Control and management mean de
facto control and management and not merely the right to control or manage. For
a firm, control and management is vested in partners, in case of an association
of persons it is vested in the principal officer.
It’s time to epitomize...!!!
Residential Status of a Company in
India
Section 6(3) deals with conditions to be satisfied for a
Company to be treated as resident in India in any previous year. A Company is
said to be resident in India if it satisfies any of the following two
conditions:
The Company is registered in India;
OR
Its place of effective
management (PoEM)*, in that year, is in India.Prior to the introduction of the concept of POEM, a Company was said to be resident in India in any previous year if it was an Indian company or during that year, the control and management of its affairs was situated wholly in India. The Finance Act, 2015 amended the above provision so as to provide that a Company would be resident in India in any previous year if it is an Indian company or its Place of Effective Management in that year is in India.
The determination of
place of effective management (POEM) in India is important to determine the
residential status of a foreign company operating in India. For Example, a
foreign company fulfilling the conditions of POEM will be deemed as Indian
Resident and the global income of such foreign company is taxable in India..
Circular 8/2017 dated
February 23, 2017 issued by CBDT has clarified that the provisions of PoEM will not be applicable
to a Company having turnover of Rs. 50 Crores or less in a financial
year.
* The POEM is required to be determined
each year since the residential status is required to be ascertained each year.
(Note: We will post
a separate article on guiding principles for determination of the Place of
Effective Management of a Company in our next blog.)
Let’s epitomize…
Advisory:
Information relates to the law prevailing in the year of publication/ as
indicated. The above article is only to enable public to have a quick and an
easy understanding to determine Residential status in India. Viewers are
advised to ascertain the correct position/prevailing law before relying upon
any document.
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