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DETERMINATION OF RESIDENTIAL STATUS FOR PURPOSE OF TAXATION OF AN INDIVIDUAL UNDER INCOME TAX ACT


Author: Kishan Santosh Pandey, IVth Year BA.,LL.B from Ajeenkya DY Patil University- School of Law.



The act of determination of Residential Status is pivotal when it comes to determination of the total taxable income by the Indian Income tad authorities. The provisions of the Income Tax Act, 1961 hereinafter referred to as the ‘act’ particularly section 6 enumerates the conditions for determination of residential status of an individual, and therefore the total taxable income with respect to the act.

One major misconception regarding residential status is that, it is only valid for non-citizens. This statement is absolutely false. The residential status of a citizen can be Non-Resident whereas that of a non-citizen can be Resident Ordinarily Resident.. The Act provides the conditions which help in determining whether the individual in question is a resident or not.

Section 6 of the Income Tax Act, 1961 states as below;

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 eighty-two 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.

……

(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. 1


Simply put, the conditions can be divided into two; Basic Conditions and Additional conditions.


Basic Conditions

182 days in the previous financial year, or;

60 days in the current year + 365 days in the preceding 4 financial years.


Additional Conditions

Been a resident (fulfilled one of the basic conditions) of India in 2 out of 10 preceding financial years.

Resided in India for a period of 730 days in the 7 previous years preceding the assessment year.

If an individual does not fulfil any of the basic conditions, then they would be considered as Non-Resident.

Fulfilment of one of the basic conditions would mean that the individual will be considered as Resident.

Fulfilment of one of the basic conditions as well as both the additional conditions would mean the individual would be considered as Resident Ordinarily Resident (ROR).

Fulfilment of one of the basic conditions and one or none of the additional conditions would mean that the individual would ne considered as Resident Not Ordinarily Resident (RNOR).


Exceptions to the Basic Condition

There are two exceptions to second basic condition for determining the residential status and they apply only for the following individuals :

An Indian citizen residing outside India for the purpose of employment and his contract for such work outside India has been approved by Central government.

(OR)

He is a member of crew of an Indian ship.


Deemed Resident of India

Another important concept is that of a Deemed Resident of India. Simply put, a citizen of India, will be deemed to be a resident of India and taxed based on the provisions detailed within the Act, if he/she is not liable to pay taxes in any other country throughout the world. This deemed residential status is applicable only if the individual earns a total income, other than the income from foreign sources, exceeding the sum of Rupees fifteen lakh during the relevant financial year. Condition to the clause that such non taxability in any other country or territory would be by reason of his domicile or residence or any other criteria of similar nature and not due to the state not recognizing or practicing the concept of Income taxes.


Why is the determination of Residential status important?

With respect to the above mentioned discussion, we understand the procedure to determine the residential status of an individual. But the importance of Residential status comes into picture when the question of taxable income is being answered. To illustrate, X if determined to qualify as Non-resident then the income accruing/ deemed to accrue in India or income received/ deemed to be received in India shall be taxable. Exceptions can be made in cases of tax treaty with their own stipulated conditions, but generally any income deemed to be accrued in India will be taxable as per the provisions laid down in the Act.

Similarly, in case of any Resident but not ordinarily resident (RNOR) the income from business or profession controlled from India is taxable as per the provisions of the Act whereas any income that is accrued outside India is not taxable. This simply means that the taxation of RNOR is much in line with the provisions enumerated for the Non- Residents.

In case of a Resident Ordinarily Resident (ROR) the situation differs drastically. In such cases, both the income accrued from business or profession controlled from and in India as well as any income that is accrued outside India is taxable as per the provisions of the act.


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