Significant Amendment from FY 2020-21:

An important change introduced from the Financial Year 2020-21 is that an individual who is a citizen of India, and is not liable to pay taxes in any other country, will be considered a resident in India only if their total income (excluding income from foreign sources) exceeds Rs 15 lakh, and they have no tax liability in any other country.

Meaning and Importance of Residential Status

The taxability of an individual in India is determined by their residential status for a particular financial year. Residential status is a legal term under the Income Tax Act of India and should not be confused with an individual’s citizenship. An individual may be a citizen of India but could be classified as a non-resident for a specific year. Conversely, a foreign citizen may be considered a resident of India for income tax purposes in a given year.

It is important to understand that the residential status for tax purposes is determined differently for various types of entities, such as individuals, firms, and companies. This article focuses on explaining how the residential status of an individual (assessee) is determined for any given financial year.

How to Determine Residential Status?

Under Indian income tax laws, individuals are classified into three categories based on their residential status:

1. Resident and Ordinarily Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non-Resident (NR)

The taxability of an individual depends on which of these categories they fall under. Before diving into the tax implications for each category, it is important to understand the criteria used to determine whether a taxpayer qualifies as a Resident, RNOR, or Non-Resident (NR).

1. Resident

An individual will be considered a resident of India for tax purposes if they meet at least one of the following two conditions:

1. The individual has stayed in India for 182 days or more during the previous financial year.
2. The individual has stayed in India for 365 days or more during the four preceding years combined, and 60 days or more in the relevant financial year.

If an individual satisfies either of these criteria, they are considered a resident of India for the given financial year under the Income Tax Act.

Exceptions to Residential Status

1. Crew Members of Indian Ships or Employment Abroad:
   If an individual, who is a citizen of India, leaves the country as a member of the crew of an Indian ship or for employment purposes, they will be considered a resident of India only if they stay in India for 182 days or more during the relevant financial year.
2. Indian Citizens or Persons of Indian Origin (PIO) Living Abroad:
   An Indian citizen or person of Indian origin who stays outside India and visits India during the relevant financial year may be treated as a resident in India if:
   • Their total income (excluding foreign income) exceeds Rs. 15 lakh in the relevant financial year, and
   • They either stay in India for 182 days or more during the financial year, or
   • They stay in India for 365 days or more during the preceding 4 years and for at least 120 days in the relevant financial year.

Additionally, as per a significant amendment, if an Indian citizen’s total income (excluding foreign sources) exceeds Rs. 15 lakh and they have no tax liability in any other country, they will be treated as a “deemed resident of India.”

2. Resident but Not Ordinarily Resident (RNOR)

After determining that an individual qualifies as a resident, the next step is to classify them as either a Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR).

An individual is considered a Resident and Ordinarily Resident (ROR) if they meet both of the following conditions:

1. They have been a resident of India in at least 2 out of the 10 previous years.
2. They have stayed in India for at least 730 days during the 7 immediately preceding years.

If an individual does not meet both of these conditions, they will be classified as Resident but Not Ordinarily Resident (RNOR). There are 3 specific situations in which an individual would be considered RNOR:

1. Failure to Meet the Criteria: If the individual fails to satisfy either or both of the above-mentioned conditions for being an Ordinarily Resident.
2. High-Income Indian Citizens or Persons of Indian Origin: If an Indian citizen or person of Indian origin has a total income exceeding Rs. 15 lakh (excluding foreign income) and has been in India for 120 days or more, but less than 182 days during the previous year, they will be considered RNOR.
3. Deemed Residents: If an individual is considered a “deemed resident” under the new provisions (i.e., a citizen of India with income exceeding Rs. 15 lakh, but no tax liability in other countries), they will be classified as RNOR by default.

3. Non-Resident (NR)

An individual will be considered a Non-Resident for a particular financial year if they fail to meet the following conditions:

1. Stay of 182 Days or More in India: The individual does not stay in India for at least 182 days in the previous year, or
2. Stay of 60 Days in the Previous Year and 365 Days in the Last 4 Years: The individual does not stay in India for at least 60 days in the previous year and 365 days in the four preceding years.

Points to Note:

• Stay in India Includes Territorial Waters: When calculating the number of days stayed in India, the term “stay in India” includes stay in the territorial waters of India (12 nautical miles into the sea from the Indian coastline).
• Non-Continuous Stay: The period of stay in India does not have to be continuous or active. Even if the stay is intermittent, it will still be counted towards the total days of stay.
• Departure and Arrival Dates: Both the date of departure and the date of arrival are included when calculating the total number of days spent in India.
• Residency for Tax Purposes: For income tax purposes, the residence status of an individual is not linked to their citizenship, place of birth, or domicile. Therefore, an individual can be a resident of more than one country, even if they have only one domicile.

Important Terms to Understand

Before delving into the key aspects of Section 6 of the Income Tax Act, 1961, it is essential to understand certain terms that are crucial for determining an individual’s residential status and taxability. Here are the key terms explained:

1. Income from Foreign Sources

• Definition: This refers to income that is earned outside India. However, it does not include income derived from a business operated or a profession set up in India, even if the income is earned abroad. Such income is not considered as income from foreign sources if it is related to activities conducted in India.

2. Non-Resident Indian (NRI)

• An NRI is an individual who is an Indian citizen or of Indian origin, but does not meet the criteria of a resident as per the provisions of Section 6 of the Income Tax Act. In other words, an NRI is someone who spends fewer than the required number of days in India during a financial year to be considered a resident.

3. Person of Indian Origin (PIO)

• An individual is considered a Person of Indian Origin (PIO) if:
  • The individual or either of their parents or grandparents was born in undivided India (before the partition of 1947).
• This classification is significant for various tax and legal provisions, including eligibility for certain exemptions or benefits.

Taxability Based on Residential Status

1. Resident and Ordinarily Resident (ROR)
   • A Resident and Ordinarily Resident (ROR) will be taxed on their global income. This means that both income earned within India and income earned outside India (foreign income) will be taxable in India.
2. Resident but Not Ordinarily Resident (RNOR)
   • The taxability of income for a Resident but Not Ordinarily Resident (RNOR) is different from that of a Resident and Ordinarily Resident (ROR). Specifically:
     • RNORs are not required to pay taxes on income earned outside India or income received outside India. However, income accrued in India or received in India will still be taxable.
3. Non-Resident (NR)
   • A Non-Resident (NR) is only taxed on:
     • Income received in India, or
     • Income accrued from India.
     • Income earned outside India and having no connection to India is not taxable.

Examples of Income Taxability:

• Income received in India:
  • For instance, interest on fixed deposits with Indian banks is considered income earned in India and is therefore taxable for residents, RNORs, and non-residents.
• Income received from India:
  • Payments made by an Indian company or person to a foreign bank account for services provided are considered income accrued from India and are subject to Indian tax for residents, RNORs, and non-residents.

In summary, the taxability of an individual’s income depends on their residential status. Residents are taxed on their global income, while non-residents are only taxed on their income sourced from or received in India.

Residential Status of Hindu Undivided Family (HUF)

1. Resident HUF
   • An HUF (Hindu Undivided Family) is considered a resident in India if the management of the HUF is carried out from within India. If the management is done outside India, the HUF will be treated as a non-resident.
2. Resident and Ordinarily Resident (ROR) / Resident But Not Ordinarily Resident (RNOR)
   • If the Karta (the head or manager of the HUF) qualifies as a resident in India based on the conditions mentioned below, the HUF will be classified as a Resident and Ordinarily Resident (ROR). If not, the HUF will be classified as a Resident but Not Ordinarily Resident (RNOR).

The Karta of an HUF must meet the following conditions for the HUF to be classified as Resident and Ordinarily Resident (ROR):

1. • The Karta must be a resident in at least 2 out of the last 10 years.
   • The Karta must have stayed in India for a minimum of 730 days during the last 7 years.
2. Note:
   • Only individuals and Hindu Undivided Families (HUFs) can be classified as Resident but Not Ordinarily Resident (RNOR) in India. Other categories of taxpayers (e.g., companies, firms) can either be resident or non-resident but cannot be RNOR.

Residential Status of a Company

A company is considered resident in India under the following conditions:

1. Indian Company: If the company is an Indian company, it will automatically be considered a resident in India.
2. Place of Effective Management (POEM): If the place of effective management (POEM) is in India during the previous year, the company will be considered a resident in India.
   • Place of Effective Management (POEM) refers to the place where the key management and commercial decisions necessary for the conduct of the business or affairs of the company are made.

Residential Status of Firms, LLPs, AOPs, BOIs, Local Authorities, and Artificial Juridical Persons

For entities like Firms, Limited Liability Partnerships (LLPs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), Local Authorities, and Artificial Juridical Persons, the residential status is determined based on where their management is carried out.

• If the management of these entities is conducted from India, they will be considered residents.
• If the management is carried out from outside India, they will be classified as non-residents.

In essence, the place from where the entity’s management is controlled decides its residential status, similar to the determination of residential status for an HUF.