Basics About Residential Status.

Let us understand the meaning and importance of residential status

The taxability of an individual in India depends upon his residential status in India for any particular financial year. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a resident of India for income tax purposes for a particular year.

Also to note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. In this article, we have discussed about how the residential status of an individual taxpayer can be determined for any particular financial year

How to find out residential status?

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

a. A resident

b. A resident not ordinarily resident (RNOR)

c. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let us first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident

An individual is said to be a resident in the tax year if he/she is:

• physically present in India for a period of 182 days or more in the tax year (182-day rule), or

• physically present in India for a period of 60 days or more during the relevant tax year and 365 days or more in aggregate in four preceding tax years (60-day rule).

If none of the above two conditions are met, the individual is said to be an NR in that tax year.

Example:

• If Mr. A comes to India on or before 30th September, he will be treated as a resident for that tax year.

• If Mr. B comes to India on or before 31st January and has stayed in India for 365 days or more during the four tax years preceding the relevant tax year, he will be treated as a resident for that tax year.

Resident Not Ordinarily Resident

A resident individual is treated as RNOR if he/she satisfies any one of the following conditions:

• He/she has been an NR in nine out of ten tax years preceding the tax year for which residential status is being determined.

• His/her physical presence in India is less than or equal to 729 days during seven tax years preceding the tax year for which residential status is being determined.

A resident individual not satisfying both of the above conditions is treated as ROR.

Example:

If an expatriate stays in India for 300 days for each of three tax years, then he/she will not qualify as RNOR in the fourth year because of the following reasons:

• He/she is not an NR in nine out of ten tax years.

• His/her physical presence in India exceeds 729 days in the preceding seven tax years.

In determining the physical presence of individuals in India, it is not essential that their stay in the country needs to be continuous or at the same place.

Non-resident

An individual satisfying neither of the conditions stated in (a) or (b) above would be an NR for the year.

Taxability

Resident: A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not pay any tax in India on their foreign income.

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.

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DISCLAIMER: The information contained herein is generic in nature and is meant for basic educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product/Examination purpose. Subject to Amendments. Yogesh Suthar is not liable for any decision arising out of the use of this information.

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