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Residential status under Income Tax explained

The term income tax refers to a type of tax that governments impose on income generated by businesses and individuals within their jurisdiction. By law, taxpayers must file an income tax return annually to determine their tax obligations.

Income taxes are a source of revenue for governments. They are used to fund public services, pay government obligations, and provide goods for citizens.

  1. Governments impose income tax on income generated by businesses and individuals within their jurisdiction.

  2. Purpose of tax is to fund public services, pay government obligations, and provide goods for citizens.

  3. Income tax that is levied on an individual's wages, salaries, and other types of income and it is specifically called as personal income tax.

  4. Taxes apply to corporations, partnerships, small businesses, and people who are self-employed are called business income taxes.

Residential Status: –

One of the important aspect of taxation is residential status of the assessee.

(a) The incidence of tax on any assessee depends upon his residential status as per income tax act and it is ascertained with reference to each previous year. A person who is resident in one year may become non-resident in another year.

(b) Residential status, domicile or place of birth and citizenship does not have any relationship. one domicile.

Different Types of Residential Status in Case of Individuals: –

Following are the categories of the Residential Status of India under Income Tax Act, 1961.

1. Resident of India

2. Non resident of India

3. Deemed Resident of India

Resident of India is further divided under

  1. Resident & Ordinary Resident and

  2. (ii) Resident but Not Ordinary Resident.

Examples of residential status as per income tax act

According to the Income Tax Act, 1961, residential status of a person is one of the important criteria in determining the tax implications. The residential status of a person can be categorised into Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR) and Non- Resident (NR).

Now let us learn further

Resident

A resident taxpayer is an individual who satisfies any one of the following conditions:

  1. Resides in India for a minimum of 182 days in a year, or

  2. Resided in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.

For example, consider the case of Mr. Damodar, who is business head for Latin America regions for a private firm. He was born and brought up in India. He has to travel to various locations of the continent for business purposes. He has spent 200 days travelling in the current financial year. Also, he has been travelling abroad from the past two years and has stayed out of India for about 400 days in this period.

Let us evaluate whether or was resident in India for the current financial year.

Condition I (Resides in India for a minimum of 182 days in a year) – Not satisfied

To figure out the resident status of, you will understand that he has only spent 165 days in India during the current financial year. Hence, he does not satisfy the first condition.

Condition II (Resides in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year) – Satisfied

However, It is given that he has been travelling only from the past two years. Also, it is said that he has travelled for 400 days in the past two years. That means, in the past four years, Mr. D has stayed in India for more than 365 days (1061 days).

Hence, Mr. Damodar has resided for atleast 60 days in the current financial year and for more than 365 days in the immediately preceding four financial years. Therefore, Mr. D satisfies the second condition.

Hence, if any one of the above two condition is satisfied he is a resident taxpayer.

Resident and Ordinarily Resident (ROR) and

Resident but Not Ordinarily Resident (RNOR)

There is a further classification under the resident status – Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR). That means a resident tax payer can be ordinary resident or not ordinary resident.

In addition to the basic conditions, if both the below conditions are met, he will be a ROR:

  1. He has resided in India for at least 2 out of 10 immediate previous years.

  2. He has resided in India for at least 730 days in seven immediately previous years.

In above example Mr. Damodar has satisfed as resident of India. Let us further classify whether Mr. Damodar is ROR or RNOR

If both the additional conditions are satisfied then Mr. Damodar is ROR

Considering the example, Mr. Damodar was travelling out of India since past 2 years only. Hence, the first condition is satisfied as he resided in India for atleast 2 years out of the immediate previous 10 years. Also, he has fulfilled the criteria of residing for at least 730 days in seven immediately preceding years. Therefore, he can be considered as Resident Ordinarily Resident.

If any one of the additional conditions is satisfied then Mr. Damodar is RNOR.

Alternatively, consider that he had to work from the headquarters of his firm, located in Malaysia for the past six years. He has only visited his parents for a week, twice a year during this time. That means, he has resided in India for 449 days in the past six years and the same applies for the current financial year too. In this case, first condition is satisfied but not the second. Therefore, Mr. D is Resident Not Ordinarily Resident.

Non-Resident

An individual who does not satisfy the basic conditions of resident can be considered as a non-resident.

For example, Ms. Ramani went to London to join a reputed university for a graduation course (three years). While studying there, her professor suggested her to join a post-graduate course at the same university (two years). She had to get an internship certificate to complete the course. Upon completion, the firm offered her a permanent position. She has been an employee there for the past four years. That is, Ms G has stayed out of India for nine years now. She receives rental income from the property that she inherited from her parents. Both the basic condition are not satisfied. That makes Ms. Ramani a non-resident.

Note:

The condition of minimum 60 days stay in the current financial year will get extended to 182 days in all the cases if:

A person is a citizen of India and he leaves India for the purpose of employment during the current financial year.

A person who stays outside India, being a citizen of India or a Person of Indian Origin (PIO), and comes on a visit to India during the year.

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