Income Tax in India: Residential Status and Its Impact on Taxation

Residential Status Under Section 6 of Income Tax Act

Understanding the impact of your residential status on income tax in India is important as it helps you estimate the tax payable by you. The Income Tax Act explicitly explains the rules classifying an individual as resident, non-resident, or resident but not ordinarily resident, and how that status will impact the income in relation to income tax.

Meaning and Importance of Residential Status

In income tax laws, an individual’s residential status is of prime importance in ascertaining the scope of their tax liability. Indian residents are taxed on their worldwide income, while non-residents are taxed only on India-sourced income. This distinction makes it very vital to determine one’s residential status accurately for income tax purposes.

How to Determine Residential Status?

Their residential status is going to be ascertained by their physical presence in India during a financial year. Section 6 of the Income Tax Act considers an individual to be a resident where the individual stays in India for: –

• 182 days or more in the relevant financial year; or
• 60 days or more in the relevant financial year and 365 days or more in the preceding four years.

Exceptions to this general rule exist for certain categories of persons, such as Indian citizens who are going abroad for employment or who are visiting India. In their case, the 60-day rule is extended to 182 days so that they do not inadvertently become an Indian resident by short visits.

Resident

A resident is liable to pay income tax on global income. This includes earnings within India and abroad, provided they meet the criteria mentioned above. There are also certain tax benefits available to residents that are not available to non-residents.

Exceptions to Residential Status

The general rules concerning residential status do not apply to the following: members of the crew of an Indian ship who are Indian citizens; individuals going to foreign employment from India, and those coming to India. In their cases, the requirement of physical presence is relaxed so that they are not taxed as residents if their stay in India does not exceed 182 days.

Resident Not Ordinarily Resident

One special category under the tax laws is the Resident Not Ordinarily Resident. An individual comes within this category if he/she has been a non-resident in nine of the ten preceding years, or their aggregate period of stay in India in the seven preceding years is less than 730 days.

An RNOR also gets similar tax benefits as a non-resident with certain nuances.

Non-Resident

A non-resident is taxed only on the income received in India, accruing in India, or having a nexus by reasons of assets held in India. For non-residents, it is very important to ensure that their income from sources outside India does not get taxed in India.

Important Terms to Understand

First and foremost, one needs to understand Citizenship, NRI, and Residential status. For example, an Indian citizen whose income is in excess of ₹ 15 lakhs from non-foreign sources and is not liable to pay income tax in any other country is a resident, irrespective of whether he may or may not be physically staying in India.

Taxability

A large part depends on residential status. While residents are taxed on worldwide income, non-residents will have taxation confined to Indian income only. Hence, it becomes of immense significance to determine residential status w.r.t. tax planning.

Residential Status of HUF

A Hindu Undivided Family (HUF) is considered to be resident in a country where it is controlled and managed. If HUF is managed wholly outside India, then it would be considered a non-resident.

Residential Status of a Company

The residential status of a company is determined based on the place of effective management (POEM). If the POEM is in India, the company would be treated as resident, and its worldwide income would become taxable in India.

Points to Note

• The physical stay in India need not be continuous; only the aggregate period over the financial year matters.
• The income tax laws have laid down elaborate stipulations for ascertaining the residential status, and this must be checked each year since it may alter.

Thus, it becomes very vital to know and understand the residential status of a person under Indian income tax laws. This step will ensure compliance and optimization of tax obligations against global and Indian sources of income.