Residential Status under Income-tax Act

Residential Status under Income-tax Act

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Created By Admin Last Updated Fri, 09-Oct-2020

It is important to determine the residential status of a person since the taxability of income of a person depends on his residential status during that financial year. For example, a person resident in India is liable to pay tax in India on his global income. 

As per section 6 of the Income-tax Act, 1961, all the assessees are divided in the following categories for the purpose of determining their residential status:

I. Individual, 

II. Hindu undivided family,

III. Company, and

IV. Every other person

Types of Residential Status:

An assessee can be categorized into following residential status during the previous year:

A) Resident in India

B) Non-Resident in India

A resident individual and HUF are further sub-categorized in to following status:

A)  Resident and Ordinarily Resident

B) Resident but Not-ordinarily Resident

I. Individual:

The residential status of individual for the purpose of taxation is determined on the basis of his physical presence in India during the previous year (April 1 to March 31) and preceding previous years. An individual is said to be a resident of India if he is:

1) Physically present in India for a period of 182 days or more in the previous year, or

2) Physically present in India for a period of 60 days or more during the relevant previous year and 365 days or more in aggregate in four preceding previous years.

If a person doesn’t meet any of the above two conditions then he is said to be a non-resident in India for the purpose of taxation in India.

A resident individual is further classified into ‘Resident but not Ordinarily Resident’ if:

1) His stay in India is of 729 days or less in previous 7 years; and

2) He was considered as ‘non-resident’ in 9 out of previous 10 years.

II. HUF:

An HUF is said to be resident in India if the control and management of HUF is in India. A resident HUF is further classified into ‘Resident but not Ordinarily Resident’ if:

a) Stay of Karta in India is 729 days or less in previous 7 years; and

b) Karta was considered as ‘non-resident’ in 9 out of previous 10 years.

If control and management of HUF is situated wholly outside India then HUF shall be treated as non-resident. 

III. Company:

An Indian Co. is always treated as resident in India. However, in the case of a Foreign Co., it shall be treated as resident in India if the Place of Effective Management (POEM) of Foreign Co. is in India. If POEM of Foreign Co. is outside India then it shall be treated as non-resident in India.

IV. Every other person:

In case of every other person, i.e., Firm/BOI/AOP, they will be treated as resident in India if control and management of person is situated in India. If it is situated outside India then status will be non-resident.

It must be noted that if a person is resident in India in a previous year in respect of any source of income, he is deemed to be resident in India in respect of all other sources of income. An assessee is not allowed to claim different residential status for his different sources of income. So, before calculating income during the year, it is most important to calculate the residential status of the assessee during the previous year.

Taxability of income in case of ordinary resident person:

A resident assessee shall be liable to pay tax in India on the following incomes:

1. Income received or is deemed to be received by him in India in the previous year. 

2. Income accrues or arises or is deemed to accrue or arise to him in India during such year. 

3. Income accrues or arises to him outside India during such year.

Taxability of income in case of non-ordinary resident person:

A resident but not ordinarily resident individual and HUF shall be liable to pay tax in India on the following incomes:

1. Income received or is deemed to be received by him in India in the previous year.

2. Income accrues or arises or is deemed to accrue or arise to him in India during such year.

3. Income accrues or arises to him outside India during such year if it is derived from a business controlled from India or from a profession setup in India.

Taxability of income in case of non-resident person:

In case of a non-resident assessee, being an individual, HUF, partnership firm, company or another person, following incomes shall be taxable in India:

1. Income received or is deemed to be received in India by such person in the previous year.

2. Income accrues or arises or is deemed to accrue or arise to such person in India during such year.