Determining an individual's residential status is crucial for understanding their tax liability in India. The Income Tax Act classifies individuals as either "resident" or "non-resident" based on their duration of stay in India and other criteria. This status significantly impacts the taxation of income earned both in India and abroad.
Understanding Residential Status in India
Residential status is not linked to citizenship but depends on the number of days spent in India during a financial year. An individual may be an Indian citizen yet qualify as a non-resident, or a foreign national may be classified as a resident for tax purposes.
Key Categories of Residential Status
|
Category |
Criteria |
|
Resident and Ordinarily Resident (ROR) |
Present in India for: • At least 182 days in the financial year, OR • At least 60 days in the financial year and 365 days in the preceding 4 years. |
|
Resident but Not Ordinarily Resident (RNOR) |
Meets ROR conditions but has: • Stayed in India for less than 730 days in the preceding 7 years, OR • Has been a non-resident for 9 out of the preceding 10 financial years. |
|
Non-Resident (NRI) |
Does not meet the criteria for ROR or RNOR. |
Example for Determining Residential Status
Example: Mr. John stayed in India for the following periods:
- 1 April 2022 to 30 June 2022 (91 days)
- 1 October 2022 to 31 December 2022 (92 days)
- 1 March 2021 to 30 June 2021 (122 days)
- 1 March 2020 to 30 June 2020 (122 days)
- No stay during 2019-20 and 2018-19
Calculation:
- Current Financial Year (2022-23): 91 days + 92 days = 183 days (meets 60-day rule)
- Previous 4 Financial Years Total Stay: 122 + 122 = 244 days (does not meet the 365-day rule)
Conclusion: Mr. John qualifies as a Resident but Not Ordinarily Resident (RNOR).
Exceptions to the 60-Day Rule
The 60-day rule does not apply if:
- An Indian citizen leaves India for employment abroad or as a crew member of an Indian ship.
- An Indian citizen or a Person of Indian Origin (PIO) visits India and stays less than 182 days in the financial year.
Impact of Residential Status on Taxation
|
Income Type |
Resident |
RNOR |
NRI |
|
Income earned or received in India |
Yes |
Yes |
Yes |
|
Income accrued outside India |
Yes |
No |
No |
What Happens If Residential Status Changes?
A change in residential status can affect various aspects of taxation:
- Tax Scope: Residents are taxed on global income, while non-residents are taxed only on income earned in India.
- Filing Requirements: Residents may need to report worldwide income, whereas NRIs generally report only Indian-sourced income.
- DTAA Benefits: Non-residents may lose access to certain benefits under the Double Taxation Avoidance Agreement (DTAA).
- Tax Rates: Non-residents are often subject to different tax rates compared to residents.
Residential Status for Other Entities
- HUFs (Hindu Undivided Families): A HUF is considered resident if its control and management are primarily in India. Further classification as ROR or RNOR depends on the Karta's residential status.
- Companies: A company is classified as a resident if either it is an Indian company or its Place of Effective Management (POEM) is located in India.
Conclusion
Understanding residential status is essential for complying with Indian tax laws and managing tax liabilities effectively. Ensuring accurate classification helps individuals and entities meet their tax obligations and benefit from applicable tax provisions. Consulting a tax professional can provide further guidance in determining residential status and ensuring compliance.
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Disclaimer: Aim of this article is to give basic knowledge about the topic to people who are not in touch with Indian tax norms. When anybody is dealing with these kinds of cases practically, he shall consider all relevant provisions of all applicable Laws like FEMA/Income Tax/RBI /Companies Act etc.