Residential Status as per Income Tax Act, 1961
The residential status of an individual plays a pivotal role in determining the tax liability on their global and Indian income. The Income Tax Act, 1961, clearly defines categories of residential statuses and lays down specific criteria for each. Let’s delve deep into understanding these categories and their implications.
Categories of Residential Status
Under the Income Tax Act, 1961, an individual’s residential status is categorized as:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Determining Residential Status
1. Resident and Ordinarily Resident (ROR):
An individual is considered as ROR if they satisfy both of the following basic conditions:
- Stayed in India for 182 days or more in the relevant financial year.
- Stayed in India for 365 days or more during the 4 years immediately preceding the relevant financial year and 60 days or more in that financial year.
If an individual satisfies the above conditions, they need to meet any one of the following additional conditions to qualify as ROR:
- Resident in India for at least 2 out of 10 years immediately preceding the relevant financial year.
- Stayed in India for 730 days or more during the 7 years immediately preceding the relevant financial year.
2. Resident but Not Ordinarily Resident (RNOR):
An individual qualifies as RNOR if they:
- Meet any of the basic conditions mentioned above.
- Do not meet both of the additional conditions.
3. Non-Resident (NR):
An individual is classified as NR if they do not satisfy any of the basic conditions.
Tax Implications Based on Residential Status
The residential status of an individual under the Income Tax Act, 1961, plays a pivotal role in determining the tax liability in India. The taxability of income in India largely depends on the residential status of the taxpayer. Let’s understand the tax implications based on different residential statuses.
1. Resident and Ordinarily Resident (ROR):
Global Income: Individuals classified as ROR are taxed on their global income. This means both income earned in India and income earned outside India are taxable.
For example, if an ROR has rental income from a property situated in the USA, such income would also be subject to tax in India, in addition to any taxes paid in the USA. However, relief might be available if there’s a Double Tax Avoidance Agreement (DTAA) between India and the other country.
2. Resident but Not Ordinarily Resident (RNOR):
Indian Income + Foreign Income from Indian business/control: Individuals classified as RNOR are taxed only on:
- Income that is earned or received in India.
- Income from a business controlled from India or from a profession set up in India, even if such income is earned outside India.
For example, if an RNOR has income from freelance services provided to a US company but controlled and set up from India, such foreign income would be taxable in India. However, foreign income which has no relation to any business or profession in India will not be taxable.
3. Non-Resident (NR):
Indian Income Only: Non-residents are taxed only on the income that is earned or received in India.
For instance, if an NR earns rental income from a property situated in India, it will be taxable in India. However, any income earned outside India will not be considered for taxation in India.
Additional Notes:
- Double Taxation Relief: In situations where an individual’s income is taxed in more than one country, relief is provided under the DTAA, if available, to ensure the income is not doubly taxed.
- Income Deemed to be Received in India: There are certain incomes that, regardless of where they are earned, are deemed to be received in India. For instance, if an NR sells property in India, the capital gains from that sale would be deemed to be income earned in India.
Illustrative Example
Let’s consider an example to clarify the determination of residential status:
Mr. Arvind’s stay in India:
- Financial Year 2022-23: 190 days
- Financial Year 2021-22: 85 days
- Financial Year 2020-21: 95 days
- Financial Year 2019-20: 90 days
- Financial Year 2018-19: 70 days
Total stay during the 4 years preceding 2022-23 = 340 days
Mr. Arvind fulfills the first basic condition as he stayed in India for more than 182 days during 2022-23. However, he does not meet the second basic condition since his total stay during the 4 preceding years is less than 365 days.
Therefore, for the financial year 2022-23, Mr. Arvind will be classified as a Resident but Not Ordinarily Resident (RNOR).
Conclusion
The determination of residential status is crucial as it dictates how an individual’s income is taxed in India. It’s imperative for taxpayers to ascertain their residential status accurately each financial year since it can change year on year based on the duration of their stay in India. Understanding these nuances will aid in proper tax planning and ensure compliance with the Income Tax Act, 1961.
