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Residential Status and Scope of Total Income

Author: Shubhangi Jain

Date: 31 Dec, 2022

Residential status plays a crucial role in determining an individual's tax liability in India for a specific financial year. It's essential to grasp that residential status, as defined by Indian tax laws, is distinct from an individual's citizenship. For instance, someone could be an Indian citizen but deemed a non-resident in a given year. Conversely, a foreign national might be treated as an Indian citizen for tax purposes in a particular year. The conditions governing residential status can be perplexing for taxpayers, potentially resulting in errors when filing income tax returns and inviting penalties. This article delves into residential status and its implications on total income to simplify this concept.

Table of Contents

• Understanding Residential Status
• Significance of Residential Status in Taxation
• Differences between Citizenship and Residential Status
• Impact of Incorrect Residential Status Determination
• Conditions for Residential Status
• Resident Individual Criteria
• Non-Resident Individual Criteria
• Resident and Ordinarily Resident Criteria

Understanding Residential Status

Residential status refers to an individual's classification based on the duration of their stay in India over the past five years. It determines the calculation of income tax liability for the current financial year and the preceding four years.

Categories under the Income Tax Act 1961

The Income Tax Act 1961 categorizes individuals into three main groups based on their residential status:

• Resident
• Resident but not ordinarily resident
• Non-resident

Becoming an Indian Resident

An individual is considered an Indian resident if they meet any of the following conditions:

• Stay in India for 182 days or more in the current financial year
• Stay in India for 60 days or more in the current financial year and 365 days or more in the preceding four years

Resident but Not Ordinarily Resident

This status applies to individuals who are residents in India but not ordinarily residents due to specific conditions like employment abroad.

Non-Resident Status

Non-resident status is assigned to individuals who do not meet the criteria for being a resident or a resident but not ordinarily resident.

Understanding residential status is crucial for determining tax obligations and benefits based on the classification of an individual's stay in India.

Indian Residency Criteria

• A person needs to stay in India for a minimum of 182 days or more to qualify as a resident.
• For the immediate 4 preceding years, the individual must have stayed in India for 365 days or more and at least 60 days in the relevant financial year.
• If someone with Indian citizenship leaves the country for employment during a financial year, they are considered a resident only after spending at least 182 days in India.
• Individuals with special circumstances are allowed a stay of fewer than 60 days or more than 182 days in India. However, starting from the financial year 2020-21, this duration is reduced to 120 days or more for those with a total income (excluding foreign sources) exceeding Rs 15 lakh.

Amendments to Residency Rules

• Effective from the financial year 2020-21, an Indian citizen not liable to be taxed in any other country is considered an Indian resident if their total income (excluding foreign sources) exceeds Rs 15 lakh and they have no tax liability in any other country due to their residence, domicile, or similar criteria.

Individuals are required to meet specific criteria to be considered residents for taxation purposes in India.

Resident Not Ordinarily Resident (RNOR)

• Someone who is considered a resident of India needs to determine if they fall under the category of Resident Ordinarily Resident (ROR) or Resident Not Ordinarily Resident (RNOR).
• To qualify as ROR, two conditions must be met:
  • Being an Indian resident in at least 2 out of the 10 immediately previous years.
  • Having stayed in India for a minimum of 730 days in the 7 immediately preceding years.

Exceptions

• Certain categories of individuals are considered residents only if they have stayed in India for a minimum of 182 days or more during the relevant previous year. This means that only the first condition of Section 6(1) needs to be checked for them.
• If an Indian citizen leaves the country during the previous year as a member of an Indian ship's crew.
• If someone leaves India for employment outside the country.
• For a person of Indian origin or citizenship involved in a job, business, profession, or any other activity outside India, who visits India in any previous year.

Understanding the Residential Status of Hindu Undivided Family (HUF)

• A Hindu Undivided Family (HUF) is considered a resident in India if the management and control of its affairs are either wholly or partly situated in India.
• For an HUF to be categorized as a Resident and ordinarily resident in India, certain conditions must be met by the Karta (the head of the family):
  • The Karta should be an Indian resident for 2 out of the 10 years immediately preceding the relevant assessment year.
  • The Karta must have stayed in India for a total of 730 days or more during the 7 years immediately preceding the relevant assessment year.
  • If the Karta does not fulfill any of the aforementioned conditions, the HUF is considered a Resident but not ordinarily resident.
• If the entire management and control of the HUF are located outside India, then the HUF is treated as a non-resident entity.

Let's break down these points further to understand them better:

Resident Status of HUF in India

• An HUF is considered a resident in India if its affairs are controlled and managed, at least in part, within the boundaries of India.

Resident and Ordinarily Resident Criteria for HUF in India

• To be deemed a Resident and ordinarily resident in India, the Karta of the HUF must fulfill specific conditions:
• The Karta needs to be an Indian resident for at least 2 years out of the 10 years preceding the current assessment year.
• The Karta should have spent a total of 730 days or more in India during the 7 years leading up to the relevant assessment year.
• If the Karta fails to meet any of these conditions, the HUF is labeled as a Resident but not ordinarily resident.

Non-Resident Status of HUF

• If the entire management and control of the HUF is situated outside India, the HUF is classified as a non-resident entity.

These distinctions are crucial in determining the residential status of a Hindu Undivided Family (HUF) in India.

Residential Status of a Firm or (AOP)

• The residential status of a partnership firm or an Association of Persons (AOP) is determined based on where its management and control are carried out. If these functions are wholly or partly conducted within the country, the firm is considered a resident; otherwise, it is classified as non-resident.

Residential Status of Company

• An Indian company is always regarded as a resident of India.

Residential Status of Foreign Company from AY 2016-17

• For a foreign company to be treated as a resident of India, it must have a Place of Effective Management (POEM) in India during the relevant previous year. The POEM is where significant management and commercial decisions necessary for the company's operations are substantially made.
• The Board may issue guiding principles for determining the POEM to assist taxpayers and tax administration.

Income Tax Refunds for AY 2021-22

• 1.5 Crore refunds were issued for the Assessment Year 2021-22.

Income Received in India

• The income earned in India refers to money earned in India under the individual's control. If remittance is received outside India, it is not taxable.
• Salaries received by non-resident seafarers for services on foreign going ships, when deposited into an NRE bank account with an Indian bank, are not considered as part of total income.

Deemed Income Received in India

The following types of income are considered to be received in the Previous Year:

• Contributions exceeding 12% of salary to Recognised Provident Fund or interest exceeding 9.5% per annum.
• Contributions to a pension scheme under section 80CCD by the Central Government or other employers.
• Amounts transferred from URPF to RPF, including employer contributions and interest.

Understanding Income Generation in India

• Accrual of income signifies the right to receive earnings, while due indicates the entitlement to enforce payment of the same. Notably, if income has been taxed based on accrual, it should not be taxed again upon receipt to avoid double taxation.

Section 9: Income Deemed to Accrue or Arise in India

• Earnings derived from business ties within India.
• Income sourced from assets, properties, or income origins in India.
• Revenue generated from the transfer of capital assets situated in India.
• Income falling under the category of Salaries, provided it is payment for services rendered in India, including rest periods that are part of the employment agreement.
• Salaries disbursed by the Indian Government to its citizens for services rendered abroad. Notably, perks and allowances paid overseas by the Government are exempt under section 10 (7).
• Pensions paid by the Government to its officials and judges residing permanently outside India are not deemed to have accrued or originated in India.

Income from Business Connection in India

According to Section 9(1)(i) of the Income Tax Act, 'Business connections' encompass any business activities conducted through a representative of a non-resident entity. This representative is defined as:

• The individual must consistently possess the authority to finalize contracts on behalf of the non-resident. However, this provision does not apply if the actions are restricted to purchasing goods or engaging in merchandising for the non-resident.
• In the absence of such authority, the establishment of a business connection can occur through the habitual maintenance of a stock of goods in India. This stock is used to regularly deliver goods or merchandise on behalf of the non-resident.
• Consistent reception of orders in India, primarily or entirely for the non-resident, also establishes a business connection. Additionally, if the representative secures orders in India for other non-residents, a business connection is formed if:
  • Such other non-resident controls the non-resident
  • Such other non-resident is controlled by the non-resident
  • Such other non-resident is subject to the same control as that of the non-resident

Exceptions to Income Deemed to Accrue or Arise in India

• The income source must be from operations in India to be taxable.

Exception 1: Partial Business Operations

Exception 2: Goods Purchase for Export

Exception 3: News Agency or Publication

Exception 4: Non-Resident Individuals

Income Tax Provisions for Non-Resident Entities in India

• When a firm doesn't have any partner who is an Indian citizen, or a company lacks shareholders but earns income from filming in India, the income isn't considered to have originated in India.
• For a foreign company involved in diamond mining, income generated solely from displaying uncut diamonds in specified zones, as announced by the Central Government, isn't deemed to have arisen in India if the business is conducted through an independent agent.

Understanding Residential Status for Income Tax Filing

Having a comprehensive understanding of residential status is crucial for taxpayers to ensure compliance with tax regulations, particularly in cases involving RNOR (Resident but Not Ordinarily Resident) and non-resident status. This knowledge helps individuals avoid penalties resulting from delays or errors in income tax filing.

Key Topics:

• Income Tax Appeal
• Income Tax Consultancy
• Income Tax Notice

Income Tax Filing Forms:

• ITR-1
• ITR-2
• ITR-2A
• ITR 3
• ITR 7
• ITR-3 vs ITR-4
• Form 16 vs Form 16A

Important Sections of the Income Tax Act 1971:

• Section 7
• Section 9A
• Section 9B
• Section 13
• Section 30
• Section 194Q
• Section 80G
• Section 80GG
• Section 80TTA
• Section 234A
• Section 234C
• Section 245

It is essential to stay informed about the latest trends and updates in the field of income tax to ensure compliance with the law.

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Summary: Income Tax Act, 1961 and Aadhaar Card

• Income Tax Act, 1961: This legislation outlines the rules for taxing various types of income acquired by individuals.
• Aadhaar Card: Introduced by the Government of India in 2011, the Aadhaar card serves as an official identity document.
• Income Tax Act, 1961:
  • Provisions for Taxation: The Act encompasses provisions for the taxation of all forms of income received by individuals.
• Aadhaar Card:
  • New Identity Document: The Aadhaar card was established as a new identity document in 2011.
• Key Dates:
  • 24th September, 2019: Significance related to the Income Tax Act.
  • 16th September, 2023: Introduction of Aadhaar card.
• Contact Information:
  • Chat on Whatsapp with Suman for further assistance and information.