Basic Concepts – CA Inter Tax Question Bank | Taxation for CA Intermediate PDF Download

What is Residential Status?

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

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

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

Resident

An individual is considered a resident of India based on the following criteria:

• A person becomes a resident if they stay in India for a minimum of 182 days or more in a financial year.
• To qualify as a resident, an individual must have been in India for 365 days or more in the immediately preceding four years, with at least 60 days in the relevant financial year.
• If an individual with Indian citizenship leaves the country for employment during a financial year, they will be considered a resident only after spending at least 182 days in India.
• Previously, individuals were allowed a stay of fewer than 60 days or more than 182 days in India. However, starting from the financial year 2020-21, this period has been reduced to 120 days or more for individuals with a total income (excluding foreign sources) exceeding Rs 15 lakh.
• Another significant amendment from the financial year 2020-21 states that an individual who is a citizen of India and not liable to be taxed in any other country will be considered an Indian resident if their total income (excluding foreign sources) exceeds Rs 15 lakh and there is no tax liability in any other country due to their residence, domicile, or similar criteria.

Individuals meeting these conditions are deemed Indian residents for taxation purposes.

Resident Not Ordinarily Resident (RNOR)

• Must be an Indian Resident in at least 2 out of the 10 immediately preceding years.
• Must have stayed in India for a minimum of 730 days in the 7 immediately preceding years.

Exceptions

• If an Indian citizen departs the country during the Previous Year (PY) as a member of an Indian ship's crew.
• If leaving the country for employment outside of India.
• For an individual of Indian origin or citizenship involved in a job, business, or profession outside India, who visited India in any previous year.

Residential Status of Hindu Undivided Family (HUF)

Below are the criteria determining the residential status of a Hindu Undivided Family (HUF):

1. An HUF is deemed a resident in India if its control and management are either wholly or partly situated within India.
2. It is categorized as a Resident and Ordinarily Resident (ROR) in India when the following conditions are met by the Karta (including successive Kartas):
   • The Karta has been an Indian resident for 2 out of the 10 years immediately preceding the relevant year.
   • The Karta has stayed in India for a duration of 730 days or more during the 7 years immediately preceding the relevant year.
3. If the Karta does not meet any of the above conditions, the HUF is considered a Resident but Not Ordinarily Resident (RNOR).
4. If the management and control of the HUF are entirely outside India, it is classified as a non-resident.

By adhering to the guidelines regarding residential status, an HUF can ensure compliance with Indian tax regulations.

Residential Status of a Firm or (AOP)

• The residential status of a partnership firm or an AOP is determined based on where the management and control of affairs are handled. If managed wholly or partly within the country, it is considered a resident; otherwise, it is deemed a 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

• A foreign company is considered a resident of India if it has a Place of Effective Management (POEM) in India during the relevant previous year. POEM refers to where key management and commercial decisions necessary for conducting the business are substantially made.
• The determination of POEM may involve a set of guiding principles issued by the Board to aid taxpayers and tax administration.

Income Received in India

The income earned by an individual is considered to have been earned in India if the location where the income is first acquired is within the borders of India. It's important to note that money remitted to India from outside the country is not subject to taxation.

Specifically, income received as a salary by non-resident seafarers for services provided outside India on a foreign-bound vessel (whether with an Indian or foreign flag) and deposited into an NRE bank account held in an Indian bank is exempt from inclusion in the total income.

Section 7: Income Deemed to be Received in India

There are certain types of income that are considered to have been received in the Previous Year (PY) for tax purposes. These include:

• Excessive contributions to a Recognised Provident Fund beyond 12% of the salary or interest exceeding 9.5% per annum.
• Contributions made under a pension scheme as per section 80CCD by the Central Government or other employers.
• Amounts transferred from an Unrecognized Provident Fund (URPF) to a Recognised Provident Fund (RPF), which consist of the employer's contributions and the accrued interest.

Income Accruing or Arising in India

• When we talk about income accruing or arising in India, we are essentially referring to the right to receive income and the right to enforce payment of that income.
• It's important to understand that income that has already been taxed based on accrual cannot be taxed again upon receipt. Doing so would lead to double taxation, which is generally not permissible.

Section 9: Income Deemed to Have Accrued or Arisen in India

• Income derived from business connections within India is considered to have accrued or arisen in the country.
• Any income generated through or from assets, properties, or sources within India falls under this category.
• Income resulting from the transfer of capital assets situated in India is also deemed to have accrued or arisen in the country.
• Specifically, income under the "Salaries" category is included if it pertains to services provided in India, including rest periods or leave periods that are part of the employment service contract.
• Salaries paid by the Indian Government to Indian citizens for services conducted outside India are covered, with exemptions for perquisites and allowances specified under section 10(7).
• Pensions disbursed by the Government to its officials and judges residing permanently outside India are not considered to have accrued or arisen in India.

Income from Business Connection in India

According to Section 9(1)(i), the concept of 'business connections' includes any business activities conducted through a representative of a non-resident entity. To establish a business connection:

1. The representative must consistently possess the authority to finalize contracts on behalf of the non-resident. However, if the activities are restricted to purchasing goods or merchandising for the non-resident, this criterion does not apply.
2. In cases where there is no such authority, but there is habitual maintenance of a stock of goods in India from which regular deliveries are made for the non-resident.
3. Habitually receiving orders in India, particularly or entirely, for the non-resident. Additionally, if the representative secures orders for other non-residents while acting on behalf of the non-resident, a business connection is established for those non-residents if:
   • The other non-resident controls the non-resident.
   • The other non-resident is controlled by the non-resident.
   • The other non-resident is subject to the same control as the non-resident.

Exceptions

• If a business conducts operations outside the country, only the income reasonably attributable to operations in India is considered accrued in India.
• No income of a non-resident is deemed to have arisen in India from operations limited to purchasing goods in India for export.
• Income earned by a Non-Resident Indian (NRI) from a news agency or publication for collecting news for transmission out of India.
• In the case of a non-resident individual who is not a citizen of India.
• A partnership or company without any Indian partners or shareholders that earns income from filming a movie in India will not be taxed for that income in India.
• Income will not be considered as earned in India for individuals or entities that do not have a direct connection to India.
• For a foreign diamond mining company, revenue from displaying uncut diamonds in specified zones will not be taxed in India if the business is conducted through independent agents as part of regular business operations.

Conclusion

A comprehensive understanding of residential status is crucial for taxpayers to prevent any issues related to tax payments, particularly for Resident but Not Ordinary Resident (RNOR) and non-residents. This knowledge safeguards them from penalties resulting from delays or errors in filing income tax returns.