Residential status and Income Tax Return- the Co-relation between the two

Introduction

To determine the liability to pay income tax in any country by a person, first we need to determine the residency of such person based on which its tax liability will be decided and if a particular person fits in to the criteria decided by the laws of that country then he will be deemed as the resident of that country for such laws. Citizenship of any country will not be affected by the residency of any country for the income tax. When we talk about the residential status of an Individual or a company in India for any particular year it will be decided based on the provisions of the Income tax Act, 1961.

A person may be resident in one or more countries because of the tax laws of that country and in such case that person might attract the compliance of the laws of that one or more countries where such person is resident.

What is residential status?

Residential status is a term mentioned under the Income Tax Act but it has nothing to do with the nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes.

How to determine residential status for the Income Tax purpose?

Residential status criteria are different for different persons i.e., Individuals residential status will be determined based on individuals’ criteria and companies’ residential status will be determined based on companies’ criteria and, residential status will be determined every year that means a person may be resident for current year and may become Non-resident in next year.

Income tax Law has divided the person into three categories as follows:

1. Resident and ordinary resident
2. Resident but not ordinary resident
3. Non-resident

Individual’s residential status

Resident (Criteria – R)

If an individual satisfies any of the below criteria, then he will be recognized as resident of India for the purpose of income tax laws. The conditions are as follows:

• If he is in India during the previous year i.e., financial year for a period amounting to 182 days or more. or
• If he was in India for a period or periods amounting in all to 365 days or more during the four years preceding the relevant previous year i.e., financial year.
• He was in India for a period or periods amounting to 60 days or more in that previous year i.e., Financial year.
• However, in respect of Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (ii) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.
• With effect from Assessment year 2021-22, the period of 60 days as mentioned in (ii) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year.
• Provided that a person who is Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. However, such an individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.
• Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
• A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.

Resident and ordinary resident (Criteria – OR)

If a person fulfills any of the above criteria then he will become resident of India, but to become an ordinary resident person needs to fulfill another two conditions mentioned as below:

• He must be resident of India in at least 2 of any 10 previous year prior to the year in question.
• He has stayed in India for at least 730 days in 7 previous year prior to the year in question.
• While counting the days of stay in India day of departure and day of arrival should be included in total stay in India.

Resident but not ordinary resident (RNOR)

• If a person fulfils the criteria of resident but does not fulfills the criteria for ordinary resident, then he will become the resident but not ordinary resident for the purpose of the income tax in India.
• In short, to become a resident and ordinary resident a person needs to fulfill any of the conditions mentioned in the criteria R and both conditions as mentioned in Criteria OR.
• The person who does not fulfil any of the conditions mentioned in the criteria OR will become a resident but not ordinary resident.

Non-Resident

• The person who is not fulfilling any of the conditions mentioned in Criteria R will be deemed as non-resident for the purpose of the Income tax in India.

Residency for Companies

Resident Companies

A company can be said to be resident of India for the purpose of Income tax laws if:

• It is an Indian company i.e., it is incorporated in India as per the Company laws.
• Place of Effective management is in India during the relevant year in question.
• Place of effective management means the place where key decisions relating to companies’ business are made and such decision are necessary for the conduct of business at anywhere.
• It means if a company is not an Indian company but conducts decisions in India then It will become the resident company for the purpose of the income tax and will be liable to pay the taxes accordingly.

Non-Resident Companies

• If a company does not satisfy any of the conditions mentioned above, then it will become a non-resident for the year in question.

Informative Read: How to file Income Tax Return for an NRI?

Why is the residential status important for Income Tax purpose?

• If a person is resident of India, then his global income i.e., earned from anywhere in the world will be subject to income tax in India and for Non-residents, only that Income which is earned from India is subject to income tax. Hence, to determine whether a person’s whole global income or income which is earned from India is subject to tax, person need to find out its resident status.
• When we say person as per income tax then it includes Individual, HUF, Company, Firm, Association of Persons or Body of Individuals, Artificial Juridical person, local authority.
• However, when a person is resident in India and having income from other countries as well, he may attract the taxes in both the countries as per the laws of that countries. But, to avoid this double taxation Indian government has entered into an agreement with many countries hereafter referred as Double Taxation Avoidance Agreement (DTAA). DTAA is generally bilateral i.e., applies to only two countries in question. DTAA is greatly beneficial for the person who earn the income from two or more countries. India has DTAA with over 100 countries and major countries with which DTAA has signed includes Unites States, Canada, Australia, United Kingdom, Singapore, New Zealand.
• Double Taxation can be avoided in two ways as per the agreement, either it provides for exemption from tax in one of the countries or it gives the credit for the tax paid in other country.

Suggested Read: Corporate tax Concession- Form 10IC and Form 10ID