Residential Status of Individual, HUF, Firm and Company
Income Tax in India is levied on the basis of residential status of the taxpayer. So, ascertaining the residential status is very important because taxability and various exemptions/deductions are based on it.
Section 6 of the Income Tax Act, 1961 governs the rules for determining the residential status. It lists different conditions that determine whether the person is resident or non-resident. In income tax, taxpayers are broadly classified into three categories based on their residential status:
- Resident and Ordinary Resident (ROR)
- Resident but Not Ordinary Resident (RNOR)
- Non-resident (NR)
Residential status of Individual
Residential status of the individual assessee is determined on the basis of his/her physical presence in India during each Previous Year i.e. Financial Year commencing from 1st April.
An individual is regarded as resident in India if he/she satisfy any one of the following conditions:
i) He/she is physically present in India for 182 days or more in the relevant financial year; OR
ii) He/she is physically present in India for 60 days or more in the relevant financial year AND is in India for a period aggregating to 365 days or more in the four previous years immediately preceding the relevant financial year.
If the individual taxpayer satisfies any one conditions mentioned above, he/she shall be considered as resident. However, if he/she fails to satisfy both the conditions then he/she shall be considered as Non Resident.
However, if an Indian citizen who leaves India for the purpose of employment abroad or as a crew member of an Indian Ship, the period of 60 days as referred in the second conditions above will be extended to 182 days. This rule will also be applied if an Indian citizen or Person of Indian Origin (PIO) employed abroad comes to visit India.
Resident – Ordinary Resident (ROR) and Resident – Not Ordinary Resident (RNOR)
An Individual taxpayer in India may be further classified into ROR and RNOR. As per section 6(6) of the Income Tax Act, 1961, a resident individual would be regarded as not ordinary resident (RNOR) if he/she fulfils any one of the following two conditions :
i) he/she has been non-resident in India in 9 out of 10 previous year immediately preceding the relevant financial year; OR
ii) he/she has stayed in India for a period of 729 days or less in 7 years immediately preceding the relevant financial year.
If both the above conditions are not fulfilled then the person will be regarded as resident ordinary resident (ROR).
Residential Status of HUF and Partnership Firm
A HUF or partnership firm will be considered as resident in India if the control and management of its affairs is situated wholly or partly in India.
They will be considered non-resident only if they are wholly controlled and managed from outside India. It is to be noted that the residence of partners or members of HUF is immaterial for determining the residential status of firm or HUF.
An HUF can be Resident and Ordinary Resident (ROR) or Resident but not Ordinary Resident (RNOR). If Karta of the resident HUF satisfies any one of the following additional conditions (same as in Individual), then resident HUF will be RNOR:
i) Karta of resident HUF has been non-resident in India in 9 out of 10 previous year immediately preceding the relevant financial year; OR
ii) Karta of resident HUF has stayed in India for a period of 729 days or less in 7 years immediately preceding the relevant financial year.
If both the conditions are not satisfied, then the resident HUF will be treated as ROR.
Residential Status of Company
A company is resident in India if :
i) it is an Indian company as per section 2(26) of the Income Tax Act, 1961; OR
ii) its place of effective management (POEM) in the relevant year is in India.
Thus, every Indian company is resident in India even if its control and management is situated wholly or partly abroad. For non-Indian company i.e. foreign company to be resident in India, its POEM has to be situated in India.
POEM means a place where key managerial and commercial decisions for the operation of the business of an entity as a whole are made.
Scope of Total Income on the basis of Residential Status
As already discussed above, income tax chargeability depends upon the residential status of the taxpayer. Following table covers the scenarios in which income will be taxable in the hands of different types of taxpayers:
|Particulars||Resident – Ordinary Resident (ROR)||Resident – Not Ordinary Resident (RNOR)||Non Resident|
|Income received or deemed to be received in India||Taxable||Taxable||Taxable|
|Income which accrues or is deemed to accrue or arise in India||Taxable||Taxable||Taxable|
|Income which accrues or arise outside India from a business or profession controlled in India||Taxable||Taxable||Not Taxable|
|Income which accrues or arise outside India from a business or profession controlled from outside India||Taxable||Not Taxable||Not Taxable|
Important Points to be kept in Mind
i) Residential status is to be determined on year to year basis.
ii) For income tax purpose, the residence of an individual has nothing to do with the citizenship, place of birth or domicile. Therefore, an individual can be resident in more than one countries even though he can have only one domicile
iii) The actual number of days an individual has stayed in India can be determined from the entries in the passport.
iv) For calculating period of stay in India, both the date of arrival and date of departure are considered to be in India.
v) The term ‘going abroad for the purpose of employment’ means travelling abroad on business visa to take up any employment or for any business carried outside India.