Residential Status of Different Kinds of Assessees
In India, there are two major categories of taxpayers namely resident taxpayers and non-resident taxpayers. Irrespective of whether a person is resident or non-resident, he/she has to pay tax on Indian income. Likewise, the foreign income of a person who is resident in India for a given previous year is taxable in India. Lastly, the foreign income of a person who is a non-resident in India for a given previous year is not taxable in India.
Section 5 of the Income-tax Act, 1961 states that the scope of the total income of an assessee is determined with reference to his residence in India in the given previous year. In simple words, it can be stated that the total income of each assessee depends upon his residential status in a given previous year.
Section 6 of the Income-tax Act, 1961 lays out the rules for testing the residential status of an assessee for the purpose of tax assessment. This section lays down the test of residence for different entities as follow:
- Individuals
- Hindu undivided family
- Firm/association of persons/body of individuals
- Company
- Every other person
As per Section 6, for the purpose of taxation, the assessees may be divided into three categories depending upon their residential status, as follows: 1. Persons who are ordinary resident in India (ROR) 2. Persons who are not ordinary resident in India (RNOR) 3. Persons who are non-resident (NR)
Residential Status of an Individual
According to Section 6(1), in any previous year, an individual is considered to be resident in India if he/she satisfies any one of the following two basic conditions:
Basic Conditions
- Individual stays in India in the previous year for a period of 182 days or more.
- The individual is in India for a minimum 60 days during the relevant previous year and for a minimum of 365 days during the 4 years immediately preceding the relevant previous year.
Note that an individual is considered as resident if he/she satisfies any one of the two basic conditions. On the contrary, if an individual does not fulfil any of these two basic conditions, he/she is considered as non-resident in India for the purpose of taxation.
Exceptions to the Rule of Residential Status of an Individual in India
Let us now discuss about two specific cases where individuals are treated as resident in India only if their period of stay in India is 182 days or more. It means that in case an individual was in India for more than 60 days but less than 182 days in the relevant previous year; then, they will not be treated as resident if their stay in India was for 365 days or more during the last four immediately preceding years.
- An Indian citizen who leaves India as a member of the crew of an Indian ship during the relevant previous year or for purpose of employment outside India, or
- An Indian citizen or a Person of Indian Origin (PIO) who is engaged in employment or a business or profession or in any other vocation outside India and comes on a visit to India during the relevant previous year
Section 6(1A) states that Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
Following Explanation shall be inserted after clause (1A) of section 6 by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, w.e.f. 1-4-2021:
Explanation: For the removal of doubts, it is hereby declared that this clause shall not apply in case of an individual who is said to be resident in India in the previous year under clause (1).
It must be noted that any such individual (as discussed in above exceptional cases) who has a total income (not including income from foreign sources) more than ₹15 lakhs during the previous year will be considered as resident in India in the following cases:
- Has stayed for 182 days or more during the relevant previous year; or
- Has stayed in India for 365 days or more during 4 years immediately preceding the previous year AND has stayed in India for at least 120 days in the previous year.
Now that you have studied about the conditions for the test of residence; let us now study about how we can classify an individual as being ordinarily resident or not-ordinarily resident.
According to Section 6(6), there are two additional conditions to classify a resident individual as being ordinary or not ordinarily resident (RNOR) in a previous year as follows:
- Individual has been a non-resident in India in nine out of ten previous years preceding that year.
- Individual has been in India for 729 days or less during the seven previous years preceding that year
Therefore, it can be stated that a resident individual is not ordinarily resident if he satisfies any one of the given conditions. If both the additional conditions are not satisfied, the individual is categorised as being ordinarily resident (ROR).
We can also have an alternative interpretation of the two additional conditions of Section 6(6). It can be said that an individual is considered as ordinarily resident (ROR) if he satisfies both of the following two additional conditions:
- The individual should have been resident in at least 2 previous years out of the previous 10 years immediately preceding the relevant previous year.
- The stay of the individual during 7 previous years immediately preceding the relevant previous year should be 730 days or more.
If an individual is not satisfied with any of the basic conditions as given in Section 6(1), then, he is considered to be a non-resident in India.
Example: Suneel visited India for the first-time during June of PY 2020-21. His period of stay was 35 days. What is his residential status for AY 2021-22?
Solution: In the given case, the period of stay of Suneel was only 35 days and he does not fulfil any of the basic conditions of being resident in India. Therefore, he is non-resident for the given AY 2021-22.
Example: Manisha visited India in 1990 with her parents. Now, she again visited India in PY 2020-21 and she stayed in India for 211 days. What is Manisha’s residential status for AY 2021-22?
Solution: In the given case, Manisha’s period of stay is 211 days and she fulfils one of the basic conditions of residential status. Therefore, for AY 2021-22, she will be considered to be the resident of India.
Residential Status of HUF
As per Section 6(2), a Hindu Undivided Family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.
In other words, it can be stated that a Hindu Undivided Family (HUF) is resident in India if its control and administration is managed completely or partially in India. Alternatively, it can be said that an HUF is considered as non-resident if its affairs are managed completely outside India. This is the primary condition for classifying a HUF as resident or non-resident.
In the context of residential status of HUF, the term ‘control and management’ is related to the central control and management of the HUF and is not related to carrying out the day-to-day business activities by servants, employees or agents. It is also possible that the business is being done from outside India but the control and management is done wholly within India.
The place of controlling business may be different from the place where the business is run or is registered at. Here, the control and management mean that the function of controlling and directing lies in a particular place and has a certain degree of permanence.
After an HUF has been classified as a resident, it needs to be classified as being either ordinarily resident or not ordinarily resident.
For this classification, the following two additional conditions need to be checked:
- The Karta of HUF should be resident in India in at least 2 previous years out of the 10 previous years immediately preceding the relevant previous year.
- The Karta should have stayed in India for 730 days or more during the 7 previous years immediately preceding the relevant previous year.
The classification of ROR, RNOR and NR HUFs on the basis of following criteria:
- ROR HUF: When the HUF satisfies the basic as well as both the additional conditions applicable for HUFs.
- RNOR HUF: When the HUF satisfies the basic condition but only one or none of the additional conditions applicable for HUFs.
- NR HUF: When the HUF does not satisfy even the basic condition applicable for HUFs.
Example 4: Mangat Ram HUF operates and takes all major policy decisions in Finland. Mangat Ram is the Karta of this HUF who was born and brought up in Mangalore, India. Mangat Ram came to India in PY 2020-21 after 10 years and stayed in India for 290 days. Determine the residential status of: a. Mangat Ram b. Mangat Ram HUF
Solution:
- Mangat Ram was in India for 290 days for PY 2020-21; therefore, he was the resident for AY 2021-22. However, he does not fulfil any conditions for being ordinarily resident. Therefore, he will be considered as RNOR.
- Since all the management and control activities of the HUF are carried out in Finland, it means control and management of the HUF lies Outside India completely. Therefore, the HUF will be categorised as NR.
Residential Status of Company Assessee
As per Section 6(3) of the Income-tax Act, 1961, a company is considered as being resident in India in any previous year if:
- it is an Indian company; or
- its place of effective management, in that year, is in India.
If a company does not satisfy even one of the given conditions, it is considered as non-resident in India. In the context of residential status of companies, the term Place of Effective Management (POEM) refers to a place where key management and commercial decisions that are critical for carrying out business activities of the company are made.
Residential Status of a Firm/AOP/BOI/Local Authority/AJP
As per Section 6(4) of the Income-tax Act, 1961, every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.
In simple words, all other persons apart from individuals, HUFs and company assessees, that is firms, AOPs, BOIs, local authorities and AJPs are considered to be resident in India if their affairs are controlled and managed wholly or partly in India. On the contrary, firms, AOPs, BOIs, local authorities and AJPs are considered as non-residents in India if their affairs are controlled and managed completely outside India.
Example: Jagdeep Power Systems (JPS) Ltd. is an Indian company located in Delhi, India. However, it has branches and regional offices in more than 15 countries. 8 out of 10 board meetings of JPS took place in Delhi, one in Frankfurt, Germany and one in Halden, Norway. What is the residential status of JPS for AY 2021-22?
Solution: Since JPS is an India company, it will always be the resident in india.
Scope of Total Income Based on Residential Status (Including Sections 5, 7 and 9)
Section 5 of the Income-tax Act, 1961 describes the scope of total income for an assessee in relation with his/her residential status. This is so because the tax incidence depends upon the residential status of an assessee.
There are three important considerations in deciding the scope of total income as follows:
- Residential status of an assessee
- Place of accrual or receipt of income (actual or deemed)
- Point of time at which the income had accrued to or was received by or on behalf of the assessee
Let us understand Section 5 in simple terms. Section 5 of the Income-tax Act, 1961 defines the scope of total income (incomes to be included) for three types of assessees, which are as follows:
- ROR Assessee: Referring to Section 5(1), it can be stated that the total income of an ordinarily resident person comprises the following:
- income that is received or is deemed to be received in India during the previous year
- income that accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year
- income that accrues or arises to the assessee outside India during previous year whether or not it is bought into India
In other words, for the relevant previous year, a ROR person has to pay tax on his total income accrued or deemed to accrue, received or deemed to be received in India or outside India.
- income that is received or is deemed to be received in India during the previous year
- RNOR Assessee: Referring to Section 5(1), it can be stated that the total income of a not ordinarily resident person comprises of the following:
- income that is received or is deemed to be received in India during the previous year
- income that accrues or arises or is deemed to accrue or arise to the assessee in India during the previous year
This means that the income accruing or arising to a RNOR person outside India should not be included in the total income of an assessee but if a RNOR person derives income from a business that is controlled in India or from a profession set up in India; then, such income should be included in his total income even if it is not received or brought into India during the previous year.
- NR Assessee: Referring to Section 5(2), it can be stated that the total income of a non-resident person comprises the following:
- income that is received or deemed to be received in India in the previous year
- income that accrues or arises or is deemed to accrue or arise in India during the previous year
- income that is received or deemed to be received in India in the previous year
Till now, you have seen that certain terms have been used in Section 5 frequently. Let us define these terms as follows:
- Income received: Income received refers to the receipt of income on the very first occasion and does not include any subsequent remittance. In case of income received, the place of receipt is the place where it is received for the first time. The foreign income of a non-resident is non-taxable even if it is remitted to India unless it is received or deemed to be received in India.
- Income deemed to be received: Income deemed to be received refers to income that has not been received in India but it is considered as being received for purpose of tax assessment. Income deemed to be received has been discussed in the Section 7 of the Income-tax Act, 1961.
- Income accrued or arise: Income accrued or arise means the right to receive income as against income received.
- Income deemed to accrue or arise: Income deemed to accrue or arise means that the income has not been accrued or arisen in India actually but is considered as being accrued or arisen in India for purpose of tax. Income deemed to accrue or arise in India has been discussed in Section 9 of the Income-tax Act, 1961.
Section 7 – Income Deemed to Be Received
As per Section 7, the following incomes are deemed to be received in the previous year:
- Taxable portion of the transferred balance of the unrecognised provident fund is deemed to be received during the previous year.
- Annual accretion to the account of any employee participating in a recognised provident fund is not received by the employer but is believed to be received during the previous year by him under the law.
- Tax deducted at source
- Dividend is deemed to be received in the year where it is declared but the interim dividend is deemed to be the income of that previous year in which it is unconditionally made available to the shareholder.
Section 9 – Income Deemed to Accrue or Arise in India
As per Section 9, the following incomes are deemed to accrue or arise in India in the previous year:
- Dividend paid by an Indian company outside India. [Section 9(1) (iii)]
- Income is Deemed to accrue or arise in India if it accrues or arises directly or indirectly. [Section 9(1) (i)]
