Under the Income Tax Act, 1961, the scope of taxable income and incidence of tax on any assessee is dependent upon his or her residential status. The residential status has to be determined in respect of every previous year because it may happen that an assessee is resident in India in one previous year and becomes non-resident in another previous year or vice versa.
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For the purposes of income tax, tax payers are classified into following categories depending upon their residential status:
- Resident in India: This may be further classified into following categories:
- Resident and Ordinarily Resident (ROR)
- Resident but not Ordinarily Resident (RNOR)
- Non-resident in India
Figure shows different categories of residential status in India on the basis of the type of ‘person’:
Residential Status of an Individual
Section 6(1) provides that an individual is said to be resident in India if he satisfies any one of the following two basic conditions during the previous year:
- Basic Condition A: The individual is in India for minimum 182 days during the relevant previous year.
- Basic Condition B: The individual is in India for minimum 60 days during the relevant previous year and for minimum 365 days during 4 years immediately preceding the relevant previous year.
However, from the financial year 2020-21, the period is reduced to 120 days or more for such an individual whose total income (other than foreign sources) exceeds ₹15 lakh. In another significant amendment from FY 2020-21, an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds ₹15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature.
Resident Not Ordinarily Resident
An individual is said to be nonresident in India if both the basic conditions are not satisfied by him. Section 6(6) provides for two additional conditions to classify a resident into ‘resident and ordinarily resident’ and ‘resident but not ordinarily resident’.
If a resident individual satisfies both the following additional conditions, he will be regarded as resident and ordinarily resident:
- Additional Condition A: The individual is resident in India in minimum 2 out of 10 previous years immediately preceding the relevant previous year.
- Additional Condition B: The individual is in India for 730 days or more during last 7 years immediately preceding the relevant previous year.
A resident individual is said to be resident, but not ordinarily resident if he satisfies either one or none of the additional conditions. From FY 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more.
However, this condition will apply only if his total income (other than foreign sources) exceeds ` 15 lakh. Also, a citizen of India who is deemed to be a resident in India (w.e.f FY 2020- 21) will be a resident and ordinarily resident in India.
Let us now understand the above-mentioned concept with the help of some illustrations.
Illustration 1: Ms. Elizabeth Miller is an American citizen. She always dreamt of visiting India. She came to India on 5 August, 2020 and visited four states. She finally left for America on 25 December, 2020. What will be her residential status for assessment year 2021-2022?
Solution: The total number of days of stay of Ms. Elizabeth during previous year 2020-2021 = 143 days. Since she is in India for more than 60 days and less than 182 days, we need to check Basic Condition (B). This was Elizabeth’s first trip to India; therefore, the number of days of stay in preceding four years = 0. Therefore, Elizabeth would be considered a non-resident for taxation purposes.
Illustration 2: An Argentinian football player, Mr White comes to India for playing yearly tournaments. For Assessment Year 2021-2022 calculate his residential status if you are given the following data:
|Year||Number of Days of Stay|
Solution: Here, the relevant previous year is 2020-2021. The number of days of Mr White in previous year is 85 days which is less than 182 days but more than 60 days. Therefore, we need to check the Basic Condition (B). Number of days of stay of Mr White in the four previous years before the relevant or the current previous year = 500 days (120+140+130+110). Since Mr White satisfies the Basic Condition B, he is a resident for the previous year 2020-2021.
Illustration 3: Refer to Illustrations 2 above. Find out whether Mr White is ordinarily resident in India or not ordinarily resident if you are given the following additional information.
|Year||Number of Days of Stay|
Solution: The total number of stays of Mr White in seven years preceding the previous year 2020-2021 is 500 + 80 + 70 + 60 = 710 days. Therefore, Mr White is resident but not ordinarily resident in India for the given previous year.
Illustration 4: Refer to Illustrations 2 and 3 above. Find out whether Mr White is ordinarily resident in India or not ordinarily resident if you are given the following additional information.
|Year||Number of Days of Stay|
Solution: The total number of stays of Mr White in seven years preceding the previous year 2020-2021 is 500 + 80 + 80 + 80 = 740 days. Therefore, Mr White is resident and ordinarily resident in India for the given previous year.
Residential Status of HUF
According to Section 6(2) of the Act, a Hindu Undivided Family (HUF) is said to be resident in India if the control and administration of its issues (affairs of the family) are completely or partially managed in India. An HUF is said to be non-resident in India if the control and administration of its undertakings are completely managed out of India. A business may be carried out outside India and its control and management might be situated in India.
In other words, the resident HUF would be considered ordinarily resident if the Karta of the HUF satisfies the following conditions:
- The Karta has been a resident in India for at least 2 out of the 10 previous years immediately preceding to the relevant previous year
- The Karta has been in India for minimum period of 730 days during seven previous years immediately preceding the relevant previous year
If one or none of the aforesaid conditions are satisfied, then the HUF is termed as ‘resident but not ordinary resident’.
An important ruling of the Supreme Court w.r.t. HUF’s residential status: CIT v. Nandlal Gandalal  40 ITR 1 (SC). In its ruling, the Supreme Court said that in order to know as to who controls and manages the affairs of the family, one has to see who actually controls the affairs and not merely the one who has the right to control the affairs.
Though, normally, the right to control the affairs of the family vests with the Karta, however, if the affairs of the family are controlled by other members of the family in India, the HUF will be considered as the resident in India even if Karta stays abroad throughout the previous year. Alternatively, the Supreme Court ruling can be understood as: the control and management (or the head and brain) means the de-facto control and management and not merely the right or power to control and manage.
Section 6(4) of the Income Tax Act, 1961, comprises provisions for the determination of residential status of a firm, Association of Persons (AOP), Body of Individuals (BOI), local authority and other artificial judicial persons.
The residency is determined as follows:
- Resident in India: A firm, AOP, BOI, etc., would be considered as resident in India if the control and management of its affairs are wholly or partly situated in India.
- Non-resident: A firm, AOP, BOI, etc., would be considered as nonresident if the control and management of its affairs are wholly situated outside India.
Residential Status of a Company Assessee
According to Section 6(3) of the Act, Indian companies are taxable in India on their worldwide income irrespective of their source and origin. Foreign companies are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India. Thus, the tax liability on income of a company depends upon the residential status of the company.
The residency is determined as follows:
- Resident in India: A company would be considered as resident in India if it is an Indian company or where the place of effective management of the company during the previous year is in India.
- Non-resident: A company would be considered as non-resident if it is not an Indian company and the place of effective management of the company during the previous year is also not in India.
Similarly, a company not satisfying any of the above conditions will be called a non-resident company. At times, there could be situations where the same income becomes taxable for the same company in more than one country. This is called double taxation. The core reasons for double taxation may be due to a company or a person being a resident of a particular country but acquiring income from another country. Thus, the income becomes taxable at both places. To overcome these situations, Double Taxation Avoidance Agreements (DTAA) exist.
Table highlights the above-mentioned detail:
|Place of Control||An Indian Company||A Company other than an Indian Company|
|Control and Management of the affairs of a company is situated:|
|Exclusively in India||Resident||Resident|
|Exclusively outside India||Resident||Non-Resident|
|Partly in India and partly outside India||Resident||Non-Resident|
Let us now look at some illustrations to better understand the concept of residential status of a company.
Illustration 5: Asha Electronics is an Indian company. It has regional offices and operations in more than 60 countries. During the previous year 2020-2021, all board meetings of the company took place in its regional offices. Determine the residential status of Asha Electronics for Assessment Year 2021-2022.
Solution: Since Asha Electronics is an Indian company, it will always be resident in India irrespective of where it conducts its business meetings.
Illustration 6: Super Mini Inc. is a US-based company. Its head office is located in Texas. It also has an office in India. In the previous year 2020-2021, it conducted 12 board meetings, out of which five were held at its India office. Determine the residential status of Super Mini for Assessment Year 2021-2022.
Solution: Since the management and control of Super Mini was partly in India and partly outside India for the previous year 2020-2021, it will be considered as non-resident.