RESIDENTIAL STATUS AND TAX INCIDENCE

Dr. Niti Saxena

CONCEPT OF RESIDENTIAL STATUS
The following norms one has to keep in mind while deciding the residential status
of an assessee:

1. Different taxable entities - All taxable entities are divided in the following
categories for the purpose of determining residential status: a. An individual;

b. A Hindu undivided family;

c. A firm or an association of persons; d. A joint stock company; and

e. Every other person.

2. Different residential status - An assessee is either: (a) resident in India, or

(b) non-resident in India.

However, a resident individual or a Hindu undivided family has to be (a) resident

and ordinarily resident, or

(b) resident but not ordinarily resident.

Therefore, an individual and a Hindu undivided family can either be: a. resident
and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company
and every other person) can either be:

a. resident in India; or b. non-resident in India.

3. Residential status for each previous year - Residential status of an assessee is to

be determined in respect of each previous year as it may vary
from previous year to previous year.

4. Different residential status for different assessment years - An assessee may

enjoy different residential status for different assessment years. For instance, an
individual who has been regularly assessed as resident and ordinarily resident has
to be treated as non-resident in a particular assessment year if he satisfies none of
the conditions of section 6(1).

5. Resident in India and abroad - It is not necessary that a person, who is

―resident‖ in India, cannot become ―resident‖ in any other country for the same
assessment year. A person may be resident in two (or more) countries at the same
time. It is, therefore, not necessary that a person who is resident in India will be
non-resident in all other countries for the same assessment year.

RESIDENTIAL STATUS OF AN INDIVIDUAL

As per section 6, an individual may be:

(a) resident and ordinarily resident in India,

(b) resident but not ordinarily resident in India, or (c) non-resident in India.

RESIDENT AND ORDINARILY RESIDENT

As per section 6(1), in order to find out whether an individual is ―resident and
ordinarily resident‖ in India, one has to proceed as follows—

Step 1 First find out whether such individual is ―resident‖ in India.

Step 2 If such individual is ―resident‖ in India, then find out whether he is

―ordinarily resident‖ in India. However, if such individual is a ―non- resident‖ in
India, then no further investigation is necessary.

BASIC CONDITIONS TO TEST AS TO WHEN AN INDIVIDUAL IS

RESIDENT IN INDIA –

Under section 6(1) an individual is said to be resident in India in any previous year,
if he satisfies at least one of the following basic conditions—
Basic condition Sec 6(1A): He is in India in the previous year for a period of 182
days or more

or

Basic condition Sec 6(1B) :He is in India for a period of 60 days or more during
the previous year and 365 days or more during 4 years immediately preceding the
previous year

EXCEPTIONS TO SEC 6(1B): In the following two cases, an individual needs to

be present in India for a minimum of 182 days or more in order to become resident
in India:

1. An Indian citizen who leaves India during the previous year for the purpose of
taking employment outside India or an Indian citizen leaving India during the
previous year as a member of the crew of an Indian ship.

2. An Indian citizen or a person of Indian origin who comes on visit to India during
the previous year (a person is said to be of Indian origin if either he or any of his
parents or any of his grand parents was born in undivided India).

However, from the financial year 2020-21, the period of 182 days is
reduced to 120 days or more for an NRI individuals whose total
income (other than foreign sources) exceeds Rs 15 lakh.
ADDITIONAL CONDITIONS TO TEST AS TO WHEN A RESIDENT
INDIVIDUAL IS ORDINARILY RESIDENT IN INDIA - Under section 6(6), a
resident individual is treated as ―resident and ordinarily resident‖ in India if he
satisfies the following two additional conditions —

Additional condition (i) He has been resident in India in at least 2 out of

10 previous years [according to basic condition noted above] immediately

preceding the relevant previous year.

Additional condition (ii) He has been in India for a period of 730 days or more
during 7 years immediately preceding the relevant previous year.
In brief it can be said that an individual becomes resident and ordinarily resident in
India if he satisfies at least one of the basic conditions [i.e., (a) or (b)] and the two
additional conditions [i.e., (i) and (ii)].

It will be worthwhile to note the following propositions:

1. It is not essential that the stay should be at the same place. It is equally not
necessary that the stay should be continuous. Similarly, the place of stay or the
purpose of stay is not material.

2. Where a person is in India only for a part of a day, the calculation of physical
presence in India in respect of such broken period should be made on an hourly
basis. A total of 24 hours of stay spread over a number of days is to be counted as
being equivalent to the stay of one day.

If, however, data is not available to calculate the period of stay of an individual in
India in terms of hours, then the day on which he enters India as well as the day on
which he leaves India shall be taken into account as stay of the individual in India.

RESIDENT BUT NOT ORDINARILY RESIDENT

As per section 6(1), an individual who satisfies at least one of the basic conditions

[i.e., condition (a) or (b) mentioned above but does not satisfy the two additional
conditions [i.e., conditions (i) and (ii)], is treated as a resident but not ordinarily
resident in India. In other words, an individual becomes resident but not ordinarily
resident in India in any of the following circumstances:

Case 1 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b)
but none of the additional conditions [i.e., (i) and (ii) of Para 12.1-

Case 2 If he satisfies at least one of the basic conditions [i.e., condition (a) or (b)

and one of the two additional conditions [i.e., (i) and (ii)

NON-RESIDENT

An individual is a non-resident in India if he satisfies none of the basic conditions

[i.e., condition (a) or (b) In the case of non-resident, additional conditions [i.e., (i)
and (ii) are not relevant.

RESIDENTIAL STATUS OF A HINDU UNDIVIDED FAMILY

As per section 6(2), a Hindu undivided family (like an individual) is either resident
in India or non-resident in India. A resident Hindu undivided family is either
ordinarily resident or not ordinarily resident.

HUF- Resident or Non-Resident

A Hindu undivided family is said to be resident in India if control and

management of its affairs is wholly or partly situated in India. A Hindu
undivided family is non-resident in India if control and management of its
affairs is wholly situated outside India.
Control and management means de facto control and management and not
merely the right to control or manage. Control and management is situated at
a place where the head, the seat and the directing power are situated.
HUF- When ordinarily resident in India
A resident Hindu undivided family is an ordinarily resident in India if the
karta or manager of the family (including successive kartas) satisfies the
following two additional conditions as laid down by section 6(6)(b):
Additional condition (i) Karta has been resident in India in at least 2 out of
10 previous years [according to the basic condition mentioned immediately
preceding the relevant previous year
Additional condition (ii) Karta has been present in India for a period of 730
days or more during 7 years immediately preceding the previous year

If the karta or manager of a resident Hindu undivided family does not satisfy the
two additional conditions, the family is treated as resident but not ordinarily
resident in India.

RESIDENTIAL STATUS OF FIRM AND ASSOCIATION OF PERSONS

As per section 6(2), a partnership firm and an association of persons are said to be
resident in India if control and management of their affairs are wholly or partly
situated within India during the relevant previous year. They are, however, treated
as non-resident in India if control and management of their affairs are situated
wholly outside India.

RESIDENTIAL STATUS OF A COMPANY

As per section 6(3), an Indian company is always resident in India. A foreign

company is resident in India only if, during the previous year, control and
management of its affairs is situated wholly in India. However, a foreign company
is treated as non-resident if, during the previous year, control and management of
its affairs is either wholly or partly situated out of India.

RESIDENTIAL STATUS OF EVERY OTHER PERSON

As per section 6(4), every other person is resident in India if control and
management of his affairs is, wholly or partly, situated within India during the
relevant previous year. On the other hand, every other person is non- resident in
India if control and management of its affairs is wholly situated outside India.

Residential status and Incidence of Tax

Residential status and Taxation - Incidence of taxation varies with changes in the
status of residence of the tax-payer. It is important, therefore, to correctly ascertain
the residential status of the assessee before his tax liability is determined. Persons
fall into the following three categories according to residential status:

(i) Resident and ordinarily Resident in India; (ii) Not Ordinarily Resident in India;
and

(iii) Not Resident in India (i.e., Non-residents).

The residential status must be determined with regard to the previous year in
respect of a source of income and not with regard to the assessment year. As the
tax is levied on the income of a particular previous year, the enquiry and
determination of residential status should be confined to the facts obtained in that
previous year. Residential status of an individual has to be determined with
reference to his stay in India in each year and the finding that he is "Resident" in
one year would not mean that he is resident in the following year also.

Resident and ordinarily Resident in India - Tax liability - In the case of residents,
all income of the previous year derived from any source forms part of his total
income, which :

(a) is received or is deemed to be received in India by or on behalf of the assessee,

(b) accrues or arises or is deemed to accrue or arise to him during such year, or

(c) accrues or arises to him outside India during such year.

In other words his entire income - whether Indian or foreign - of that previous year
is taxable in India.

‘Not ordinarily resident’ - Tax liability - In the case of a person ̳not ordinarily
resident‘ in India, the total income of the previous year includes all income from
whatever sources derived, which:

(a) is received in India in such year by or on behalf of such person,

(b) accrues or arises or is deemed to accrue or arise to him in India during such
year, or

(c) accrues or arises outside India during such year from a business controlled in or
a profession set up in India.

In brief, his foreign income of the previous year, not falling under (c) above, is not
taxable in India.

Note :- All income accruing or arising through or from :- (i) any business
connection in India, or

(ii) any property in India; or

(iii) any asset or source of income in India, or

(iv) the transfer of capital asset situated in India shall be deemed to accrue or arise
in India.

Non-Resident-Tax liability - In the case of a non-resident, the total income of such

person of any previous year shall include all income from whatever source derived,
which:

(a) is received or deemed to be received in India in such year by or on behalf of

such person, or

(b) accrues or arises or is deemed to accrue or arise to him in India during the year.

Thus, in the hands of person who is ̳Resident‘ all income received by him or
accruing to him anywhere in the world, will be taxed. In the case of a ̳Not
Ordinarily Resident‘ person, only the Indian income will be taxable. The foreign
income will not be taxable unless it is relatable to a business controlled in India or
a profession which was set up in India. In the case of a ̳Non-resident‘ his Indian
income alone will be taxable. The foreign income of a ̳Non-resident‘ is not taxable
in India.

Incidence of Tax
Particulars

Tax Incidence ROR

NOR NR

Income received in India by or on behalf of assessee

Yes

Yes Yes

Income deemed to received in India by or on behalf of assessee

Yes

Yes

Yes

Income accruing or arising in India

Yes

Yes

Yes

Income deemed to accrue or arise in India

Yes

Yes

Yes

Income which accrues or arise outside India

Section 9: ‘Income Received’ or ‘Deemed to be Received’

̳ Received‘ for this purpose means the FIRST RECEIPT i.e. when the recipient
gets the money under his control.

Deemed to be received- In the following cases income is deemed to be received in

India irrespective of whether it has actually been received or not:

Employer contribution to Provident fund in excess of 12% of salary

Interest credited to P.F in excess of 9.50%

Transfer of balance from unrecognized provident fund to recognized

provident fund.

Meaning of ‘Accrue’ or ‘Arise’

Accrue = Day to day accumulation Arise = Right to Receive

Examples of Deemed to be Accrue or Arise in India

All income accruing or arising, whether directly or indirectly, through or from any
business connection in India. In the case of a business of which all the operations
are not carried out in India, the income of the business deemed under this clause to
accrue or arise in India shall be only such part of the income as is reasonably
attributable to the operations carried out in India

Income from salary if earned in India, in respect of services rendered in India.

Income from salary which is payable by the Government of India to the citizen of
India for rendering services outside India.

Receipt of Interest, royalty and Fees for technical services

Any income which arises from any property situated in India is deemed to accrue
or arise in India

Capital gain arising from the transfer or sale of a capital asset situated in India
would be deemed to accrue or arise in India

Dividend paid by the Indian company outside India

Note:

1. Remittance of income earned outside India into India is not an income.

2. Pension payable outside by the Government to its officials and judges who
permanently reside outside India is not taxable
3. Salary of an employee in United Nations organization is not taxable