Residential status in income tax is important in calculating taxes and can have a big impact on how much you pay or receive back. This is especially important during this tax filing season. In fact, it is one of the factors used to assess a person’s tax liability for a given financial year.
What is residential status in Income Tax India?
A taxpayer’s residential status is important as the Income Tax Department provides different tax treatments for the taxpayer. It is therefore imperative that all taxpayers verify their residency status before completing tax planning, tax calculation, and tax returns. Residential status can be classified as Resident and Ordinary Resident (ROR), Resident but not Ordinary Resident (RNOR), or Non-Resident (NR).
How is residential status determined?
Residential status of an individual –
An individual is said to be resident in India in any previous if he:
(i) is in India for at least 182 days; or
(ii) has been in India for at least 365 days during the four years preceding the previous year and has been in India for at least 60 days during the previous year.
The above period of 60 days will be extended to 182 days if an Indian national leave India during the year for employment outside India or if an Indian citizen leaves India as a crew member on an Indian ship during the year.
For this purpose, they must leave India for employment (employment can be in India or outside India).
An individual who is a citizen of India and has a total income, other than income from foreign sources, in excess of Rs.15 lakhs in the previous year is a resident of India in that year.
If the individual fulfills any one of the conditions listed above, he is a resident. He is a non-resident if both of the above conditions are not satisfied.
An individual is ordinarily resident and ordinarily resident:
An individual can become a resident and ordinary resident of India if, in addition to meeting any of the above conditions, he/she meets both of the following conditions under u/s 6(1):
- He has resided for at least two out of the ten years immediately preceding the relevant year, and
- He is in India for 730 days or more during seven previous years immediately preceding the relevant previous year.
Resident but not ordinarily resident:
An individual is not ordinarily resident in any previous year if-
- He has been a non-resident in India in 9 out of 10 previous years preceding that year, or
- He has during the 7 previous years preceding that year benn in India for a period of, or periods amounting in all to, 729 days or less.
A citizen of India or a person of Indian origin whose total income, excluding income from foreign sources, exceeds Rs. 15 lakhs in the previous year and who has been in India for 120 days or more but less than 182 days; or; or
An Indian citizen who is deemed to be a resident of India pursuant to clause (1A).
Residential Status Of HUF:
A Hindu Undivided Family (HUF) is said to be resident in India if it has control and management of its affairs in India wholly or partly.
A HUF resident will be treated as a resident and ordinarily resident of India if Karta (including succeeding Karta) satisfies both of the following conditions:
- A resident HUF Karta must be resident for at least two out of the ten previous years immediately preceding the relevant previous year.
- The stay of Karta during seven previous years immediately preceding relevant previous years should be 730 days or more.
It is immaterial whether Karta is resident or non-resident during relevant previous years, for the purpose of determining whether HUF is ROR or RNOR. If the Karta satisfies both the additional conditions, then HUF will be ROR, otherwise RNOR.
Residential status of firms & association of persons (AOP):
Resident: If the control and management of its affairs wholly or partially in India.
Non-resident: If control and management of its affairs are located entirely outside of India.
Residential status of a Company:
A company is a resident in India in any previous year if-
(i) it is an Indian company, or
(ii)The place of effective management this year is India.
A foreign company is resident in India if its place of effective management (POEM) during the previous year is in India. A place of effective management is a place where significant managerial and business decisions necessary to conduct the operations of the entire company are substantially made.
Resident: a company whose place of effective management at any time in the previous year is in India.
India company is resident, irrespective of the fact whether the POEM is in India or not.
Non-resident: A company, whose palace of effective management has not been in India at any time in the previous year.
What is residential status example?
Aakash’s income for the year ended March 31, 2022, was as follows:
In India, he received a salary for three months – of Rs. 7,000
House property income in India- Rs. 15,560
Interest on savings bank deposit- Rs. 2500
Amount brought to India from previous tax-exempt income in Germany – Rs. 25,000
USA agricultural income dominated from India – Rs. 13,230
Income from a business in Nepal, controlled from India- Rs. 11,450
Dividends received in London from french companies, out of which remittance of Rs. 3,500 to India- Rs. 27,000.
compute his total income for the assessment year 2022-23 if he is : (i) a resident; (ii) a not ordinarily resident, and (iii) a non-resident.
Computation of total income of Aakash is given below
|Particular||Resident& ordinarily resident||Resident but not ordinarily resident||Non-resident|
|Salary received in India for 3 months (Indian received in India)||7,000||7,000||7,000|
|Income from house property in India (Income arises or accrues in India)||15,560||15,560||15,560|
|Interest on saving bank deposit (Income accrues or arises in India)||2500||2500||2500|
|Amount brought into India out of past untaxed profits earned in Germany (not an income, hence not taxable)||NIL||NIL||NIL|
|Income from agriculture in USA, being controlled from India (Income accrues or arises outside India)||13,230||NIL||NIL|
|Income from a business in Nepal, being controlled from India (Income accrued outside India from a business controlled from India)||11,450||11,450||NIL|
|Dividends received in London from french companies, out of which Rs. 3,500 were remitted to India (Income accrues outside India. Income remittance to India is irrelevant)||27,000||NIL||NIL|
Why is the residential status important for income tax calculation?
The determination of residential status is crucial because residents who are ordinary residents must pay tax on their worldwide income even though they are eligible for DTAA benefits. While non-residents or residents but not ordinary residents (RNOR) must pay tax on the portion of their income that comes from India or was received or earned there.
How do I change my residential status on my tax return?
Follow these steps to change your residential status on your tax return:
- Login to https: //www.incometax.gov.in/iec/foportal.
- Click the dropdown menu in the right corner of the page. Then click Edit Profile.
- Click on Edit.
- Select Residential status and save.
Frequently Asked Questions (FAQs)
Which section is related to residential status?
Section 6 of the Income Tax Act, 1961 contains provisions regarding residential status in India.
Is it possible to change your residential status?
No. It is not possible to change the residential status during the financial year. You can take safety measures based residence you prefer in the following years.
Do non-residents need to pay taxes?
Yes. Non-residents must pay tax on amounts earned directly in India.
How to get rid of double taxation?
If you are eligible for double taxation, ie. If you are a non-resident of India as well as your home country, you can resort to a DTAA (Double Tax Avoidance Agreement).
If you don’t comply with the requirements for establishing residency, you will be termed as a not ordinarily resident or even as a non-resident. The amount of tax you owe is entirely determined by your residential status. Therefore, it is important to familiarize yourself with the regulations and residential status.