Residential Status Section 6 – The quantum and applicability of tax on a person, depends upon the Residential Status of such person. Under the Income Tax Act, 1961 : –
- Person who are resident and ordinarily resident for income tax purpose are liable to pay tax on their global income (i.e., Indian income and foreign income).
- Person who are resident but not ordinarily resident in India are liable to pay tax on Indian sourced income, and following foreign income : –
– Business income where business is controlled wholly or partly from India.
– Income from profession which is set-up in India. - Person who are non-resident are taxable only for their Indian sourced sourced income.
RESIDENTIAL STATUS SECTION 6
As discussed above, taxpayers are classified as resident or non-resident for tax purpose. In case of individuals and HUF, resident taxpayers are further categorised as : –
- Resident and ordinarily resident; and
- Resident but not ordinarily resident.
RESIDENTIAL STATUS OF AN INDIVIDUAL
RESIDENTIAL STATUS OF AN INDIVIDUAL – CRITERIA FOR DETERMINING WHETHER A PERSON IS A RESIDENT IN INDIA
As per Section 6(1), an individual, is said to be resident in India, in any previous year, if he satisfies any one of the following basic conditions . If the individual does not satisfy any of these two basic conditions, he is said to be non – resident : –
a) Basic Condition 1
He has been in India during the previous year for a total period of 182 days or more; or
b) Basic Condition 2
He has been inIndia during the 4 years immediately preceding the previous yearfor total period of 365 days or more , and he has been in India for at least 60 days in the previous year .
EXCEPTIONS : – The requirement that a person who has been in India for at least 60 days in the previous yearis not taken into consideration in two cases . In these two cases, an individuals will be considered as a resident, only if the period of their stay during the relevant previous year in India is 182 days or more : –
CASE I : –
Indian citizen, who leaves India in any previous year, for the purpose of employment outside India; or
An Indian citizen, who leaves India in any previous year as a member of the crew of an Indian ship for the purposes of employment outside India
In both these cases, the requirement of 182 days is applicable only in the year when the person leaves for employment/ as a member of the crew of an Indian ship. In the subsequent years, the normal limitation of 60 days is applicable.
CASE II : –
Indian citizen or a person of Indian origin, who, being outside India and comes on a visit to Indiain any previous year. A PERSON IS SAID TO BE OF INDIAN ORIGIN if : –
- He was born in undivided India.
- Either of his parents were born in undivided India.
- Either of his grandparents were born in undivided India.
In such cases, the individual shall not be treated as resident even if he was in India for 365 days during the 4 preceding years and 60 days in the relevant previous year.
Person who is resident can be further classified into the following two categories : –
- Resident and ordinarily resident ; and
- Resident but not ordinarily resident.
RESIDENT AND ORDINARILY RESIDENT
A person is said to be RESIDENT AND ORDINARILY RESIDENT , if he satisfies both the additional conditions specified under section 6(6).
These additional conditions are discussed as under
ADDITIONAL CONDITIONS : –
- CONDITION I : –
Individual has been resident in India in 2 out of 10 previous years immediately preceding the relevant previous year. - CONDITION II : –
Individual has been in India for a period of 730 days or more, during 7 previous years preceding the relevant previous year.
RESIDENT BUT NOT ORDINARILY RESIDENT
NOTE :
- An individual is said to be a resident but not ordinarily resident (RNOR) if he fails to satisfy any of the additional conditions.
- Only Individuals and HUFs can be RNOR/ROR. All other classes of Assessee can be either resident or Non-resident
POINTS TO CONSIDER
- Residential status is to be determined on year to year basis
- The term “stay in India” includes stay in the territorial waters of India (i.e. 12 nautical miles into the sea from the Indian coastline). Even the stay in a ship or boat moored in the territorial waters of India would be sufficient to make the individual resident in India.
- The residence of an individual for income-tax purpose has nothing to do with citizenship, place of birth or domicile. An individual can, therefore, be resident in more countries than one even though he can have only one domicile.
- For the purpose of counting the number of days stayed in India, both the date of departure as well as the date of arrival are considered to be in India.
- It is not necessary that the period of stay must be continuous or active nor is it essential that the stay should be at the usual place of residence, business or employment of the individual.
RESIDENTIAL STATUS OF AN INDIVIDUAL EXAMPLES
Residential Status of an Individual – Example 1 : –
Rahul is an Indian citizen working at an MNC in Mumbai. He was given an opportunity to work on an assignment in UK for such an MNC. He had never visited any foreign country earlier and left India on June 30, 2016. Determine his residential Status ?
Solution : –
An individual is said to be resident in India, if he stays in India for 60 days or more during the previous year and for 365 days or more during 4 preceding years. However, when an Individual is leaving India for the purpose of employment outside India, then the said period of 60 days during the previous year is extended to 182 days.
In this case Rahul stayed in India for 91 days during the PY 2016-17.
[30 days (April) + 31 days (May) +30 days (June)] during PY 2016-17.
Since he has stayed in India for less than 182 days he is NR for PY , 2016-17 as he does not satisfy any of the basic conditions.
Residential Status of an Individual – Example 2 : –
Jerry is a foreign citizen outside India, who is a person of Indian origin. He comes on a personal visit to India on January 1, 2017. He left India on April 1, 2017. Determine his residential Status for PY 2016-17 ?
Solution : –
As a general rule, a person is said to be resident in India if he is in India for 60 days or more during the previous year and 365 days or more during 4 preceding years.
However, when a person of Indian origin comes on visit to India, then the said period of 60 days is extended to 182 days. Since Jerry was in India forless than 182 days, he is a NR for previous year 2016-17.
Residential Status of an Individual – Example 3 : –
Ramesh is working with an MNC located at Gurgaon. He has taken foreign visit on various occasion due to company’s work in the past. However, he has not taken any foreign visit during the previous year 2017-18. His stay in India during the last 7 years is given as under :-
Determine his residential status ?
Solution : –
Ramesh is present in India during the entire PY 2017-18. Thus, he is a resident in India as he satisfies one of the basic conditions under Section 6.
Once a person is a resident, he can either be a resident and ordinary resident, or resident but not ordinary resident. However, in order to be considered as resident and ordinarily resident he has to satisfy both of the additional conditions, i.e : –
a) Ramesh should be resident in India in 2 out of 10 previous years immediately preceding the relevant previous year.
b) During the 7 preceding years Ramesh should be in India for a period of 730 days or more.
Residential Status Of Ramesh During The Last 10 Years Is Given Here Under : –
In this case, Ramesh satisfies both the additional conditions as he has been in India for more than 730 days during the last 7 years (1508 days) and he has been resident in India in last 8 years out of 10 years. Thus, Ramesh is Resident and Ordinarily resident in India for the relevant PY.
HOW TO DETERMINE PERIOD OF STAY IN INDIA FOR AN INDIAN CITIZEN, WHO IS A CREW MEMBER ? – RULE 126
In case of foreign bound ships , whose destination is outside India, determining the period of stay in India for an Indian citizen, who is a crew member of such ship was uncertain.
CBDT has vide, Notification No. 70/2015 dated 17.8.2015, inserted Rule 126 in the Income-tax Rules, 1962 , which provides that in case of an individual, who is a citizen of India and a member of the crew of a ship, the Indian stay period an eligible voyage shall exclude : –
MEANING OF CERTAIN TERMS : –
a) Continuous Discharge Certificate – This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate-cum Seafarer’s Identity Document) Rules, 2001 made under the Merchant Shipping Act, 1958.
b) Eligible voyage – A voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where – for the voyage having originated from any port in India, has as its destination any port outside India; and for the voyage having originated from any port outside India, has destination of any port in India.’.
RESIDENTIAL STATUS OF A HUF, FIRM, AOP/BOI, LOCAL AUTHORITIES AND ARTIFICIAL JURIDICAL PERSONS
Residential Status of HUF – An HUF, Firm, AOP/BOI, local authorities and artificial juridical person would be a resident in India if the control and management of their affairs is situated wholly or partly in India.
While a resident HUF, can additionally be an ROR or RNOR , Firms, Association of persons, Local Authorities and other artificial juridical persons can only be either resident or non-resident.
POINTS TO CONSIDER
- If the control and management of the affairs is situated wholly outside India it would become a non-resident.
- Control and Management of HUF is with its Karta or its Manager.
- Control and Management of Firm/AOP is with its Partners/Members.
RESIDENTIAL STATUS OF A HUF – ROR OR RNOR
As discussed above, an HUF, would be a resident in India, if the control and management of their affairs is situated wholly or partly in India. Further, the control and management of HUF is with the Karta.
An resident HUF, can additionally be an ROR or RNOR, depending on whether the Karta of the Resident HUF, satisfies both the additional conditions (applicable to Individuals), i.e : –
- Karta of Resident HUF should be resident in at least 2 previous years out of 10 previous years immediately preceding relevant previous year.
- Stay of Karta during 7 previous year immediately preceding relevant previous year should be 730 days or more.
NOTE : –
If the Karta of the HUF fails to satisfies both the additional conditions, such Karta would be a Resident but not ordinarily resident in India.
EXAMPLE 1 : –
The head office of XYZ, HUF was situated in UK. What would be the residential status of HUF (resident or non-resident) for PY 2017-18 when affairs of HUF are managed from –
- UK , entirely;
- Partly from India and partly from UK
SOLUTION : –
a) The residential status of HUF would be non-resident, as it is wholly managed from outside India
b) The residential status of HUF would be resident as it is partly managed from India.
EXAMPLE 2 : –
Determine the residential Status in clause (b) in the above example, if the Karta of HUF is present in India for more than 730 days during the preceding 7 years. He is also resident in India in 8 years out of preceding 10 years..
SOLUTION : –
Since the Karta of the Resident HUF, satisfies both the additional conditions (applicable to Individuals), , HUF would be resident and ordinarily resident in India.
SUMMARY OF VARIOUS CRITERIONS TO DETERMINE THE RESIDENTIAL STATUS – SECTION 6
RESIDENTIAL STATUS OF A COMPANY
Residential status of a company, is an important factor to determine, whether the company would be liable to pay tax in or outside India on a particular income, i.e, whether in India or outside India.
- UPTO ASSESSMENT YEAR 2016-17, the residential status of a company in India was dependent on whether the control and management of the companies affairs was situated wholly in India .
- FROM ASSESSMENT YEAR 2017-18 AND ONWARDS, the residential status of a company in India is dependent on its place of effective management (“POEM”). POEM, is an internationally acceptable test to determine, whether a company incorporated in a foreign jurisdiction, is a tax resident of another country.
Let us now understand these two provisions in detail : –
RESIDENTIAL STATUS OF A COMPANY – UP-TO ASSESSMENT YEAR 2016-17 – PRE – AMENDED SECTION 6
Prior to it’s amendment, Section 6(3) of the Income Tax Act, 1961 (“IT Act”) provided that a company is said to be resident in Indiain any previous year, if –
- it is an Indian company; or
- during that year, the control and management of its affairs is situated whollyin India.
Thus, under these provisions, an Indian Company was always considered as a tax resident of India. It did not matter whether, the control and management of its affairs, was situated partly in India, whollyin India or whollyoutside India.
However, in case of a foreign company, it was considered as a tax resident of India, only when the control and management of its affairs was situated whollyin India. Thus, if the control and management of its affairs, was situated partly in India or whollyoutside India, it was considered as a non- resident.
RESIDENTIAL STATUS OF A COMPANY – FROM ASSESSMENT YEAR 2017-18 AND ONWARDS
Under the amended provisions, a company is said to be resident in India in any previous year, if : –
- it is an Indian company; or
- its Place of Effective Management (‘POEM’), in that year, is in India.
Thus, under the revised provisions the criterion to consider an Indian company as a resident of India, has not been changed. An Indian Company would always a tax resident of India irrespective of whether, the control and management of its affairs, was situated partly in India, whollyin India or whollyoutside India.
However, in case of a foreign company, it would be considered as a tax resident of India, only when its Place of Effective Management (‘POEM’), in that year, is in India. Thus, the criteria of control and management of affairs, has been replaced by the concept of POEM to determine the residential status of a foreign company for Indian tax purpose