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• Posted 21 Jul, 2020
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Individual Residential Status - Income-tax Law

Finance Act 2020 has brought in certain changes in the computation of residential status of Individual. This article is an attempt to clarify the same for the interest of general public.

Why it is so important to know the “Residential Status” of an Individual?

In India, Income-tax is levied and collected on the basis of “Residential Status” and not all the income are taxable in every hands. In order to fix the taxability, Individuals are categorized into three as Resident and Ordinarily Resident (ROR), Resident but Not ordinarily Resident (RNOR) and Non-Resident (NR). It is being done considering the international relationship which India has with other countries and other practial difficulties faced by Individual Assessees. Considering the above three categories, there are exceptions in the items of income which are taxable in India as provided in the table below:-.

In order to understand clearly as to what makes an individual to become Resident of India, one must categorize Individuals into the following: -

1. Citizen of India

2. Person of Indian Origin

3. Other Individual

1. Citizen of India

Citizen of India becomes Resident only when his stays in India during the year for more than 182 days. No other conditions applicable to him. Especially when Citizen of India leaves India for employment outside India or leaves as crew member of an Indian ship then to make him as Resident, he must have been in India for 365 day or more in preceding four previous year and 182 days or more during the year. Hence, Citizen of India will become Resident if and only if his stay in India during the year > = 182 days.

Generally, once an Individual becomes "Resident" then his global income is taxable in India, if he also becomes "Resident and Ordinarily Resident" (ROR). But when the said Resident, becomes Not ordinarily resident (RNOR) then, certain items of income are not taxable in India as given in the table above. Hence it is important to know that becoming Resident and Ordinarily Resident (ROR) makes an Individual in India to offer his income from the other parts of the world also in India.

Foreign Tax Credits:

It is further to be understood that when an income earned outside India offered to tax in India by virtue of becoming Resident of India can invoke the Articles of Double Taxation Avoidance Agreement which India entered into with that country. There are cases where taxes paid in India would be allowed as credit in outside India and vice-versa. Hence an Individual pays taxes in two or more countries should ensure that all the eligible other country tax credits are duly availed. 

What conditions makes a 'Resident' to become 'Resident and Ordinarily Resident' (ROR)?

If any of the following conditions NOT satisfied by a Resident, render him to become ROR.

• An Individual must be Non-Resident for 9 out of 10 preceding previous year. For example, if you are calculating Residential Status for financial year 2019-20, you have to count 10 year backward from financial year 2018-19 to 2009-10. (or)
• Has been in India for 729 days or less during the 7 preceding previous years. For example, if you are calculating Residential Status for financial year 2019-20, you have to count 7 year backward from financial year 2018-19 to 2012-13.

Citizen of India Visits India?:

When a Citizen of India being outside India visits India during the any year, his residential status must be calculated as follows:-

a. When his Indian Income for the year > Rs.15 lakhs

If his stay during the said year exceeds 120 days and his stay in India for preceding four years 365 day or more becomes Resident. One can follow the conditions given above to identify whether the Resident becomes ROR or RNOR. As this is crucial to tax global income in India.

b. When his Indian Income for the year < / = Rs.15 lakhs

If his stay during the said year exceeds 182 days and his stay in India for preceding four years 365 day or more becomes Resident. One can follow the conditions given above to identify whether the Resident becomes ROR or RNOR. As this is crucial to tax global income in India.

Citizen of India nowhere liable to pay tax in the World?

When Citizen of India for any year, if not liable to tax in any other country becomes deemed Resident of India ONLY when his Indian income exceeds Rs.15 lakhs. Under this category, Resident automatically becomes “Resident but not ordinarily Resident (RNOR) consequently his global income not taxable in India. Please refer the table above for the items of income not taxable in India. A deemed Resident never becomes Resident but Ordinarily Resident (ROR).

2. Person of Indian Origin (PIO)

A person shall be deemed to be of Indian Origin if he, or either of his parents or any of his grand-parents,was born in undivided India. When a PIO being outside India visits India during the any year, his residential status must be calculated as follows:-

a. When his Indian Income for the year > Rs.15 lakhs

If his stay during the said year exceeds 120 days and his stay in India for preceding four years 365 day or more becomes Resident, but in order to tax global income in India, he must be a Resident and Ordinarily Resident. Follow the conditions given above to determine the same.

b. When his Indian Income for the year < / = Rs.15 lakhs

If his stay during the said year exceeds 182 days and his stay in India for preceding four years 365 day or more becomes Resident, but in order to tax global income in India, he must be a Resident and Ordinarily Resident. Follow the conditions given above to determine the same.

3. Other Individual (Other than Citizen of India and PIO)

Any other Individual [except Citizen of India and Person of Indian Origin] has to test the following conditions to find out Residential Status.

a. Either stay in India during the year must be > = 182 days (or)

b. Stayed in India during the year > = 60 days and > = 365 days in preceding 4 years.

Once he becomes Resident, it is important to identify as to whether he is ROR or RNOR. This test to be done as explained above because only ROR has to offer his global income in India.

Income-tax Act Vs Foreign Exchange Management Act. 

Residential Status under Income-tax Law and Foreign Exchange Management Act (FEMA) are different. With respect to the reporting to banker for changing the status of bank accounts into NRO / NRE account is to be identified as per FEMA provisions. To know the residential status provisions under FEMA Click here.