It is important for the taxpayer to decide the residential status of himself. It gets to be especially important during the Income Tax Return (ITR) filing. In truth, this is often of the components based on which a taxpayer’s taxability is decided.
What is Residential Status in India?
Our government can collect taxes only if the income produced in India or the income created from or through the individuals of India. Nearly each individuals accept that they are residents of India just because they were born here. But, many of them travel outside of India for work. Moreover, individuals from all over the world come to India.
It becomes necessary to determine whether someone has to pay taxes in India or outside India. To remove all these confusions the Income Tax Department has made a standard rules for collection of taxes. These depend on the “Residential Status” of a person.
From income tax point of view, there are normally two categories of residential status in India:
- Resident
- Non-Resident
Resident is further classified into two sub parts,
- Ordinary Resident
- Not Ordinary Resident
Importance of residential status
Getting to know the residential status of an individual is important for several reasons. The below are a few reasons why understanding residential status is essential:
Tax Liability: The assess liability of an person in India depends on their residential status. To decide the precise tax payable it is significant to decide your exact residence status.
Compliance necessities: Diverse compliance prerequisites apply to people based on their residential status. Deciding the residential status is therefore basic in order to follow to assess rules and regulations.
Double Taxation: An individual who may be of more than one country may be subject to double taxation. Double Taxation is being burdened twice on the same salary in both nations. Knowing residential status can help individuals to claim tax relief benefit of the Double Taxation Avoidance Agreements (DTAA). India has entered into with other countries for DTAA.
WHO IS A NON-RESIDENT?
A person who is a not a resident of India, is a Non-Resident.
WHO IS A RESIDENT?
A person who is a resident of India, is a Resident.
1. Individual
As per Section 6 of Income Tax Act, a taxpayer would qualify as a resident of India if he can satisfies any one of the following two conditions
- . Stay in India for a time is 182 days or further or
- Stay in India for the immediately 4 preceding years is 365 days or further and 60 days or further in the relevant fiscal year
Resident and Ordinary Resident (ROR)
According to section 6( 6) of the Income Tax Act of 1961, there are two criteria under which an individual will be considered a “ Resident and Ordinarily Resident ”( ROR) in India.
If an individual spends 730 days or further in India in the seven years preceding the current year.
If he she has resided in India for at least two of the ten previous fiscal years before the current year.
ROR individualities are taxed on their global earnings, i.e., earnings earned in India as well as earnings earned everyplace.
Resident but Not Ordinarily Resident (RNOR)
Being a Resident but Not Ordinarily Resident (RNOR) is a category of Resident. A person become an RNOR if –
- You stay in India for 730 days or more in the last fiscal year.
- You were a resident of India for at least 2 out of 10 days in the last fiscal year.
As an RNOR, you are taxed on income earned in India and income brought into or allowed to be brought into India. However, income earned elsewhere is not taxed in India. RNOR status is beneficial for individuals who have returned to India after being a Non-resident for a long time or those planning to leave soon.
Non Resident
Non-resident Indian’ is an individual who’s a citizen of India or a person of Indian origin and who isn’t a resident of India. An individual will be eligible for Non-Resident (NR) status if following crucial points are met:
- If an individual spends lower than 181 days in India within a financial year.
- If an individual stays in India for no further than 60 days in a financial year.
- If a person spends more than 60 days in India during a financial year but has not stayed for 365 days or more in the previous four financial years.
Therefore, the residential status of an individual usually depends on his physical presence or period of stay in India and not on his nation or domicile.
2. Hindu Undivided Family (HUF) Firm/ Associations of Persons
A Hindu Undivided Family (HUF) or a firm or all associations of persons is spoke to be resident in India in every case except where the control and administration of its affairs is positioned wholly outside India, during the fiscal year. Therefore, where the control and administration of its affairs is positioned indeed incompletely in India, a firm, etc. becomes a resident in India.
A Hindu Undivided Family is spoke to be ‘not ordinary resident’ in India if its manager is ‘not ordinarily resident’ in India. For the purpose of calculating the extent of the manager’s stay in India, the periods of stay in India of the successive managers of a Hindu Undivided Family during its uninterrupted existence have to be adjoined up.
NOTE: The resident but not ordinary resident is only workable to individuals and Hindu Undivided Family (HUFs)
3. Company
An Indian company is a resident in India. Foreign company is spoke to be resident in India if its Place of Effective Management (POEM), in that year, is in India during the fiscal year. “Place of effective management” means a position where crucial management and marketable opinions that are necessary for the conduct of business of reality as a total are, in substance made. Thus, the main points to determine the status of the company are as below-
- Indian companies constantly preserve their presence within the boundaries of India only.
- A foreign company can be recognised as an Indian resident solely if it has been efficiently managed within India throughout the preceding year.
- If a foreign company’s place of effective management wasn’t located in India during the previous year, it’s distinguished as anon-resident.
- Indeed if there’s the fewest potentiality of a foreign company being played effectively from a position outsideIndia, it’ll be distinguished as a non-resident.
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