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Determination of residential status

Residential Status Under Income Tax Act

Determining the residential status of an individual or entity is a crucial step for the Income Tax Department in India as it directly influences the taxability of income. The residential status defines the scope of income that will be subject to taxation in India, making it especially important during the tax filing season. It’s important to note that the concept of "residential status" under the Income Tax Act is distinct from an individual's citizenship; a person can be an Indian citizen but be a non-resident for tax purposes, or a foreign citizen can be a resident in India for tax purposes within a particular year.

Resident Status Classifications

The Income Tax Act classifies an individual's residential status into three main categories based on their stay in India during the fiscal year:

1. Resident and Ordinarily Resident (ROR)

2. Resident but Not Ordinarily Resident (RNOR)

3. Non-Resident (NR)

These classifications are determined by specific conditions outlined under Section 6 of the Income Tax Act.

1. Resident and Ordinarily Resident (ROR)

An individual is classified as a Resident and Ordinarily Resident (ROR) in India if they meet the following conditions:

Basic Conditions (Section 6(1)):

  • The individual must have been in India for at least 182 days during the fiscal year, or
  • The individual must have been in India for at least 60 days during the fiscal year and 365 days or more during the preceding four fiscal years.

Additional Conditions (Section 6(6)):

  • The individual has been a resident of India in at least two out of the ten previous fiscal years immediately preceding the current year, and
  • The individual has spent a total of 730 days or more in India during the seven fiscal years immediately preceding the current fiscal year.
  • An individual who meets both the basic and additional conditions will be classified as Resident and Ordinarily Resident (ROR). This status implies that the individual’s global income, including income earned both within and outside of India, will be subject to taxation in India.
2. Resident but Not Ordinarily Resident (RNOR)

An individual is classified as Resident but Not Ordinarily Resident (RNOR) if they satisfy one of the basic conditions for residency (staying in India for at least 182 days in the fiscal year, or 60 days in the fiscal year and 365 days or more in the preceding four fiscal years), but do not meet both of the additional conditions under Section 6(6).

In simpler terms, an RNOR individual is someone who qualifies as a resident based on their stay in India during the fiscal year but does not qualify as an "Ordinarily Resident" because they either:

Have not been a resident in at least two out of the ten preceding fiscal years, or Have not stayed in India for 730 days or more during the seven fiscal years preceding the current year. RNOR status is a transitional category between a Resident and a Non-Resident. For individuals classified as RNOR, only the income earned or accrued in India is taxable. Their global income is not subject to taxation in India.

3. Non-Resident (NR)

An individual is classified as a Non-Resident (NR) if they do not meet any of the basic conditions for residency, which include:

Staying in India for less than 182 days during the fiscal year, or Staying in India for 60 days or less during the fiscal year and not staying for 365 days or more in the preceding four fiscal years. Non-Residents are only taxed on income that is earned or accrued in India. Income generated outside of India is not taxable in India.

Tax Implications Based on Residential Status

The tax implications differ based on an individual's residential status:

Resident (ROR):

A Resident and Ordinarily Resident is taxed on their global income, meaning all income earned inside and outside of India is subject to tax in India.

Resident but Not Ordinarily Resident (RNOR):

An RNOR is only taxed on income earned or accrued in India. Their foreign income is not taxed in India.

Non-Resident (NR):

A Non-Resident is taxed solely on income that is earned or accrued in India. Their foreign income remains outside the purview of Indian taxation.

Double Taxation Avoidance Agreement (DTAA)

In cases where income is taxed both in India and another country, the Double Taxation Avoidance Agreement (DTAA) comes into play. India has entered into DTAA with various countries to prevent the same income from being taxed twice. Individuals who qualify under DTAA provisions can avail themselves of tax relief, either by way of exemption or a tax credit, depending on the specific agreement between India and the other country.

How to Calculate the Residential Status of an Individual To calculate the residential status of an individual:

  1. Check for Exceptions: First, determine if the individual falls under any exception to the primary conditions (e.g., for Indian citizens leaving for employment or as crew members on Indian ships, the 60-day criterion is replaced by 182 days).
  2. Apply Basic Conditions: Next, assess if they satisfy the basic condition of being in India for 182 days or more in the fiscal year.
  3. Consider Additional Conditions: If they qualify as a resident, check if they meet the additional conditions to determine whether they are an ROR or RNOR.
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