Determining the residential status of individuals and entities is crucial for tax purposes under the Income Tax Act, of 1961. This status influences the taxability of a person or company’s income in India. While an individual’s citizenship might be straightforward, their residential status for tax purposes can vary based on their stay in India during a fiscal year. This guide provides an in-depth look at the classifications of residential status, their implications, and how to calculate them.
Residential status is a key determinant in assessing an individual’s or company’s tax liability in India. It is important to note that residential status under the Income Tax Act differs from citizenship. An individual can be an Indian citizen but still be considered a non-resident for tax purposes in a specific year, and conversely, a foreign citizen may qualify as a resident in India for tax purposes.
The Income Tax Act classifies individuals into three main residential status categories based on their duration of stay in India:
An individual is classified as a Resident and Ordinarily Resident (ROR) if they meet the following conditions:
The individual must either stay in India for 182 days or more during the fiscal year or stay in India for 60 days or more during the fiscal year and for 365 days or more in the four years immediately preceding the current fiscal year.
Under Section 6(6) of the Income Tax Act, an individual will be considered an ROR if:
You may also want to know Section 234F of Income Tax Act
An individual is classified as a Resident but Not Ordinarily Resident (RNOR) if they meet the following conditions:
The individual must stay in India for 182 days or more during the fiscal year, or stay for 60 days or more in the fiscal year and for 365 days or more in the four preceding years.
An individual is considered RNOR if:
An individual is classified as Non-Resident (NR) if they do not meet any of the conditions for being a Resident or RNOR:
The individual spends less than 181 days in India during the fiscal year, or
They stay in India for no more than 60 days in the fiscal year and do not stay for 365 days or more in the four preceding years.
You may also want to know Section 195 – TDS on Non-Residents
The residential status of an individual significantly impacts their tax liability in India. It determines the scope of income that is taxable under the Income Tax Act. Here’s a detailed breakdown of the tax implications based on residential status:
An individual’s residential status is classified into:
The scope of taxable income varies depending on residential status:
Residents earning income abroad may face double taxation. Relief can be availed under:
Understanding the tax implications based on residential status ensures compliance with Indian tax laws and helps optimize tax liabilities effectively.
To determine an individual’s residential status, follow these steps:
Determine if the individual meets the primary condition of staying 182 days or more in India during the fiscal year.
If the primary condition is met, further evaluate if the individual satisfies the additional criteria for being a Resident and Ordinarily Resident (ROR) or Resident but Not Ordinarily Resident (RNOR).
Based on the conditions satisfied, classify the individual as ROR, RNOR, or NR.
Understanding the residential status under the Income Tax Act is essential for accurate tax compliance and planning. Whether an individual is a Resident, Resident but Not Ordinarily Resident, or Non-Resident, their tax obligations in India vary significantly. By comprehensively evaluating the duration of stay and other relevant conditions, individuals can ensure proper tax treatment of their income.
Residential status is determined based on the duration of an individual’s stay in India during a fiscal year and their stay in the preceding years. The status categorizes individuals as Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR).
A ROR status is defined for individuals who meet the basic condition of staying 182 days or more in India during the fiscal year or staying for 60 days or more in the fiscal year and for 365 days in the preceding four years, along with additional conditions related to the number of days spent in India over the past years.
NRs and RNORs are taxed only on income earned within India. They are not taxed on income earned abroad and can use the Double Taxation Avoidance Agreement (DTAA) to avoid paying taxes on the same income in multiple countries.
To calculate residential status, check if the individual meets the primary condition of staying 182 days or more in India. Then, assess if additional conditions for ROR or RNOR status are met. If neither set of conditions is met, the individual is classified as Non-Resident (NR).
Residential status determines the scope of an individual’s tax liability in India, influencing whether they are taxed on global income or only on income generated within India. Proper classification ensures compliance with tax laws and optimal tax planning.
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