TAX – RESIDENTS RULE IN INDIA

Tax – Residents Rule in India

Introduction

Residential status for tax purposes varies based on state laws, individual factors like physical presence, and the ownership of property or financial interests. For companies, it is determined by where the place of incorporation or management is located. The concept of domicile differs from residence under tax laws, especially in international contexts like double taxation treaties.

Residential Status

Under the Income Tax Act, 1961, Section 6 defines the tests for determining the residential status of different entities (individuals, companies, Hindu Undivided Families, firms, etc.). There are three residential statuses for individuals:

1. 1. Resident and Ordinarily Resident (ROR)
   2. Non-Resident (NR)
   3. Resident but Not Ordinarily Resident (RNOR)

Determining Residential Status for Individuals

For determining if an individual is a Resident or Non-Resident, the criteria are based on their physical presence in India during the previous year (April 1 to March 31).

Test 1 (Condition 1):

An individual is a Resident if they are in India for an aggregate period of 182 days or more during the previous year.

Test 2 (Condition 2):

An individual is a Resident if:

• • They stay for 60 days or more in the relevant year, and
  • Their total stay in India during the four preceding years is 365 days or more.

These conditions apply regardless of nationality.

Exceptions to the Above Rule

• • Indian citizens and foreign citizens of Indian origin have a special rule:
    • The 60 days condition changes to 182 days in the following cases:
      • If an Indian citizen is a crew member of an Indian ship or employed abroad.
      • If a foreign citizen of Indian origin visits India.

Note: When calculating the number of days spent in India, the entry and exit days are counted, even if the time spent is short.

Non-Ordinarily Resident (NOR) Status

An individual who is a Resident may still be considered Not Ordinarily Resident (NOR) under Section 6(6) if:

1. 1. They have been a non-resident for 9 out of the last 10 years, or
   2. They have stayed in India for 729 days or fewer in the previous 7 years.

Until March 31, 2003, the threshold for NOR was 730 days in the preceding 7 years.

Residential Status of Other Entities

1. 1. Hindu Undivided Families (HUF), firms, and associations of persons (AOP) are considered residents unless the control and management of their affairs are outside India.

   2. Companies are considered residents if:

      • They are an Indian company, or
      • The control and management of their affairs is wholly within India.

   3. Other persons are considered residents unless their affairs are wholly outside India.

Residential Status for NRIs

• • For NRIs (Non-Resident Indians), the residential status must be determined for each previous year (April 1 to March 31). The days of stay in India for each year must be calculated.
  • Arrival and departure days count as days spent in India.
  • The NRI status may remain in place for multiple years if their stay in India does not exceed certain thresholds.

Key Points for NRIs

• • Track stay: Maintain a record of days spent in India for tax purposes.
  • First year of employment outside India: Leave before September 29 to ensure foreign income is not taxed in India.
  • Last year of employment abroad: Return to India after February 1 (or February 2 in a leap year) to avoid exceeding 59 days in India.
  • Non-Resident Status Retention: If an NRI’s stay in the preceding 4 years doesn’t exceed 364 days, they can return to India without losing their non-resident status.

Income Taxation for Different Residential Statuses

• • Resident (ROR and RNOR): Both Indian and foreign income are taxable in India.
  • Non-Resident (NR): Only Indian-sourced income is taxable in India.

Sources of Income and Taxation

1. 1. Indian Income (e.g., income received in India, income accruing or arising in India) is taxable for all categories of residents and non-residents.
   2. Foreign Income:
      • Residents: Taxable in India.
      • Non-Residents: Not taxable in India.