Income Tax Law: What is the Residential Status for Income Tax?

Last Updated at: December 14, 2019
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Income Tax Law-What is the Residential Status for Income Tax?

In India, Income Tax laws determine the scope of taxable income of an individual based on the residential status of taxpayers for that financial year. The residential status is assessed based on the number of days of the physical presence of the taxpayers in India, irrespective of the purpose of stay during the financial year.

The term residential status is coined under the Income Tax Act, and it’s not to be confused with the nationality or citizenship of a person. An individual may be a citizen of India but a non-resident for the purpose of income tax for a particular year. Similarly, a foreign citizen may end being a resident of India for income tax purposes.

In this article, let’s explore the residential status and taxability structure in detail.

What are the different categories of residential status?

Section 6 of the Income-tax Act, 1961 determines the residential status for the purpose of Income-tax in India.

The residential status of different types of a person i.e., an individual, a firm, a company, a HUF etc is determined differently. They are divided into three categories of residential status, namely:

Residential status of an individual:

  • Resident and ordinarily resident in India (ROR)
  • Resident but not ordinarily resident in India (RNOR)
  • Non-resident (NR)

Residential status of a Hindu undivided family (HUF):

  • Resident and ordinarily resident in India
  • Resident but not ordinarily resident in India
  • Non-resident

Residential status for persons other than an individual or a HUF:

For the purpose of Income Tax law, any person other than an individual or a HUF, i.e., company, partnership firm, etc., may have the following residential status:

    • Resident
    •  Non-resident

E-file Your Income Tax Returns

Determination of residential status of an assessee:

First, it’s necessary to determine whether he/she is a resident or non-resident. If he is a resident, the next step is to determine whether he is resident and ordinarily resident or resident but not ordinarily resident.

How to determine the residential status of an individual?

CONDITION 1: To determine whether the assessee is a resident or non-resident in India, he should satisfy any of the following two conditions. If not, an individual will be treated as non-resident in India.

  • He is in India for a period of 182 days or more in that year; or
  • He is in India for a period of 60 days or more in that year and for a period of amounting in all to 365 days or more in immediately preceding 4 years.

CONDITION 2: Resident and ordinarily resident (or) resident but not ordinarily resident (This step is performed only if an individual turns to be a resident in India)

A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies both the following conditions:

  • He is a resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
  • His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

A resident individual who doesn’t satisfy any of the above-mentioned conditions or if he satisfies only of one of the conditions in CONDITION 2 he will be considered as a resident but not ordinarily resident by the Income-tax law.

How to determine the residential status of the Hindu undivided family (HUF)?

A Hindu undivided family (HUF) is said to be resident in India except in every case where the control and management of affairs are situated wholly out of India.

CONDITION 1: Resident or non-resident HUF

If the control and management of the affairs of the HUF are located (partly or wholly) in India then the HUF will be treated as a resident in India.

CONDITION 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident.

The Karta or manager of a HUF must satisfy both the below-mentioned conditions to be considered as a resident and ordinarily resident in India.

  • He is a resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
  •  His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

If the control and management of HUF affairs are wholly outside India, then the HUF will become non-resident.

How to determine the residential status of a company?

  1. A company incorporated in India will always be considered as a resident in India.
  2. A company other than an Indian company (i.e., a foreign company) which has a place of effective management (POEM) of business in India for that particular year is said to be resident in India. The concept of POEM is effective from 2017-18.

Here, the term “place of effective management” is considered as a place where the key management and business decisions are made to run the business of an entity. POEM is an internationally recognized test of determination of residence of a company.

How to determine the place of effective management (POEM) of the business in India?

  1. Identification of a person or persons who actually takes all the key management and commercial decisions for the purpose of conducting business in India.
  2. Next, the determination of a place where all these decisions are made.

How to determine the residential status of a person other than an individual, HUF and company?

Every person other than an individual, HUF and company is a resident in India if the control and management of business affairs are wholly or partly located in India for that year.

Taxation based on the residential status of a person:

  • ROR – Resident and ordinarily resident
  • RNOR – Resident but not ordinarily resident
  • NR – Non-resident

Types of Income

Residential status

ROR*

RNOR*

NR*

Income generated in India

Taxed

Taxed

Taxed

Income deemed to accrue or arise in India

Taxed

Taxed

Taxed

Income arising outside India from a business controlled in India

Taxed

Taxed

Not taxed

Income other than the above mentioned (I.e., income which has nothing to do with India)

Taxed

Not taxed

Not taxed

Income Tax Law: What is the Residential Status for Income Tax?

2630

In India, Income Tax laws determine the scope of taxable income of an individual based on the residential status of taxpayers for that financial year. The residential status is assessed based on the number of days of the physical presence of the taxpayers in India, irrespective of the purpose of stay during the financial year.

The term residential status is coined under the Income Tax Act, and it’s not to be confused with the nationality or citizenship of a person. An individual may be a citizen of India but a non-resident for the purpose of income tax for a particular year. Similarly, a foreign citizen may end being a resident of India for income tax purposes.

In this article, let’s explore the residential status and taxability structure in detail.

What are the different categories of residential status?

Section 6 of the Income-tax Act, 1961 determines the residential status for the purpose of Income-tax in India.

The residential status of different types of a person i.e., an individual, a firm, a company, a HUF etc is determined differently. They are divided into three categories of residential status, namely:

Residential status of an individual:

  • Resident and ordinarily resident in India (ROR)
  • Resident but not ordinarily resident in India (RNOR)
  • Non-resident (NR)

Residential status of a Hindu undivided family (HUF):

  • Resident and ordinarily resident in India
  • Resident but not ordinarily resident in India
  • Non-resident

Residential status for persons other than an individual or a HUF:

For the purpose of Income Tax law, any person other than an individual or a HUF, i.e., company, partnership firm, etc., may have the following residential status:

    • Resident
    •  Non-resident

E-file Your Income Tax Returns

Determination of residential status of an assessee:

First, it’s necessary to determine whether he/she is a resident or non-resident. If he is a resident, the next step is to determine whether he is resident and ordinarily resident or resident but not ordinarily resident.

How to determine the residential status of an individual?

CONDITION 1: To determine whether the assessee is a resident or non-resident in India, he should satisfy any of the following two conditions. If not, an individual will be treated as non-resident in India.

  • He is in India for a period of 182 days or more in that year; or
  • He is in India for a period of 60 days or more in that year and for a period of amounting in all to 365 days or more in immediately preceding 4 years.

CONDITION 2: Resident and ordinarily resident (or) resident but not ordinarily resident (This step is performed only if an individual turns to be a resident in India)

A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies both the following conditions:

  • He is a resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
  • His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

A resident individual who doesn’t satisfy any of the above-mentioned conditions or if he satisfies only of one of the conditions in CONDITION 2 he will be considered as a resident but not ordinarily resident by the Income-tax law.

How to determine the residential status of the Hindu undivided family (HUF)?

A Hindu undivided family (HUF) is said to be resident in India except in every case where the control and management of affairs are situated wholly out of India.

CONDITION 1: Resident or non-resident HUF

If the control and management of the affairs of the HUF are located (partly or wholly) in India then the HUF will be treated as a resident in India.

CONDITION 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident.

The Karta or manager of a HUF must satisfy both the below-mentioned conditions to be considered as a resident and ordinarily resident in India.

  • He is a resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
  •  His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

If the control and management of HUF affairs are wholly outside India, then the HUF will become non-resident.

How to determine the residential status of a company?

  1. A company incorporated in India will always be considered as a resident in India.
  2. A company other than an Indian company (i.e., a foreign company) which has a place of effective management (POEM) of business in India for that particular year is said to be resident in India. The concept of POEM is effective from 2017-18.

Here, the term “place of effective management” is considered as a place where the key management and business decisions are made to run the business of an entity. POEM is an internationally recognized test of determination of residence of a company.

How to determine the place of effective management (POEM) of the business in India?

  1. Identification of a person or persons who actually takes all the key management and commercial decisions for the purpose of conducting business in India.
  2. Next, the determination of a place where all these decisions are made.

How to determine the residential status of a person other than an individual, HUF and company?

Every person other than an individual, HUF and company is a resident in India if the control and management of business affairs are wholly or partly located in India for that year.

Taxation based on the residential status of a person:

  • ROR – Resident and ordinarily resident
  • RNOR – Resident but not ordinarily resident
  • NR – Non-resident

Types of Income

Residential status

ROR*

RNOR*

NR*

Income generated in India

Taxed

Taxed

Taxed

Income deemed to accrue or arise in India

Taxed

Taxed

Taxed

Income arising outside India from a business controlled in India

Taxed

Taxed

Not taxed

Income other than the above mentioned (I.e., income which has nothing to do with India)

Taxed

Not taxed

Not taxed

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