Residential Status of an Individual or Company: How is it Related to Income Tax?

Last Updated at: May 21, 2020
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Residential Status of an Individual or Company_ How is it Related to Income Tax_

It is important to understand the taxation procedures, especially when an individual keeps moving in and out of the nation. Under the Income Tax Act, 1961, the residential status of the individual plays a crucial role in determining the income tax amount that has to be paid by them. Further, according to residential status, the taxpayers are divided into three types. 

  1. What is a residential status?

  2. Types of residential status

    1. Resident

    2. Resident not ordinarily resident (RNOR)

    3. Non-resident

  3. Taxability

  4. Conclusion

What is the residential status?

The residential status in simple terms means the number of days an individual has stayed in the country during a particular financial year. Further, the total number of days of the taxpayer being present in the country does not depend on their purpose of presence. Additionally, the income earned by an individual in India will be liable for tax in India itself. 

The residential status of an individual must not be confused with their citizenship for a country. For example, a foreign citizen (say from the US), staying for a longer duration, would be considered as the resident of India for a particular financial year. According to the income tax rules, various aspects, including state of domicile and state of residence, are considered. 

Types of residential status

The residential status is of three types, as per the income tax rules set up by the government. The classification of the taxpayers is as follows:

  • Resident
  • Resident not ordinarily resident (RNOR)
  • Non-resident (NR)

Various conditions have to be considered through which the category of the taxpayer is decided under the income tax rules

Resident:

To qualify as a resident taxpayer, the following conditions must be satisfied: 

  • In a particular year, the individual has stayed in India for 182 days or more. 
  • In consecutively preceding four years, the individual has resided in India for 365 days or more. Additionally, for the present financial year, the individual has to stay in the country for more than 60 days.

Let us take an example of an Indian resident say X. He has to travel across various borders for business deals. In the current financial year, he has travelled for 250 days. Additionally, he has been following this routine of moving in and out of the country for the past three years. In three years, he was out for over 450 days. 

Evaluating the complete situation, he was present in the country just for 115 days. This makes the first condition false. But, according to the second condition, he was in the country or state of domicile for more than 365 days, and more than 60 days in the current FY. And so, he will be considered as a resident taxpayer.

File your income tax now

Resident not ordinarily resident (RNOR):

The resident status is also classified as follows:

  • Resident ordinarily resident (ROR)
  • Resident not-ordinarily resident (RNOR)

To qualify as ROR, the taxpayer must meet the following conditions:

  • Previously the individual should have resided in the country for at least 2 out of 10 years.
  • In the past 7 years, the individual should have resided in the country for more than 730 days.

Considering the case mentioned above of X, he will fall under the category of ROR. 

If the resident X fails to stay in the state of domicile for more than 730 days, he will fall under the category of RNOR.

Non-resident

To qualify as a non-resident, the individual must not satisfy any of the conditions mentioned above. This can happen when an individual moves abroad and settles down without any earnings or taxation liabilities in the state of domicile. In such cases, the individual follows the taxation system of the country in which they reside. 

Taxability

In the case of a resident, all the income earned either in the country of residence or globally, and the taxation procedure will be followed as per the Indian income tax rules. However, in the case of RNOR and NR, they have to pay income tax only on the amount of income earned in India. 

Additionally, to avoid paying taxes twice, in the country of residence and work, the taxpayer can sign the Double Taxation Avoidance Agreement (DTAA). Under the agreement, the taxpayer pays tax in the country as decided by the government, or the pact signed between the countries.

Conclusion

As such, a taxpayer must check their residential status carefully to avoid any legal issues and income tax payment. For a person residing in the state of domicile permanently, payment of income tax is smooth without any legal liabilities. However, for those moving in and out of the nation, special considerations are made. One must check all the conditions and whether they qualify for it or not before paying the taxes, to avoid double taxation on their income. 

 

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Residential Status of an Individual or Company: How is it Related to Income Tax?

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It is important to understand the taxation procedures, especially when an individual keeps moving in and out of the nation. Under the Income Tax Act, 1961, the residential status of the individual plays a crucial role in determining the income tax amount that has to be paid by them. Further, according to residential status, the taxpayers are divided into three types. 

  1. What is a residential status?

  2. Types of residential status

    1. Resident

    2. Resident not ordinarily resident (RNOR)

    3. Non-resident

  3. Taxability

  4. Conclusion

What is the residential status?

The residential status in simple terms means the number of days an individual has stayed in the country during a particular financial year. Further, the total number of days of the taxpayer being present in the country does not depend on their purpose of presence. Additionally, the income earned by an individual in India will be liable for tax in India itself. 

The residential status of an individual must not be confused with their citizenship for a country. For example, a foreign citizen (say from the US), staying for a longer duration, would be considered as the resident of India for a particular financial year. According to the income tax rules, various aspects, including state of domicile and state of residence, are considered. 

Types of residential status

The residential status is of three types, as per the income tax rules set up by the government. The classification of the taxpayers is as follows:

  • Resident
  • Resident not ordinarily resident (RNOR)
  • Non-resident (NR)

Various conditions have to be considered through which the category of the taxpayer is decided under the income tax rules

Resident:

To qualify as a resident taxpayer, the following conditions must be satisfied: 

  • In a particular year, the individual has stayed in India for 182 days or more. 
  • In consecutively preceding four years, the individual has resided in India for 365 days or more. Additionally, for the present financial year, the individual has to stay in the country for more than 60 days.

Let us take an example of an Indian resident say X. He has to travel across various borders for business deals. In the current financial year, he has travelled for 250 days. Additionally, he has been following this routine of moving in and out of the country for the past three years. In three years, he was out for over 450 days. 

Evaluating the complete situation, he was present in the country just for 115 days. This makes the first condition false. But, according to the second condition, he was in the country or state of domicile for more than 365 days, and more than 60 days in the current FY. And so, he will be considered as a resident taxpayer.

File your income tax now

Resident not ordinarily resident (RNOR):

The resident status is also classified as follows:

  • Resident ordinarily resident (ROR)
  • Resident not-ordinarily resident (RNOR)

To qualify as ROR, the taxpayer must meet the following conditions:

  • Previously the individual should have resided in the country for at least 2 out of 10 years.
  • In the past 7 years, the individual should have resided in the country for more than 730 days.

Considering the case mentioned above of X, he will fall under the category of ROR. 

If the resident X fails to stay in the state of domicile for more than 730 days, he will fall under the category of RNOR.

Non-resident

To qualify as a non-resident, the individual must not satisfy any of the conditions mentioned above. This can happen when an individual moves abroad and settles down without any earnings or taxation liabilities in the state of domicile. In such cases, the individual follows the taxation system of the country in which they reside. 

Taxability

In the case of a resident, all the income earned either in the country of residence or globally, and the taxation procedure will be followed as per the Indian income tax rules. However, in the case of RNOR and NR, they have to pay income tax only on the amount of income earned in India. 

Additionally, to avoid paying taxes twice, in the country of residence and work, the taxpayer can sign the Double Taxation Avoidance Agreement (DTAA). Under the agreement, the taxpayer pays tax in the country as decided by the government, or the pact signed between the countries.

Conclusion

As such, a taxpayer must check their residential status carefully to avoid any legal issues and income tax payment. For a person residing in the state of domicile permanently, payment of income tax is smooth without any legal liabilities. However, for those moving in and out of the nation, special considerations are made. One must check all the conditions and whether they qualify for it or not before paying the taxes, to avoid double taxation on their income. 

 

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