ITR

Residential Status Of An Individual Or Company: How Is It Related To Income Tax?

Understanding tax laws is essential, particularly for people who frequently move within and outside of the country. According to the Income Tax Act of 1961, a person's residency status is a significant factor in deciding how much income tax is due from them. Let’s find out in detail about the “Residential Status Of An Individual Or Company & How Is It Related To Income Tax?” in this article.

Residential Status

During a given financial year, an individual’s residential status is measured by the number of days he or she has spent in the country. Furthermore, the taxpayer’s total number of days in the country doesn’t depend on their purposes of presence. Individuals in India will also be required to pay taxes on their income earned in India. 

It is important not to confuse a person’s residency status with their citizenship status. For example, a foreign national (such as a US citizen) staying more than a year in India would be considered an Indian resident. Various aspects are considered when calculating income tax, such as domicile and residence states. Section 80p of income tax act places a lot of importance on residential status because it has a significant impact on how much tax is owed. There are two types of assessees: Indian residents and non-Indian residents. HUFs and individuals who are residents may be either normally residents or ordinarily residents. The assessment can either be made by a resident or by a non-resident.

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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 slab

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 traveled 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.

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 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 a result, a taxpayer should carefully verify their residency status to avoid any legal repercussions and income tax obligations. Payment of income tax is simple for someone who lives permanently in their state of domicile and has no legal obligations. However, there are particular considerations for people who are entering and leaving the country. To prevent paying taxes twice on the same income, one must first verify that they meet all the requirements and are eligible for the benefit.

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