Residential Status of Individual for Income tax

As per the provisions of Income tax Act, 1961, determining residential status of taxpayer is quite important to know his correct tax liability for a specific financial year.

In this blog we will discuss about residential status as per IT Act, its importance and its determination.

Topics covered –

Meaning of Residential Status as per IT Act

Income tax Act, 1961 defines Residential Status of a person, which has nothing to do with his citizenship or nationality in India.

It is important to understand that residential status of a person as per IT Act is different from his citizenship status in India. Conclusively, a person can be a citizen of but non-resident of India for a specific financial year under Income Tax Act.

Similarly, in a particular year a citizen of Canada can be a resident of India for tax purposes. Residential status is determined only for tax purpose.

Broadly, IT Act categorized residential status in 3 categories as under:

Resident(Ordinarily Resident)
Resident but Not Ordinarily Resident
Non-Resident

Note: – Vide Finance Act, 2020, concept of Deemed Resident has been introduced, which we will discuss later in this blog.

How to determine Residential Status of an Individual under IT Act,1961?

Section 6 of the I-T Act,1961 defines “Residence in India” for tax calculating income tax in India.

As per this section, a person shall be considered as either Resident (i.e. Ordinary Resident) or Resident but not ordinary resident or Non-Resident upon the satisfaction of respective conditions prescribed under the I-T Act. Thus, a person has to determine his residential status on yearly basis to calculate his tax liability.

Let’s first discuss about the conditions to be either Resident (Ordinarily Resident), Resident but Not Ordinarily Resident or Non-Resident of India as under:

The First & the basic Condition to be a Resident of India in a particular year is as follow –

That the individual in that specific year is in India for a period of 182 days or more,
That he has been in India for a period of either 365 days or more within the 4 years preceding that specific year, and is in India for a period of 60 days or more in that specific year.

The Second Condition for deciding whether Resident is Ordinarily Resident of India or Not Ordinarily Resident of India under the I-T Act

That the individual has been resident of Indiain at least 2 years out of 10 previous years that are immediately preceding the year under consideration.
That the individual has been in India for a period of 730 days or more during the 7 years that are immediately preceding the year under consideration.

The above-mentioned conditions are briefly presented in a tabular format:

Resident(Ordinarily Resident) of India

Resident but Not Ordinarily Resident of India

Non-Resident of India

Should satisfy any of First & Basic Condition

Should not satisfy any of First & Basic Condition

Should satisfy both of Secondary Condition

Should not satisfy either one or both of Second Condition

N.A.

Important Points to remember while determining residential status of the Individual

The day on which a person enters India will be counted as day of his stay in India.
The day on which a person leaves India will be counted as day of his stay in India.
Only one primary and condition i.e. stay of at least 182 days or more is mandatorily required to consider that the person is a Resident of India, who is an Indian citizen and leaves India during the previous year for any of the following reasons
For employment without India
As a member of Crew of an Indian Ship, required to stay outside India
When an Indian origin person comes to visit India for lesser period.

Importance of determining Residential Status of an Individual

As we already know that residential status of a person is basically determined for calculating his tax liability of a specific year. Tax liability of a Resident tax payer may differ from Resident but Not Ordinarily Resident or from Non-Resident even if they earn same kind of income in same year from different countries.

Let’s now understand the how the income is chargeable to tax on the basis of residential status of an Individual, as follow

Source of Individual’s income	Resident( i.e. Ordinarily Resident) of India	Resident but Not Ordinary Resident of India	Non-Resident of India
Indian Income of individual i.e. Received in India Deemed to be received in India Accrued / Arise in India Deemed to be accrued / arise in India Accrued / Arise outside India, but received in India Deemed to accrue or arise outside India, but received in India	Taxable	Taxable	Taxable
Foreign Income i.e. Accrued or Arose outside India. Deemed to accrue/arise out of India.	Taxable	Not Taxable	Not Taxable
Accrued / Arise outside India from business / profession controlled from India.	Taxable	Taxable	Not Taxable

Therefore, it is important to determine Residential status of a person before filing his Income tax return and to determine his correct tax liability of a specific year.