Residential Status for the purpose of Income Tax

The determination of Residential Status of a person is very important for the purpose of levy of income tax, as income tax is levied based on the residential status of a taxpayer. The Residential Status of a taxpayer can be divided in the following categories

Determination of Residential Status of a taxpayer is very important at the time of filing of income tax return as income tax is levied based on the Residential status of the taxpayer. The following types of incomes are taxable in the hands of the different categories of taxpayers:-

Particulars	Resident and Ordinary Resident	Not ordinary Resident	Non-Resident
Income received or deemed to be received in India whether earned in India or elsewhere	Yes	Yes	Yes
Income which accrue or arise or is deemed to accrue or arise in India during the previous year, whether received in India or elsewhere	Yes	Yes	Yes
Income which accrue or arise outside India and received outside India from a business controlled from India	Yes	Yes	No
Income which accrue or arise outside India and received outside India in the previous year from any other source	Yes	No	No
Income which accrues or arises outside India and received outside India during the year preceding the year and remitted to India during the previous year	Yes	No	No

From the above table, it is clearly visible that the maximum income tax is levied in case of an Ordinary Resident, lesser in case of Not-Ordinary Resident and the least in the case of a Non Resident Indian (NRI).

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After determining the residential status, the all incomes of an individual (except Capital Gains) would be taxable as per the Income Tax Slabs for that financial year.

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Determination of Residential Status of Individual

The Residential Status of an Individual is to be determined on the basis of period of stay of the taxpayer in India and is computed separately for each year. If an individual satisfies any one of the following conditions, he is said to be Resident in India for that financial year. The conditions are:-

He is in India for a period of 182 days or more in that financial year

He is in India for 60 days or more during that financial year and has been in India for 365 days or more during 4 previous years immediately preceding the relevant financial year.

If any one of the above conditions is satisfied, the individual is said to be resident in India. However, if none of the conditions is satisfied, he is said to be a Non Resident Indian (NRI)

Exceptions to Residential Status

There are 2 exceptions to the above rule of classification of Residential Status:-

In case of an individual, who is a citizen of India and who leaves India in any financial year for the purpose of employment outside India, the 2^nd condition stated above shall not be applicable and only the 1^st condition of 182 days or more would be applicable
In case of an individual (whose Indian income is less than Rs. 15 Lakhs) who is a citizen of India or is a person of Indian origin and who being outside India comes on a visit to India in any financial year, the 2^nd conditions stated above shall not be applicable and only the 1^st condition of 182 days or more would be applicable. In case the indian income is more than 15 lakhs – then the no. of days in the 2nd condition would be considered as 120 instead of 60)

Classification of Ordinary Resident & Non Ordinary Resident

As per Section 6(6), a person shall be not ordinary resident in India if he satisfies any one of the following conditions:-

He has been a non-resident (in the manner computed above) in 7 out of 10 years immediately preceding the Financial Year (Amended by Budget 2020)

He has been in India for a period of 729 days or less in 7 previous years immediately preceding the financial year.

If any 1 of the above conditions is satisfied, the person is said to be resident but not-ordinary resident in India. However, if none of the above conditions is satisfied, the person is said to be Resident and Ordinary Resident in India.

Relevant points regarding Residential Status

Receipt of Income

For the purpose of levy of income tax, what is important is the 1^st receipt. If an amount is received outside India and then subsequently remitted to India, it shall be a receipt outside India. Merely, because it has been remitted to India would not make it an income received in India. For eg: A non-resident receives income equivalent to Rs. 80,000 in USA but then remits it to India. This income would not be taxable in his hands in India because it is neither earned in India nor received (1^st receipt) in India.

Citizenship of a Country and Residential Status

Citizenship of a country and residential status are separate concepts. A person may be an Indian national/citizen but may not be a resident in India. On the other hand, a person may be a foreign national/citizen but may be a resident in India.

Computation of Period of Stay

In computing the period of stay for the purpose of residential status, it is not necessary that the stay should be for a continuous period. What is to be seen is the total number of days of stay in India during that financial year. It is also not necessary that the stay should be only at 1 place and can be anywhere in India.

For the purpose of computing the period of 182 days for the determination of residential status, the day he enters India and the day he leaves India should both be treated as stay in India. However, in borderline cases where stay in India is very close to 182 days, his stay in India has to be calculated on hourly basis and a total of 24 hours will be taken as 1 day.