Residential Status for Income Tax – Individuals & Residents
The Income Tax Department needs to determine the residential status of an individual or company. It becomes particularly important during the tax filing season. This is one of the factors based on which a person’s taxability is decided.
Let us examine the residential status and taxability in detail.
Meaning and importance of residential status
The taxability of an individual depends upon his residential status in India for any financial year. The term residential status has been issued under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but at the end up being a non-resident for a particular year. Thus, a foreign citizen may at the end up being a resident of India for income tax purposes for a particular year.
Also note that the residential status of different types of persons like an individual, a firm, a company, etc. is determined differently.
How to determine residential status?
The tax laws in India classifies taxable persons as:
- A resident
- A resident not ordinarily resident (RNOR)
- A non-resident (NR)
The tax liability differs for each of the above categories of taxpayers. Let us understand how a taxpayer becomes a resident, an RNOR, or an NR.
Resident in India
- An individual is a resident in India if he satisfies any one of the conditions.
- Basic conditions: –
- The individual is in India
- if he stays for 182 days or more during the previous year or
- if he stays for 60 days or more during the previous year and for 365 days or more during or more during 4
years immediately preceding the relevant previous year.
Resident Not Ordinarily Resident
If a person qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR. He will be a Resident ordinarily resident if he satisfies both of the following conditions:
- he has been in India at least 2 out of 10 years immediately previous years and
- He stayed in India for at least 730 days in 7 immediately preceding years.
If any individual does not comply with any of the basic conditions mentioned above, he will be considered to be non-resident.
Resident: A resident will be charged to tax in India on his global income earned (i.e. income includes earned in India as well as income earned outside India).
NR and RNOR: Their tax liability in India is limited to the income they earn in India. They need not pay any tax in India on their foreign or outsider income.
Further note that in a case of double taxation of income where the same income is getting taxed in India as well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would have entered into with the other country to dismiss the possibility of giving taxes twice.