Under the income tax law in India, an individual’s residential status is determined based on their presence in India during a financial year (FY) and the preceding ten FYs. It is important to note that residential status needs to be freshly determined for each year. An individual will qualify as a resident or non-resident (NR) based on whether they satisfy any of the basic conditions mentioned below.
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If an individual is physically present in India for 182 days or more during the relevant FY, they will qualify as a resident. Alternatively, if they are physically present in India for 60 days or more during the relevant FY and 365 days or more in the preceding four FYs, they will also qualify as a resident.
There is also a deemed residency rule, which applies to individuals who are citizens of India and have a total income, other than income from foreign sources, exceeding ₹15 lakh during the relevant FY. If such an individual is not liable to tax in any other country or territory due to their domicile or residence or any other criteria of a similar nature, they will be considered a resident for tax purposes.
The 60-day condition mentioned above is extended to 182 days if an Indian citizen is leaving India for employment outside of India. Furthermore, the 60-day condition is extended to 120 days for an individual who is an Indian citizen or a person of Indian origin (PIO) based outside of India and comes to India for a visit if their total income, excluding income from foreign sources, exceeds ₹15 lakh. However, if their total income is up to ₹15 lakh, then the 60-day condition is extended to 182 days.
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It is important to note that the deemed residency rule and the 120-day rule were introduced recently and have been effective since the financial year 2020-21.
An individual who qualifies as an NR will be taxed on India-sourced incomes. This includes income accruing or arising in India, income deemed to accrue or arise in India, and income received or deemed to be received in India. It is worth noting that there are separate rules for the taxation of different types of income, such as dividend income and the sale of unlisted securities, for NRs.
Understanding one’s residential status is crucial for tax purposes, as it determines the individual’s liability to pay taxes in India. Residents are taxed on their global income, which includes income earned outside India, while NRs are taxed only on their India-sourced income. Therefore, it is essential for individuals to determine their residential status accurately to avoid any discrepancies and tax liabilities.
It is worth noting that tax treaties entered into by India with other countries may override the provisions of the Income-tax law regarding residential status and taxation of income. These treaties may provide relief to individuals who would otherwise be subject to double taxation. Therefore, it is advisable for individuals to consult tax professionals to understand the implications of tax treaties and their residential status.
In addition to residential status, the Income-tax law also has provisions for determining the residential status of companies and firms. The residential status of a company is determined based on its place of incorporation and the place where its management and control are exercised. On the other hand, the residential status of a firm is determined based on the residential status of its partners.
An individual’s residential status is determined based on their physical presence in India during a financial year and the preceding ten FYs. The criteria for residency differ depending on whether the individual is an Indian citizen or a person of Indian origin.
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Additionally, NRs are taxed on India-sourced income, and separate rules apply to the taxation of different types of income. It is essential for individuals to understand the residential status criteria and taxation rules in India to ensure compliance with the Income-tax law.
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In conclusion, determining one’s residential status is essential for compliance with the income-tax law in India. The criteria for residency and taxation of income differ for residents and NRs. It is advisable for individuals to consult tax professionals to understand the implications of their residential status and to ensure compliance with the Income-tax law.
