This article is written by Avinash Kumar, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.com. Here he discusses “What are the Different Types of Residential Status Under Income Tax Act and What is their Relevance?”.

Introduction

Section 6 of the Income Tax Act 1961 talks about the Residential Status. Residential status of a person means that whether the particular person is entitled to pay the income tax in India or not?  

Residential status of a person plays a vital role in the purpose of the levy of income tax because the Income Tax department takes the tax based on the residential status of the person. If a person is a citizen of India but at the end of the day, he can be a non-resident for a financial year. 

This can be also a vice versa like a foreigner can be a citizen of that particular country and if he is living in India for a particular time period and that time period is fulfilling the criteria for the Resident of India then he can be taxable in India. 

While the residential status of the individual, company, a firm is determined in a different way. Each one has a different time period for the determination of Resident in India.

Why Residential Status is Important?

We are living in such a society where we don’t like the concept of sharing. We only think about the individual while we should think of society for the large. 

That’s why we try all possibilities to not share own hard money to the government. However, it is a very important duty to pay the tax for the growth of the nation. Because the money which we are paying in the form of tax that is directly or indirectly connected to our own development. 

At the time of filing of tax return, the residential status of the individual is very important. Because the Income Tax Department calculate tax according to the residential status of the individual. 

Residential Status of the individual, company, a firm is necessary because they are commencing their business in India and for their business, they are using the resources of the particular country and while using the resources they are earning money. So Residential status of the particular person plays an important role while at the time of paying taxes.

Burden of Proof

One of the important questions arises that if any dispute arises in a calculation of residential status of the individual, company or firm then the burden of proof will be on the assessee. This is the question of the fact that assessee is a resident or non-resident and it is the duty of the assessee to produce all the necessary facts to the Income Tax department to prove the resident or non-resident.  

Classification of Residential Status

As per the depending stay of the individual in India, Income Tax Law has classified the residential status into three categories. 

Residential status of an individual will cover the financial year of an individual and as well as his/her previous years of stay.

There are the following categories which classified the residential status of an individual.

1. Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non Resident (NR)

1. Resident and Ordinarily Resident (ROR)

Under Section 6(1) of the Income Tax Act an Individual is said to be resident in India if he fulfils the condition:

If he/she stay in India for a period of 182 days or more in a financial year, or He/ She is in India for a period of 60 days or more in a financial year and If he/she stays in India for a period of 365 days or more during the 4 years immediately preceding the previous year. 

As per section 6(6) of Income Tax Act, 1961 there are following two conditions when an individual will be treated as the “Resident and Ordinarily Resident” (ROR in India. 

1. If He/ She stays in India for a period of 730 days or more during the 7 years of preceding previous year. 
2. If He/ She stays in India for at least 2 out of 10 previous financial years which is preceding the previous years. 

If the individual doesn’t satisfy either of the condition, then he is no eligible to qualify as Resident and Ordinarily Resident (ROR).   

Points which are essential while calculating ROR

• It is not mandatory that assessed should stay at the same place and it is not mandatory that stay should be a continuous period of time which means it shouldn’t be on a regular basis.
• Territorial of India includes territorial water, continental shelf, and airspace which is up to twelve nautical miles.
• When any person visits India then their calculation of resident in India will be counted through their physical presence in India. And these physical presences will be counted on an hourly basis. If any dispute arises while calculating their physical presence, then the day on which he comes to India and the day on which he leaves India shall be taken into consideration while calculating the Residential status. 

Let’s understand the ROR with an example: 

Suppose Mr. Nayar who is a resident of India who went to another country in October 2018 while he had stayed in India during the financial year (2018-19) is for a period of 250 days which is exceeding the 182 days and his stay in previous 7 financial years is more than 730 days then he is eligible for paying the tax in India. That’s why the income of Mr. Nayar will be taxable in nature because he is fulfilling the condition of ROR.

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2. Resident but Not Ordinarily Resident (RNOR) 

An individual will be treated as RNOR when an assessee fulfill the following basic conditions:

In a financial year if an individual stays in India for a period of 182 days or more; Or He/ she stays in India for a period of 60 days in a financial year and 365 days or more during the 4 previous financial years. 

However, an Assesse will be treated as a Resident but Not Ordinarily Resident (RNOR) if they satisfy one of the basic condition which is as follows:

1. If He/ She stays in India for a period of 730 days or more during the 7 preceding financial year or;
2. If He/ She was a resident of India for at least 2 out of 10 in the previous financial year.

Let’s understand Resident but Not Ordinarily Resident with an example: 

Suppose Mr. Nayar who is in the Financial year 2017-18 stayed in India for a period pf 192 days so he was fulfilling the condition No 1 but He didn’t stay in India for more than 730 days during the period of 1st April 2010 to 31st March 2011 which was immediately preceding the Financial Year 2017-18. So in this situation, Mr. Nayar will be qualified for a Resident but Not Ordinarily Resident (RNOR).

3. Non – Resident (NR)

An individual will be qualified for Non Resident (NR) if He/ She satisfies the following conditions which are as follows: 

1. In a financial year if an Individual stay in India for less than 181 days and
2. In a financial year If an Individual stay in India for not more than 60 days
3. If an Individual stay in India which exceed 60 days in a financial year but doesn’t exceed the 365 days or more during the 4 previous financial years.     

What are the steps required to Calculate the Residential Status of an Individual?

• First, we check whether the Individual is falling under the category of exceptions for the basic conditions or not?
• After that, we check that whether they are satisfying the basic condition of 182 days of more or not? if they are satisfying then he will be treated as a resident otherwise he will be non–resident.  

If an Individual is not fulfilling the above condition, then we apply both the condition and if he satisfies any of the basic condition takes then he is said to be a Resident.

Conclusion

Origin, Nationality, place of birth, domicile doesn’t play a vital role in the calculation of Income Tax. If a person who is an Indian citizen can be non- resident and the person who is not a citizen of India and if they are residing in India, and if they are fulfilling the criteria of Resident then as an eye of Income Tax they can be resident of India and they will be taxable in nature. 

A resident will be charged to tax in India on his global income i.e. income earned in India as well as income earned outside India.

While calculating the residential status of an individual we check the physical stay in India and the physical stay of an individual is checked by their physical stay of the previous years. However, the residential status of an individual is change year to year. 

Like a person who can be resident for this year they can’t be resident for the next year if they are not fulfilling the resident criteria. That’s why once a taxpayer can’t be a taxpayer for next year.

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