RESIDENTIAL STATUS UNDER

INCOME-TAX ACT, 1961

RESIDENTIAL STATUS

Tax implication for an assessee depends on his residential status as per Indian Income-
tax Act, 1961. In the case of Indian citizen, whether an income accrued to such a person
outside India, is taxable in India depends upon the residential status of the person in
India. Similarly, whether an income earned by a foreign national in India (or outside
India) is taxable in India depends on the residential status of the individual, rather than
on his citizenship. Therefore, determining correctly the residential status of a person is
very significant in order to find out a person’s tax liability.

Tests of Residence under the Act

NON-RESIDENT STATUS UNDER THE INCOME TAX/

WEALTH TAX ACTS

The term non-resident is negatively defined under section 2(30) of the Income-tax Act.
An individual who is not a resident under the Income-tax Act is a non-resident
(generally, termed NRI). For the purpose of section 92, 93 and 168, even not ordinarily
resident is also considered as NRI.

Test of Residency for Individual

The status of a person as a resident or non-resident depends on his period of stay in

India. The period of stay is counted in number of days for each financial year beginning
from 1st April to 31st March (known as previous year under the Income-tax Act). The
definition is explained in simple terms as under.

If an individual who satisfies any one of the understated conditions of section 6 of the
Income-tax Act, then he becomes a Resident.
 Condition Status

 If yes, then he is
1 He is in India for 182 days or more during the resident (If not, check
. relevant previous year the next condition)

 If yes, then he is
2 He is in India for 60 days or more during the resident
. previous year and he is in India for 365 days or
more during the 4 years prior to the previous year

The above provisions are applicable to all individuals irrespective of their nationality.

However, as a special concession for Indian citizens and Person of Indian Origin, the
period of 60 days referred to in condition 2 above, is extended to 182 days in two
cases:
(i) where an Indian citizen leaves India in any year as a member of crew of an Indian
ship or for the purpose of employment outside India; and (ii) where an Indian citizen or
a Person of Indian Origin, who is outside India, comes on a visit to India.

Further for an Indian citizen, being a member of a crew of a foreign bound ship leaving
India, the period beginning from the date of joining the ship till the date of sign off from
the ship, as entered into the continuous discharge certificate, shall not be included while
calculating period of stay in India.

If an Individual is not satisfying any of the above conditions to become resident, then he
will be non-resident.

RESIDENT BUT NOT ORDINARILY RESIDENT (RNOR)

An Individual, who is resident in a given year and who satisfies one of the following
conditions, is given a special status of RESIDENT BUT NOT ORDINARILY RESIDENT
(RNOR) else he will be Resident and Ordinarily Resident in India.

Condition Status

He is not a resident, as per the above provisions,

1  If yes, he is RNOR
for at least 9 out of 10 previous years prior to
.
previous year under consideration

 If yes, he is RNOR
2 His stay in India during the 7 previous years prior
 to the previous year under consideration should
.
not be 730 days or more

For HUF, the above test is to be applied on manager.

Test of Residency for Others

HUF, Firm and AOP is always considered as resident, except where during the year the
control and management of its affairs is situated wholly outside India.

Company is resident if (i) it is an Indian Company or (ii) its place of effective

management in that year is in India.

Place of Effective Management (POEM) is the country where key management and
commercial decisions that are necessary for the conduct of the business of an entity as a
whole are in substance made.

Guiding Principles for POEM

 In case of a company engaged in active business outside India, POEM presumed

to be outside India if majority of the meetings of the Board of Directors are held
outside India. However, the powers of management are effectively exercised by
any person resident in India then POEM shall be considered to be in India.

 The determine POEM in the case of other company (i.e., the company other than
those engaged in active business outside India) is two stage process. First,
identify/ascertain the person(s) who actually makes the key management and
commercial decisions for conduct of the company’s business as a whole and
second determine the place where these decisions are in fact being made.

CBDT through press release dated 24th January 2017 has clarified that the intention is
to target shell companies and companies which are created for retaining income outside
India although real control and management of affairs is located in India. Intention is not
to cover foreign companies or to tax their global income merely on the ground of
presence of PE or business connection in India.

Some of the other relevant points

 Residential status is always determined for the previous year (period of 12

months from 1st April to 31st March)

 If a person is resident in India in a previous year in respect of any source of

income, he shall be deemed to be resident in India in the previous year relevant
to the Assessment Year in respect of each of his other sources of Income [Section
6(5)].
  To calculate the number of days stay in India, both the day of Arrival into India
and the day of departure from India are counted as the days of stay in India.

 Dates stamped on Passport are normally considered as proof of dates of

departure from and arrival in India.

 Presence in territorial waters in India would also be regarded as stay in India.

 It is not necessary that the stay should be for a continuous period or at one
place.

 A person is said to be of Indian Origin if he or either of his parents or any of his

grandparents was born in undivided India [Section 115C].

 Official tours abroad in connection with employment in India shall not be

regarded as employment outside India.

 A person may be resident of more than one country for any previous year.

 Citizenship of a country and residential status of that country are two separate
concepts. A person may be an Indian national/Citizen but may not be a resident
in India and vice versa.

 A Company can have more than one place of management, but it can have only
one place of effective management. POEM is required to be determined on year to
year basis.

 If the key decisions by the Directors are in fact being made at a place other than
place where a formal board meetings are held, then such other place would be
relevant for POEM.

 The place where the management decisions are taken is more important than the
place where such decisions are implemented.

 The day-to-day routine operational decisions undertaken by junior or middle

management shall not be relevant for determining POEM.

 For the purpose of determining POEM, a company is considered to be engaged in

“active business outside India” if the passive income is not more than 50% of
total income and

1. less than 50% of its total assets are situated in India; and

2. less than 50% of total number of employees are situated in India or are resident
in India; and

3. the payroll expenses incurred on such employees are less than 50% of the total
payroll expenditure.

IMPLICATIONS OF RESIDENTIAL STATUS

The incidence of tax depends upon a person’s Residential Status and also upon the place
and time of accrual and receipt of income.

The charge of income tax with regard to the three categories of taxpayers can be
summarised as follows:

Sources of Income R & OR R & NOR NR

Indian Income

Income received or deemed to be received in Taxable Taxable in Taxable in

India during the current financial year in India India India

Income accruing or arising or deemed to accrue Taxable Taxable in Taxable in

or arise in India during the current financial year in India India India

Income accruing or arising or deemed to accrue

Taxable Taxable in Taxable in
or arise outside India, but first receipt is in India
in India India India
during the current financial year

Foreign Income

Income accruing or arising or deemed to accrue Not Not

Taxable
or arise outside India and received outside India, Taxable in Taxable in
in India
during the current financial year India India

Income accruing or arising outside India from a Not

Taxable Taxable in
Business/ profession controlled in/from India Taxable in
in India India
during the current financial year India

In the above context, it may be noted that the ‘receipt’ of income refers to the first
occasion when the recipient gets the money under his own control and it is the first
receipt that determines the year and place of receipt for the purposes of taxation. If the
income is already received outside India, no tax liability will arise when the whole or any
part of such income is remitted to India.
 1. Taxpayers in all categories are chargeable on income, from whatever source
derived, which is received or is deemed to be received in India by or on behalf of
them or which accrues or arises or is deemed to accrue or arise to them in India
other than income specified as exempt income.

2. A “resident and ordinarily resident” pays tax in India on his entire world income,
wherever accrued or received.

3. A “non-resident” pays tax only on his taxable Indian income and his foreign
income (earned and received outside India) is totally exempt from Indian taxes.

4. A “not-ordinarily resident” pays tax on taxable Indian income and on foreign

income derived from a business controlled in or a profession set up in India.

TEST OF RESIDENCY UNDER THE TAX TREATY

To avail the benefit of the provisions of tax treaty, a person should be resident of one or
both the contracting States. To prove that a non-resident or a foreign company is tax
resident of a country with whom India has signed a tax treaty, they need to obtain a tax
residency certificate (TRC) from their tax authorities. Finance Act, 2013 has done away
with the requirement of obtaining TRC in the prescribed format. Hence, TRC obtained in
any format is acceptable. However, now along with TRC, a non-resident is required to
furnish certain information under self-declaration in the prescribed form, i.e. Form No.
10F.