Residential status and income tax – individual

Individual Tax Payers are either “resident in India” or “non resident in India”.But a resident Individual can be either

(i) resident and ordinarily resident in India or
(ii) resident but not ordinarily resident in India.

Resident Status

First find out if the Individual is a resident or a non resident in India.

In case such Individual is resident in India, then we will find out whether he is

(i) “ordinarily resident inIndia” or
(ii) “not ordinarily resident of India”.

An Individual is a resident in India in case

(a) “he is in India in the previous year for a period of 182 days or more” or
(b) “he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year”.

Note: Condition (b) above is not taken into consideration in two cases given below and in these two cases, residential status of an Individual shall be determined only on the condition (a) above.

Case1 - This covers an Indian Citizen who leavesIndia during the previous year for the purpose of employment outsideIndia or an Indian citizen who leavesIndia during the previous year as a member of the crew of an Indian ship. For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or outside India)

Case 2 - This covers an Indian Citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he or either of his parents or any of his grand parents (grand parents include both maternal and paternal grand parents), was born in undividedIndia.

A resident Individual is treated as “resident and ordinarily resident in India” if he satisfies additional two conditions namely -

(i) he has been resident inIndiain at least 2 out of 10 previous years immediately preceding the relevant previous year.
(ii) he has been in India for a period of 730 days or more  during 7 years immediately preceding the relevant previous year.

An individual who satisfies at least one of the basic conditions [conditions (a) or (b) given above] but does not satisfy the two additional conditions [conditions (i) and (ii) above], is treated as a resident but not ordinarily resident in India.

An Individual is a non-resident in India if he satisfies none of the basic conditions (a) or (b) above. In the case of non-resident, additional conditions (i) and (ii) above are not relevant.

Relationship between residential status and Incidence of Tax

Incidence of tax on a tax payer depends on his resident status and also on the place and time of accrual or receipt of income.

It is important to know the meaning of “Indian Income” and foreign income” to understand the relationship between residential status and tax liability.

Indian income

It includes following:

  1. If income is received (or deemed to be received) inIndiaduring the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) inIndiaduring the previous year.
  2. If Income is received (or deemed to received) inIndiaduring the previous year but it accrues (or arises) outsideIndiaduring the previous year.
  3. If income is received outsideIndiaduring the previous year but it accrues or arises or is deemed to accrue or arise) inIndiaduring the previous year.

Foreign Income

If the following two conditions are satisfied, then such income is “foreign Income”

  1. Income is not received (or not deemed to be received) inIndiaand
  2. Income does not accrue or arise (or does not deemed to accrue or arise) in India.

Incidence of Tax

Indian income

(i)   For resident and ordinarily resident in India Individuals        - Taxable in India
(ii)  For resident but nor ordinarily resident in India Individuals   - Taxable in India
(iii) For non-resident Indians Individuals               … …              .  - Taxable in India

Foreign Income

(i)  For resident and ordinarily resident in India Individuals        - Taxable in India
(ii) For Individuals resident but not ordinarily resident in India – only two types of foreign incomes (case 1 and case 2 given below) are taxable in India.
Case 1- If it is business income and business is controlled wholly or partly from India.
Case 2- If it is income from profession which is set up in India.
No other foreign income (like salary, rent, interest, etc.) is taxable in India in the hands of a resident but not ordinarily resident Individuals
(iii) For non-resident Indians Individuals                                  .Not taxable in India