How to determine the residential status of an individual and some Important untouched points for Non-residents

Income tax provisions for the non-resident are not straightforward. There are many provisions which in itself are difficult to understand. To understand the provision applicable to non-residents it is important to first determine the residential status. The residential status is divided into 3 categories-

  1. Non-Resident (NR)
  2. Resident and Ordinarily Resident (ROR)
  3. Resident but not Ordinarily Resident (RNOR)

The question arises that why we determine the residential status of any person. The applicability of income tax provisions is different for residents and non-residents. In order to determine the taxability of any person, we first need to understand how residential status is determined.

Two alternative tests for the individual are provided under section 6 of the income tax act. The residential status is determined based on the person staying in India. Stay for a one day or more will make a difference and change the residential status of an individual, hence High net worth individuals (HNI/HNWI) often plan to stay in India in a way that gives them non-residential status in India.

Who is non-resident in India

As per the section 6 of the income tax act an individual who satisfies none of the following two conditions will be treated as non-resident:

  1. He is in India in the previous year for a period of 182 days or more
  2. He is in India for a period of 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year

When an individual is deemed to be a resident but no ordinary resident

Exceptions have been provided under section 6(1A) and section 6(6)(c) that an individual shall be deemed to be resident but non-ordinary resident in India, if he satisfies all the following conditions-

a) Exception of Section 6(1A)

  1. He is an Indian citizen,
  2. His total income from India is more than Rs.15,00,000 during the previous year,
  3. He is not liable to tax in any other country or territory by reason of his domicile or residence,
  4. He is not resident in India within the parameters of section 6(1)

b) Exception of Section 6(6)(c)

  1. He is a citizen of India, or a person of Indian origin,
  2. His total income, other than the income from foreign sources, exceeding Rs. 15,00,000 during the previous year,
  3. He has been in India for a period or periods amounting in all to 120 days or more but less than 182 and 365 days during 4 years immediately preceding the relevant previous year.

Our Observations on the above exceptions:

  • It is important to note that foreign income shall not be included in calculating Rs.15,00,000.
  • Income deemed to accrue or arise in India shall also be added in Rs.15,00,000
  • Income which does not become part of total income is not to be clubbed with total income such as exempted income, even if it is earned in India.

Important concluding Points:

  • Section 6 emphasises the physical presence of a person in India. A rich person wandering hotel to hotel and never staying more than two nights in the same place or staying on a yacht moored in the territorial water of India would be staying in India.
  • India means the geographical territories and the territories water of India. Therefore, the days for which any individual staying on an Indian ship abroad are not to be taken into account (CIT vs Avtar Singh 247 ITR 260)
  • A man might well be compelled to reside here completely against his will, however, if a person was compelled to stay in India because his passport was impounded, the period for which the passport was impounded has to be excluded (CIT vs Suresh Nanda 375 ITR 172)
  • Deeming provision has been introduced in the finance act 2020 in order to check the tax evasion method adopted by the state less individuals. Now an Indian citizen having an income of more than Rs.15 lakhs and not liable to tax in any country will be deemed to be resident in India.
  • It is important to read the provision of section 6 with tax treaties (DTAA) signed with other countries. Taking the DTAA and Income tax act together will give you a path to understand the correct methodology or practice to be adopted

About the author: Nitin Bhatia is a qualified chartered accountant practising in Delhi/NCR. He is the best CA in Gurgaon. During his professional journey, he has gained advanced experience in International Taxation, Transfer Pricing, Expatriate Taxation, Corporate Taxation, Domestic Taxation and litigation matters. International Taxation and Domestic taxation are his study topic and he is deeply involved and updated with the recent judicial pronouncements. It helps him to give efficient and legitimate tax planning to his clients.

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