The income-tax liability of an assessee is calculated on the basis of his “Total Income”. What is to be included in the total income (Scope of total income) of an assessee is greatly influenced by his residential status in India. The scope of total income and residential status is mentioned in sections 5 & 6 of the income tax act 1961. Finding or fixing the residential status of a person is the first step in Income tax consulting. The definition of a Person as per the Income tax act is an inclusive definition (Individual, Hindu Undivided Family (HUF), Firm & LLP, AOP & BOI, Local Authority, Artificial Juridical person). Among these ‘Persons’ fixing of the residential status of an individual has emerged as a complex one, especially after the amendments put forward through the Finance Act 2020.
This article focuses on the residential status of an Individual and explores the options to arrive at a conceptual clarity on the subject which is very ambiguous. The requirement of fixing residential status came to be more important in recent years because of the minute details that are to be declared in the Income-tax return of an individual, hence making mistakes in fixing residential status can cause legal consequences which may have retrospective effects.
The rationale for fixing residential status:
A person who never left India will always be resident and ordinarily resident. In his / her case the global income will be taxable in India subject to a tax credit available through Double Taxation Avoidance Agreement (DTAA). Practically, from the point of view of a consultant, dedicated research and investigation are needed to find out the exact residential status of an individual and the same is very imperative in the following cases:
1) An individual (citizen or otherwise of India) frequently visiting abroad in the relevant previous year or during multiple previous years before the relevant previous year.
2) A foreign national visiting India and going back in a relevant previous year and/ or multiple previous years before the relevant previous years.
In both the above scenarios dedicated analysis of the number of days stayed in India by the Individual is a prerequisite. Passport visa stamping can be used to find the number of days stayed outside India.
The difference in the definition of the residential status of an Individual as per FEMA Act 1999 and the Income Tax Act 1961 as amended by the Finance Act of every year are as follows:
As per Section 2(V) of FEMA Act 1999 the purpose of staying in India or outside India is considered a major factor to determine the residential status of Individuals in comparison to the number of days stay in India or outside India as per Income tax Act 1961.
Section 2(v of FEMA act 1999 read as follows:
“Person resident in India” means—
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either case—
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
There is a misconception among individuals employed abroad or doing business abroad, due to the FEMA definition communicated to them through various facilitating intermediaries including Banks that, staying for more than 6 months abroad will make them Non- resident Indians for the purpose of income tax compliance. This casual understanding is fundamentally wrong and may create complex problems when the residential status as per the Income tax act is applied in the context. So having a perfect understanding of what constitutes residential status as per the income tax Act is of utmost importance.
Four factors are to be considered while arriving at residential status.
Whether the person has stayed in India for a period of more than 182 days
Whether the person has stayed in India for a minimum period exceeding 60 and below 182 days in the relevant previous year and stayed in India for 365 days for 4 years preceding the relevant previous year subject to four statutory exceptions.
Whether an Indian citizen or person of Indian origin having Indian Income exceeding Rs.15 Lakhs came to visit India for a period exceeding 120 days and not exceeding 181 days
Whether a person is a deemed resident (an Indian citizen having Indian income exceeding Rs.15 lakhs and not liable to pay tax in any foreign jurisdiction irrespective of the number of days stay in India)
As per the Income Tax Act 1961, the residential status of an Individual is categorized into the following categories
An individual is treated as a resident in India if he stays in India for:
a) 182 days or more during the relevant previous year; or
b) 60 days or more (but less than 182 days) during the relevant previous year and for 365 days or more in the 4 years preceding the previous year.
Condition (b) is not applicable in the case of an Indian citizen or a person of Indian Origin in the following circumstances.
Exception 1: 60 days' to be replaced with '182 days
Condition (b) is substituted with the condition of stay in India for 182 days during the relevant previous year and for 365 days or more in 4 years preceding the previous year if the individual falls in any of the following categories:
Indian citizen, being outside India, who comes on a visit to India during the previous year and his Indian income is up to Rs. 15 lakhs;
Person of Indian Origin, being outside India, who comes on a visit to India during the previous year and his Indian income is up to Rs. 15 lakhs:
An Indian citizen who leaves India during the previous year for the purpose of employment; or
An Indian citizen who leaves India during the previous year as a member of the crew of an Indian Ship.
Exception 2: 60 days to be replaced with 120 days.
Condition (b) is substituted with the condition of stay in India for 120 days during the relevant previous year and for 365 days or more in 4 years preceding the previous year if the following conditions are satisfied:
a) The individual is an Indian Citizen or a Person of Indian Origin:
b) He comes on a visit to India; and
c) His Indian income during the previous year exceeds Rs. 15 lakhs.
The individual, in this situation, is deemed as 'Not Ordinarily Resident in India'
An individual will be treated as a Resident but Not Ordinarily Resident (NOR) in India if he satisfies any one condition specified below:
He has been a non-resident in India for at least 9 out of 10 years immediately preceding the relevant previous year; or
He has been in India for 729 days or less during the period of 7 immediately preceding the previous year.
If he does not satisfy any of the abovementioned conditions, he is treated as Ordinarily Resident (ROR) in India.
Who is a deemed resident?
A new category of deemed resident has been introduced in clause (1A) of Section 6 with effect from Assessment Year 2021-22. As per Section 6(1A), an Indian citizen who is not a resident under Section 6(1), shall be deemed to be resident in India irrespective of his stay in India if his total income, excluding income from foreign sources (hereinafter referred to as 'Indian Income'] exceeds Rs.15 lakhs during the previous year and he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Here, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India) and which is not deemed to accrue or arise in India. A deemed resident is always treated as a Not-Ordinarily Resident.
While determining the residential status on account of stay in India for 120 days to 181 days the major factor to be noted is that either the individual must be an Indian citizen or a person of Indian origin, who visits India and the Indian income must exceed 15 Lakhs. On the other hand, while determining the deemed residency the factors like Person of Indian origin, and visit to India are not considered at all. Further deemed residency looks into whether the Individual is an Indian Citizen and has an Indian Income of Rs 15 Lakhs but is not liable to pay tax in any foreign jurisdiction.
Many Individuals including those who work abroad consider filing Income tax returns as a means to get a refund of tax deducted on various incomes by banks and financial institutions. Those working abroad are disappointed when tax is deducted from their Non-Resident Ordinary (NRO) account and they express their disappointment to the bank and the bank consoles them mentioning casually that the tax deducted will be refunded if he/she files an income tax return. This kind of guidance has created a mindset in many Individuals that filing of Income tax return is to get a refund. A paradigm shift in this matter is very much essential in that filing of Income tax returns is more related to legal compliance when a person’s tax scenario so emerges.
From the company law compliance perspective irrespective of private company or public company, the management includes individuals holding the position of Directorship, KMPS and membership thus they may have different configurational scenarios in relation to their residential status. Thorough knowledge about the residential status and its impact will be an added advantage for a professional in guiding the above-mentioned stakeholders relating to Income Tax and FEMA compliance.
The author is CS final exam qualified and undergoing mandatory training program.