Residential status

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Overview
The incidence of tax on an assessee depends upon
- nature of income (revenue or capital)
- place of its accrual or receipt
- assessees residential status

Assessees are either
- resident or
- non-resident
in India.

Resident individuals and Hindu undivided families may be
- resident and ordinarily resident or
- resident but not ordinarily resident

Residential status has to be determined for each previous year. Residential status can
change from year to year.
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Residential status of an individual Sec. 6

An individual may be
- resident and ordinarily resident
- resident but not ordinarily resident
- non-resident

Resident and ordinarily resident [Sec. 6(1), 6(6)(a)]

Step 1 Determine whether individual is resident in India.

Step 2 - If individual is resident in India, determine whether he is ordinarily resident
in India.
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Basic tests to determine whether an individual
is resident in India
Section 6(1)
An individual is said to be resident in India in any previous year, if he satisfies atleast
one of the following basic conditions

(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 the four years immediately preceding the previous year.

Note :
1. Residential status is always determined for the Previous Year (period of 12 months
from 1st April to 31st March).

2. Stay in India includes stay in the territorial waters of India (12 nautical miles into
the sea from the Indian coastline.



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Basic tests to determine whether an
individual is resident in India

3. Period of stay need not be continuous.

4. Stay need not be at the usual place of residence, business or employment of the
individual.

5. For counting the number of days of stay in India, both the date of arrival and the
date of departure are to be included.

6. Dates stamped on Passport are normally considered as proof of dates of departure
from and arrival in India.

7. Official tours abroad in connection with employment in India shall not be regarded
as employment outside India.





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Basic tests to determine whether an
individual is resident in India


8. A person may be resident of more than one country for any Previous Year.

9. The residence of an individual for income tax purpose has nothing to do with
citizenship or place of birth. An individual can, therefore, be resident in more than
one country.

10. 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.


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Basic tests to determine whether an
individual is resident in India

Exceptions

A. Explanation (a) to Section 6(1)
The period of 60 days in (b) has been extended as follows :


Who can take the benefit of extended period Extended
period
An Indian citizen
- who leaves India
- during the previous year
for the purpose of employment outside India or
as a member of the crew of an Indian ship
182 days
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Basic tests to determine whether an
individual is resident in India


B. Explanation (b) to Section 6(1)

The period of 60 days in (b) has been extended as follows :





A person is deemed to be of Indian origin if
- he or
- either of his parents or
- any of his grand parents
was born in undivided India






Who can take the benefit of extended period Extended
period
An Indian citizen or a person of Indian origin
- who comes on a visit to India
182 days
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Additional tests to determine whether a
resident is ordinarily resident in India
Section 6(6)

A resident individual is treated as resident and ordinarily resident in India if he
satisfies the following 2 additional conditions

i. He has been resident in India in atleast 2 out of 10 previous years immediately
preceding the relevant previous year

AND

i. He has been in India for a period of 730 days or more in the 7 years immediately
preceding the relevant previous year.


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Resident but not ordinarily resident &
Non-resident
Resident but not ordinarily resident

An individual
- who satisfies one or more of the basic conditions laid down in Section 6(1)
- but does not satisfy the 2 additional conditions laid down in Section 6(6)
is treated as resident but not ordinarily resident in India

Non-resident

An individual
- who does not satisfy any of the basic conditions laid down in Section 6(1)
is treated as non-resident.
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Residential status of a Hindu undivided family
Section 6(2)
A Hindu undivided family (HUF) is said to be resident in India if the control and
management of its affairs are wholly or partly situated in India.

If the HUF is resident, the status of the karta determines whether the HUF is
resident and ordinarily resident or resident but not ordinarily resident.

A resident HUF is ordinarily resident in India if -
- the karta or manager of the family (including successive kartas) is
i. resident in India in atleast 2 out of 10 previous years immediately
preceding the relevant previous year
AND
ii. he has been in India for a period of 730 days or more in the 7 years
immediately preceding the relevant previous year.

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Residential status of a Hindu undivided family

If the karta / manager of a resident HUF does not fulfill any one or both the above
conditions, the HUF will be regarded as resident but not ordinarily resident in India.

An HUF will be non-resident in India if its control and management is situated wholly
outside India.


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Residential status of a company

Section 6(3)

An Indian company is always resident in India.

A foreign company is resident in India if the control and management of its affairs are
wholly situated in India during the relevant previous year.

However, a foreign company will be non-resident in India if its control and
management is situated wholly or partly outside India.

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Residential status of a firm or an association of
persons

Section 6(4)

A partnership firm or an association of persons is said to be resident in India if the
control and management of its affairs are wholly or partly situated in India during the
relevant previous year.

However, a partnership firm or an association of persons will be non-resident in India
if its control and management is situated wholly outside India.





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Residential status of local authorities and
artificial juridical persons
Section 6(4)

Local authorities and artificial juridical persons will be treated as resident in India if
the control and management of its affairs is situated wholly or partly in India.

Where the control and management of its affairs is situated wholly outside India, they
would become non-residents.

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Control and management

The term control and management refers to the head and brain which
directs the affairs and management of the company.

Usually control and management of a companys affairs is situated at the place
where the meetings of its board of directors are held.

Control and management refers to the central control and management and not to
the carrying on of day-to-day business by servants, employees or agents.

The place of control and management may be different from the usual place of
running the business or even from the registered office of the assessee.

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Incidence of tax
Section 5

Incidence of tax of a taxpayer depends on
- his residential status
- place of accrual or receipt of income
- time of accrual or receipt of income

Incidence of tax in the case of resident and ordinarily resident Section 5(1)

a. Income which is received or deemed to be received in India in the previous year by
him or on his behalf
b. Income which accrues or arises or is deemed to accrue or arise to him in India
during the previous year and
c. Income which accrues or arises to him outside India during the previous year.
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Incidence of tax

Incidence of tax in the case of resident but not ordinarily resident Section 5(1)

Same as in the case of resident and ordinarily resident except that income accruing or
arising to him outside India is NOT to be included in his total income.

However, where such income is derived from a business controlled from or a
profession set up in India, then it must be included in his total income even though it
accrues or arises outside India.

Incidence of tax in the case of a non-resident Section 5(2)

a. Income which is received or deemed to be received in India in the previous year by
him or on his behalf and
b. Income which accrues or arises or is deemed to accrue or arise to him in India
during the previous year.


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


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Sources of Income R & OR R & NOR NR
Indian Income
Income received or deemed to be
received in India during the
current financial year
Taxable in India Taxable in India Taxable in India
Income accruing or arising or
deemed to accrue or arise in India
during the current financial year
Taxable in India Taxable in India Taxable in India
Income accruing or arising or
deemed to accrue or arise outside
India, but first receipt is in India
during the current financial year
Taxable in India Taxable in India Taxable in India
Incidence of tax


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Sources of Income R & OR R & NOR NR
Foreign Income
Income accruing or arising or
deemed to accrue or arise outside
India and received outside India,
during the current financial year
Taxable in India Not Taxable in
India
Not Taxable in
India
Income accruing or arising
outside India from a Business/
profession controlled in/from
India during the current financial
year
Taxable in India Taxable in India Not Taxable in
India
Income accruing or arising outside
India from any source other than
Business / Profession controlled
from India
Taxable in India Not Taxable in
India
Not Taxable in
India
Incidence of tax
In the above context, 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.
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.
A "resident and ordinarily resident" pays tax in India on his entire world income,
wherever accrued or received.
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.
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.

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Deemed receipt and accrual of income in India
Taxability of a certain item as income would depend upon the method of accounting
followed by the assessee.

Cash system income would be taxable only when received by the assessee
himself or on his behalf.

Mercantile system income would be taxable once the assessee gets the legal
right to claim the amount.

Salaries liability to tax arises immediately when the income is due to the
assessee irrespective of the method of accounting followed.

Dividends u/s 8, income would be included in the total income of the
shareholder in the year in which final dividend is declared and in the case of
interim dividend, in the year in which they are made unconditionally available to
the shareholders.

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Meaning of income received or deemed to be
received
Income received or deemed to be received in India is taxable in India irrespective
of
assessees residential status
place of accrual of income

The receipt of income refers to only the first occasion when the recipient gets the
money under his control.

Once an amount is received as income, remittance or transmission of that amount
from one place or person to another does not constitute receipt of income in the
hands of the subsequent recipient or at the place of subsequent receipt.
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Meaning of income received or deemed to
be received

Income deemed to be received Section 7

The following shall be deemed to be received during the previous year, irrespective of
whether it is actually received or not
(i) The annual accretion to the balance at the credit of an employee participating in
a recognised provident fund, to the extent to which it is chargeable to tax under
rule 6 of Part A of the Fourth Schedule
- employers contribution in excess of 12% of salary
- Interest in excess of 8.5%

(ii) Transferred balance in a recognised provident fund to the extent to which it is
chargeable to tax under sub-rule (4) of rule 11 of Part A of the Fourth Schedule.

(iii) Contribution made by the Central Govt. or any other employer to the account of
an employee under a pension scheme referred to Section 80CCD.
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Meaning of income accruing or arising
Accrue refers to the right to receive income, whereas due refers to the right to
enforce payment of the same.
Example : Salary for work done in a month will accrue throughout the month, day to
day, but will become due on the last day of the month or the first day of the next
month.


Explanation 1 to Section 5 : An item of income accruing or arising outside India shall
not be deemed to be received in India merely because it is taken into account in a
balance sheet prepared in India.

Explanation 2 to Section 5 : Once an item of income is included in the assessees total
income and subjected to tax on the basis of its accrual / deemed accrual or receipt, it
cannot again be included in the persons total income and subjected to tax either in
the same or subsequent year on the ground of its receipt whether actual or
deemed.
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Income deemed to accrue or arise in India
Section 9

Certain incomes deemed to accrue or arise in India even though they may actually
accrue or arise outside India.
Applies to all assessees irrespective of residential status, nationality, domicile and
place of business.

Nature of income deemed to accrue or arise in India

Income from business connection in India
Income from any property, asset or source of income in India
Capital gain on transfer of a capital asset situated in India
Income from salary if service is rendered in India
Income from salary (not being perquisite / allowance) if service is rendered
outside India (provided the employer is Government of India and the employee is
a citizen of India)
Dividend paid by an Indian company
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Income deemed to accrue or arise in India

Nature of
income [Sec.
9(1)(v) / (vi) /
(vii)]
From whom
income is
received
Payers source of income Whether income
deemed to accrue
or arise in India
Interest Government of
India
Any Yes
Interest A person resident
in India
Borrowed capital used by
the payer for carrying on
business / profession
outside India or earning
any income outside India
No
Interest A person resident
in India
Borrowed capital used by
the payer for any other
purpose
Yes
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Income deemed to accrue or arise in India

Nature of
income [Sec.
9(1)(v) / (vi) /
(vii)]
From whom
income is
received
Payers source of income Whether income
deemed to accrue
or arise in India
Interest A person non-
resident in India
Borrowed capital used by
the payer for carrying on
business / profession in
India

Yes
Interest A person non-
resident in India
Borrowed capital used by
the payer for any other
purpose

No
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Income deemed to accrue or arise in India


Nature of
income [Sec.
9(1)(v) / (vi) /
(vii)]
From whom
income is
received
Payers source of income Whether income
deemed to accrue
or arise in India
Royalty / fees
for technical
services
Government of
India
Any Yes
Royalty / fees
for technical
services

A person resident
in India
Payment is relatable to a
business / profession or
any other source carried
on by the payer outside
India
No
Royalty / fees
for technical
services

A person resident
in India
Payment is relatable to any
other source of Income
Yes
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Income deemed to accrue or arise in India




































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Nature of
income [Sec.
9(1)(v) / (vi) /
(vii)]
From whom
income is
received
Payers source of income Whether income
deemed to accrue
or arise in India
Royalty / fees
for technical
services
A person non-
resident in India

Payment is relatable to a
business / profession or
any other source carried
on by the payer in India
Yes
Royalty / fees
for technical
services
A person non-
resident in India

Payment is relatable to any
other source of Income

No

Income deemed to accrue or arise in India


Explanation to Section 9

Income of a non-resident shall be deemed to accrue or arise in India under clause (v)
interest, clause (vi) royalty or clause (vii) fees for technical services of Section 9(1)
and shall be included in his total income, whether or not, -

a. The non-resident has a residence or place of business or business connection in
India or
b. The non-resident has rendered services in India.

In other words, income by way of interest, royalty, fees for technical services from
services utilised in India would be deemed to accrue or arise in India in case of a non-
resident and be included in his total income, whether or not such services were
rendered in India.
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