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Residential Status -Individual

Bavitha
Feb 163 min read

Updated: Feb 21

1.Key Points of Importance

  • Definition: It evaluates an individual's tax responsibilities based on their duration of stay in India within a financial year.

  • Distinct from Citizenship: An individual may hold Indian citizenship yet be classified as a non-resident for tax purposes in a given year.

  • Categories:

    • Resident: Liable for tax on global income.

    • Non-resident: Taxed solely on income derived within India.

  • Varies by Entity: The criteria for determining residential status vary for individuals, firms, companies, etc.

  • Tax Liability: Residents are taxed on worldwide income, whereas non-residents are taxed only on income sourced from India.

  • Eligibility for Benefits: Residential status affects eligibility for tax deductions and exemptions.

  • Avoidance of Double Taxation: It influences the application of Double Taxation Avoidance Agreements (DTAA).

  • Filing Requirements: Affects the necessity and method of filing tax returns.

  • Tax Planning: Aids individuals and businesses in effective tax planning.

2. How to Determine Residential Status for Income Tax in India

In India, taxpayers are categorized into three groups based on their residential status for tax purposes:

  1. Resident and Ordinarily Resident (ROR)

  2. Resident but Not Ordinarily Resident (RNOR)

  3. Non-Resident (NR)


Each classification affects the individual's tax obligations. The following outlines how to determine residential status:

Resident:

An individual is considered a Resident if they meet one of the following conditions:

  1. Stay of 182 days or more in India during the previous year.

  2. Stay of 365 days or more in India during the preceding 4 years and at least 60 days in the relevant year.

Exceptions:

  • Indian Citizens on Indian Ships/Employment: Considered a resident if staying in India for 182 days or more.

  • Indian Citizens or Persons of Indian Origin (PIO) residing abroad: If they visit India and earn over Rs. 15 lakhs (excluding foreign income), they will be regarded as a resident if:

    • Stay in India for 182 days or more, or

    • Stayed in India for 365 days in the last 4 years and 120 days in the relevant year.

Additionally, if an Indian citizen with income exceeding Rs. 15 lakh has no tax liability in other countries, they will be considered a "deemed resident."

Resident but Not Ordinarily Resident (RNOR):

  • ROR Conditions: A resident is classified as an ROR if they fulfill both these conditions:

    1. Resident in at least 2 out of the last 10 years, and

    2. Stayed in India for at least 730 days in the last 7 years.

  • If either condition is unmet, they are RNOR. Additional RNOR scenarios include:

    • Indian citizens/PIOs with income exceeding Rs. 15 lakhs (excluding foreign income), staying 120 to 182 days in India in the year.

    • A deemed resident (with income exceeding Rs. 15 lakh, no foreign tax liability) will be classified as RNOR.

Non-Resident (NR):

An individual is a Non-Resident if they fail to meet both conditions for residency:

  1. Stay less than 182 days in India during the previous year.

  2. Stay less than 60 days in the current year and 365 days in the previous 4 years.

Key Points to Remember:

  • Stay in India includes time spent in India's territorial waters (12 nautical miles).

  • Stay need not be continuous.

  • Dates of arrival and departure are considered when calculating days of stay.

  • Citizenship, birthplace, or domicile do not affect residential status.


3. Taxability Based on Residential Status in India

1. Resident and Ordinarily Resident (ROR):

  • Subject to taxation on global income, encompassing both Indian and foreign earnings.

  • Includes income generated within India and abroad.

2. Resident but Not Ordinarily Resident (RNOR):

  • Taxed on income generated within India.

  • Exempt from taxation on:

    • Income earned outside India and received outside India.

    • Foreign income, unless it originates from an Indian business or profession.

3. Non-Resident (NR):

  • Taxed solely on:

    • Income received in India (e.g., interest on Indian bank deposits).

    • Income sourced from India (e.g., payments from an Indian company for services rendered abroad).

  • Exempt from taxation on income earned abroad with no connection to India.

Examples:

  • Received in India: Interest on fixed deposits held in Indian banks (Income generated in India).

  • Received from India: Payment by an Indian company to a foreign bank account for services provided (Income accrued from India).

 
 
 

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