Residential Status: Individuals

Introduction-

Section 5 and 6 of the Income Tax Act, 1961 are the key sections that determine whether the income of a taxpayer in India is taxable. Section 5 defines the scope of income, while Section 6 determines the residential status of a taxpayer. The residential status of a taxpayer is important because it determines whether their income is taxable in India.

In this article, we will discuss the rules for determining the residential status of an individual taxpayer. We will also discuss the amendments to the residential status rules made by the Finance Acts of 2021 and 2022.

Determining the residential status of an assessee is the first step in determining their taxable income in India. The Income Tax Act of 1961 (ITA 1961) classifies residential status into two categories: resident and non-resident.

Individual assessees can be further classified as resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR). Other persons are only classified as resident or non-resident.

Conditions for determining residential status-

If an individual assessee fulfils any of the following conditions he shall be considered as a resident in India-

For that year, his period of stay in India is182 days or more (say ‘C1’) or For that year, his period of stay in India is 60 days or more and in the 4 previous years prior to the relevant previous year his period of stay in India is 365 days or more (say ‘C2’).

An individual is considered resident in India if they meet either C1 or C2. C1 is a simple test: if an individual has stayed in India for more than 182 days in the previous year, they are considered resident. If they have not stayed in India for more than 182 days, they must meet C2.

C2 has two parts. First, the individual must have stayed in India for at least 60 days in the previous year. Second, they must have stayed in India for at least 365 days in the four previous years. If both of these conditions are met, the individual is considered resident.

If an individual does not meet either C1 or C2, they are considered non-resident.

However, the condition C2 one shall not apply in the following cases-

• Citizen of India, who leaves India in a previous year as a member of crew of an Indian Ship, or

• Citizen of India or person of Indian origin, who is engaged in any employment or Business or profession outside India, and is visiting India during the previous year.

• Citizen of India leaving India for the purposes of employment outside India, (However, after the amendment made by the Finance Act, 2020; in case of an individual whose Total Income exceeds 15 Lakh Rupees, 120 days shall be considered instead of 182 days.)

Further, Finance Act, 2020 has also provided that where an individual who is a citizen of India who is not liable to tax in any other country will be deemed to be a resident in India. The condition for deemed residential status applies only if the total income (other than foreign sources) exceeds Rs 15 lakh and nil tax liability in other countries or territories by reason of his domicile or residence or any other criteria of similar nature. Such a provision has been inserted as it was noticed that certain individuals were using the above relaxation as tax avoidance measure and planning visit and stay in India so that they do not meet the threshold of 182 days.

Rational behind doing so is as under-

Sub-section (1) of section 6 of the Act provide for situations in which an individual shall be resident in India in a previous year. Clause (c) thereof provides that the individual shall be Indian resident in a year, if he,-

(i) has been in India for an overall period of 365 days or more within four years preceding that year, and

(ii) is in India for an overall period of 60 days or more in that year.

Clause (b) of Explanation 1 of said sub-section provides that an Indian citizen or a person of Indian origin shall be Indian resident if he is in India for 182 days instead of 60 days in that year. This provision provides relaxation to an Indian citizen or a person of Indian origin allowing them to visit India for longer duration without becoming resident of India.

Instances have come to notice where period of 182 days specified in respect of an Indian citizen or person of Indian origin visiting India during the year, is being misused. Individuals, who are actually carrying out substantial economic activities from

India, manage their period of stay in India, so as to remain a non-resident in perpetuity and not be required to declare their global income in India.

Sub-section (6) of the said section provides for situations in which a person shall be “not ordinarily resident” in a previous year. Clause (a) thereof provides that if the person is an individual who has been non-resident in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for an overall period of 729 days or less. Clause (b) thereof contains similar provision for the HUF.

This category of persons has been carved out essentially to ensure that a non-resident is not suddenly faced with the compliance requirement of a resident, merely because he spends more than specified number of days in India during a particular year. The conditions specified in the present law in respect of this carve out have been the subject matter of disputes, amendments and further disputes. Further, due to reduction in number of days, as proposed, for visiting Indian citizen or person of Indian origin, there would be need for relaxation in the conditions.

The issue of stateless persons has been bothering the tax world for quite some time. It is entirely possible for an individual to arrange his affairs in such a fashion that he is not liable to tax in any country or jurisdiction during a year. This arrangement is typically employed by high net worth individuals (HNWI) to avoid paying taxes to any country/ jurisdiction on income they earn. Tax laws should not encourage a situation where a person is not liable to tax in any country. The current rules governing tax residence make it possible for HNWIs and other individuals, who may be Indian citizen to not to be liable for tax anywherein the world. Such a circumstance is certainly not desirable; particularly in the light of current development in the global tax environment where avenues for double non-taxation are being systematically closed.

In the light of above, it is proposed that-

(i) the exception provided in clause (b) of Explanation 1 of sub-section (1) to section 6 for visiting India in that year be decreased to 120 days from existing 182 days.

(ii) an individual or an HUF shall be said to be “not ordinarily resident” in India in a previous year, if the individual or the manager of the HUF has been a non-resident in India in seven out of ten previous years preceding that year. This new condition to replace the existing conditions in clauses (a) and (b) of sub-section (6) of section 6.

(iii) an Indian citizen who is not liable to tax in any other country or territory shall be deemed to be resident in India.

Condition for being R-OR or R-NOR-

After a person is classified is resident, we need to further test as to whether such person is regarded ordinarily resident in India (ROR) or not ordinarily resident in India (NOR).

For a person to be regarded as RNOR, following additional conditions are required to be complied with, which are as stated below:

• If he was a non-resident in India in 9 out of 10 previous years, prior to the relevant previous year (say C3) or

• Has not during 7 previous years preceding relevant previous year stays in India for 729 days or more (say C4)

If the individual satisfies any of the conditions C3 or C4, then he is said to be ‘not ordinary resident’ for that previous year, otherwise, he will be regarded as ordinarily resident

TAXABILITY OF INCOME AS PER RESIDENTIAL STATUS:

Conditions Stated above needs to be checked every year to determine residential status of a person.