Residential Status Under the Income Tax Act

1. Resident in India

An individual is considered a resident if they satisfy any one of the following conditions:

Basic Conditions (Section 6)

• Stay in India for 182 days or more during the financial year, OR
• Stay in India for 60 days or more in the financial year and 365 days or more in the four preceding financial years.

Exceptions to 60-day Rule (Relaxation for Indian Citizens & PIOs)

The 60-day condition is extended to 182 days in the following cases: Indian citizens leaving India for employment abroad or as a crew member of an Indian ship. Indian citizens or Persons of Indian Origin (PIOs) visiting India (if total income, excluding foreign income, is ₹15 lakh or less). If total Indian income exceeds ₹15 lakh, the threshold is 120 days instead of 182 days.

2. Resident but Not Ordinarily Resident (RNOR)

If an individual qualifies as a resident, they may further be classified as RNOR if they meet either of the following conditions: Have been a non-resident in India for 9 out of the 10 preceding years, OR Have stayed in India for 729 days or less in the preceding 7 financial years. Additionally, an Indian citizen or PIO with total income above ₹15 lakh will be RNOR if their stay in India is 120-181 days.

3. Non-Resident (NR)

An individual is classified as a non-resident if they do not satisfy any of the basic conditions mentioned above.

A ‘deemed resident’ is an individual who is considered a resident of India under special provisions introduced in the Finance Act, 2020 to prevent tax avoidance by high-net-worth individuals who are not taxed in any other country.

Criteria for Deemed Residency (Section 6(1A))

An individual will be considered a deemed resident if:

• They are an Indian citizen.
• Their total income (excluding foreign income) exceeds ₹15 lakh in the financial year.
• They are not liable to pay tax in any other country due to their domicile, residency, or similar criteria.

The term ‘Not-Ordinarily Resident’ (RNOR) refers to an individual who is classified as a resident in India but does not meet the criteria of being ordinarily resident. This status provides limited tax liability compared to a Resident & Ordinarily Resident (ROR).

Criteria for RNOR Status (Section 6(6))

An individual is classified as RNOR if they satisfy any one of the following conditions:

1. Non-resident in India for 9 out of the 10 preceding financial years, OR
2. Stayed in India for 729 days or less in the preceding 7 financial years, OR
3. Indian citizen or Person of Indian Origin (PIO) with total income (excluding foreign income) exceeding ₹15 lakh, who has stayed in India for 120 to 181 days in the financial year, OR
4. Deemed Resident (Indian citizen with total income exceeding ₹15 lakh who is not liable to tax in any other country).

The residential status of a Hindu Undivided Family (HUF) under the Income Tax Act, 1961, is determined based on the control and management of its affairs in India.

Classification of HUF Residential Status

A HUF can be classified into:

1. Resident HUF – If the control and management of its affairs is wholly or partly in India.
2. Non-Resident (NR) HUF – If the control and management of its affairs is wholly outside India.

Resident but Not Ordinarily Resident (RNOR) HUF

A Resident HUF is further classified as RNOR if its Karta (Manager) satisfies any one of the following conditions:

• Has been a non-resident in India for 9 out of the 10 preceding financial years, OR
• Has stayed in India for 729 days or less in the preceding 7 financial years.

The residential status of a company under the Income Tax Act, 1961, is determined based on its place of incorporation and place of effective management (POEM).

1. Resident Company

A company is considered resident in India if:

• It is incorporated in India, OR
• Its Place of Effective Management (POEM) is in India during the financial year.

Place of Effective Management (POEM): It refers to the location where key management and commercial decisions necessary for the company’s overall operations are made in substance.

2. Non-Resident Company

A company is classified as non-resident if:

• • It is not incorporated in India, AND
  • Its POEM is outside India.

The residential status of Partnership Firms, Association of Persons (AOPs), Body of Individuals (BOIs), and other entities under the Income Tax Act, 1961, is determined based on the place of control and management of their affairs during the financial year.

1. Resident Entity

A partnership firm, AOP, or BOI is considered resident in India if the control and management of its affairs is wholly or partly in India during the financial year.

2. Non-Resident Entity

An entity is considered non-resident if the control and management of its affairs is wholly outside India during the financial year.

Key Considerations for Determining Control & Management

• Control & Management refers to strategic decision-making, not day-to-day operations.
• If major business decisions are taken in India, the entity is likely resident.
• If all key decisions are made outside India, the entity is considered non-resident.

The scope of income for a Resident and Ordinarily Resident (ROR) under the Income Tax Act, 1961, includes global income, meaning they are liable to pay tax on income earned in India as well as abroad.

1. Income Taxable for ROR Individuals

An individual classified as ROR is taxed on the following:

• Income earned or received in India (salary, business income, capital gains, rental income, etc.).
• Income earned outside India (salary, business profits, dividends, interest, etc.).
• Foreign income received outside India but later remitted to India is still taxable.
• Income from foreign assets (such as rental income from property abroad or interest on foreign bank accounts).

2. Foreign Income Taxation & DTAA Benefits

Since global income is taxable, ROR individuals earning abroad may face double taxation. However, they can claim relief under:

• Section 90/91: Foreign Tax Credit (FTC) under Double Taxation Avoidance Agreements (DTAA).
• Exemptions/Deductions: Certain foreign income (e.g., pension) may be exempt based on treaties.

3. Foreign Asset Disclosure

ROR individuals must disclose foreign assets in their Income Tax Return (ITR) under the Foreign Asset Schedule to comply with tax laws and avoid penalties.

The scope of income for a Resident but Not-Ordinarily Resident (RNOR) under the Income Tax Act, 1961, is limited compared to a Resident and Ordinarily Resident (ROR). RNORs are taxed only on specific types of income, making it a beneficial status for returning NRIs and certain high-net-worth individuals.

1. Income Taxable for RNOR Individuals

An RNOR is liable to pay tax in India on:

• Income earned, accrued, or received in India (salary, business income, capital gains, rental income, etc.).
• Income earned outside India but derived from a business controlled or profession set up in India.

2. Income Not Taxable for RNORs

• Foreign income (salary, business profits, dividends, interest, etc.), provided it is not derived from an Indian-controlled business or profession.
• Income from foreign assets (property, bank deposits, stocks, etc.), unless it originates from an Indian business.
• Remittance of foreign income to India (only earning it matters, not transferring it).

3. Benefits of RNOR Status

• No tax on most foreign income, unlike RORs who are taxed on their global income.
• Foreign assets need not be disclosed in ITR (mandatory for RORs).
• Useful for returning NRIs, allowing them time to restructure tax residency before becoming fully taxable in India.

The scope of income for a Non-Resident (NR) under the Income Tax Act, 1961, is limited only to income that has a source in India. A Non-Resident is not taxed on foreign income earned outside India.

1. Income Taxable for Non-Residents

A Non-Resident (NR) is liable to pay tax in India on:

• Income received or deemed to be received in India (salary, pension, dividends, interest, etc.).
• Income accruing or arising in India (business income, capital gains from Indian assets, rental income from property in India).
• Income earned outside India but directly connected to an Indian business or profession (e.g., a business controlled in India).

2. Income Not Taxable for Non-Residents

• Foreign income (salary, business profits, capital gains, interest, dividends, rental income, etc.), unless earned from an Indian source.
• Foreign assets and bank deposits are not subject to Indian taxation.

3. Special Tax Provisions for Non-Residents

• Tax Deducted at Source (TDS): Higher withholding tax rates apply to NRs under Sections 195, 194E, etc..
• Capital Gains Tax: Gains from the sale of shares, property, or other assets in India are taxable.
• DTAA Benefits: Non-Residents can claim relief under Double Taxation Avoidance Agreements (DTAA) to avoid being taxed twice.

If an individual has income from both India and abroad, the taxability depends on their residential status under the Income Tax Act, 1961.

1. Resident and Ordinarily Resident (ROR)

• Taxed on global income (income earned in India and abroad).
• Foreign income, including salary, business profits, capital gains, dividends, and rental income, is taxable in India.
• Required to disclose foreign assets and income in the income tax return (ITR).
• Can claim relief under Double Taxation Avoidance Agreements (DTAA) to avoid double taxation.

2. Resident but Not Ordinarily Resident (RNOR)

• Taxed on income earned in India and income derived from a business or profession controlled in India.
• Foreign income is not taxable, unless it is linked to an Indian-controlled business.
• No requirement to disclose foreign assets in ITR.
• Beneficial status for returning NRIs as they transition into full taxation.

3. Non-Resident (NR)

• Taxed only on income earned, received, or accrued in India (e.g., salary received in India, capital gains from Indian property, interest from Indian bank accounts).
• Foreign income is completely tax-free in India.
• No requirement to disclose foreign assets in ITR.
• May be subject to Tax Deducted at Source (TDS) on Indian income, but DTAA benefits can help reduce the tax burden.

How to Avoid Double Taxation?

If an individual is taxed in both India and another country, they can claim relief under:

• • DTAA (Double Taxation Avoidance Agreement): Allows credit for tax paid in a foreign country.
  • Foreign Tax Credit (FTC): Tax paid abroad can be deducted from Indian tax liability.
  • Exemptions and Deductions: Some types of foreign income may be exempt under specific DTAA provisions.