Under income tax laws in India, an individual’s income tax is determined by their residential status for that fiscal and the prior four years. Sometimes a person, who is an Indian citizen, may not be residing in the country for an entire year. A non-Indian can also choose to be a resident of India for one specific year due to income tax purposes. The residential status of a person is determined differently from that of a firm or a large company.
During the tax filing process, determining a person’s residential status becomes a job of utmost priority for the Income Tax Department. A person’s taxability heavily relies on their residential status.
Classifications of a residential status
The income tax law in India has segregated the residential status of an individual staying in India, determined by the length of their stay. A person’s residential status also considers their current year and the preceding years of their stay. The status is divided into three heads:
Resident/Ordinary Resident
To be qualified as a ROR or Resident of India, an individual must fulfil either of these two conditions set by the Income Tax Act in Section 6(1)-
- The person must stay in India for a whole year or a minimum of 182 days or,
- The person must reside in India for sixty days or more in India for the current fiscal year, and
- The person resides in the country for three hundred and sixty-five days (or more) in the last four years instantly before the preceding year and belongs to the ‘ordinary resident’ category.
Under Section 6(6) of the Income Tax Act of 1961, two essential criteria determine whether a person is a ‘Resident’ or ‘Ordinary Resident’ (ROR) of India-
- If a person resides in India for 730 days or more in the last seven years before the current fiscal year.
- Before the current year, a person has stayed in India for at least two out of the previous ten years.
In some exceptional cases where a citizen of India or a person of Indian origin travels out of India for employment reasons during a financial year, he will only be qualified as an Indian resident if the person spends at least 182 days (or more) in India. But recently, from the FY 2020-2021, the period has been cut down to 120 days (or more) only if that individual’s income (not including foreign sources) exceeds fifteen lakh rupees.
Another change was made; a citizen of India who is not liable to pay tax in other countries will be considered a citizen of India. But for this amendment, the person’s complete income should be more than fifteen lakh rupees, and there must be no extra tax liabilities in other countries/states by the person’s residency.
Resident but not an Ordinary Resident
To be considered as a RNOR (Resident not an Ordinary Resident), the following conditions must be met by a person:
- The person must stay in India for a minimum of 730 days (or more) in the last financial year.
- The individual was residing in India for two out of ten days in the previous FY.
Non-Resident
Once the person fails to tick any of the conditions mentioned in the above two categories, that person is considered a non-resident. Further criteria for an NR status are:
- When a person stays in India for less than 181 days in an FY.
- When an individual resides in India for less than sixty days in an FY.
- When a person does stay in India for 60 days in an FY but has not lived in India for 365 days (or more) in the previous four financial years.
Determining the residential status of an enterprise
Resident (Ordinary Resident)
An enterprise is called a resident of India if they are a company that originated in India or the place of most productivity and significant decisions made for the company as a whole for the FY were made in India.
Resident but not an Ordinary Resident
A company or an enterprise can never fall under the ‘Not Ordinary Resident’ status.
Non-Resident
If the governing company fails to meet the above criteria, it falls under the ‘Non-resident’ status by default. It means the company is not an Indian-origin company, nor has its effective management taken place in India.
Residential status in income tax: Tax rates for a ROR, RNOR and a Non-Resident
A resident: A person who falls under the resident status in India will be charged tax based on their global earnings (money earned in India and outside the country).
A non-resident and RNOR: The people whose residential status has been defined as these two have their tax liabilities restricted to the earnings they gained in India only. Income made in foreign lands is not taxable in India.
Verification of residential status for an individual
First, one must ensure that the person is eligible for exceptions for prime conditions. Once the verifications are done, it is noted if they fulfil the simple criteria of 182 days (or more). If the person checks the list, they will be eligible for a resident or non-resident status.
Note: One must make the Double Taxation Avoidance Agreement (DTAA) bench aware if they are being charged double tax on their earnings both here and in foreign countries. This will allow them to avoid paying double taxes.
FAQs
Why is the residential status of a person important in taxation?
Their presence in India wholly determines a person's residential status during an FY. It also helps establish the extent of taxable income required to be paid for a current financial year in India.
What proofs are required to verify the NRI status?
Firstly a xerox of a valid passport must be submitted to the authorities. A copy of their PAN card (Form 60 as an alternate) and a copy of a legit visa or Overseas Resident Card must also be provided.
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