With regard to income taxation, a classification of a person’s residency status is an essential factor that determines the scope of their tax obligations within a nation. Understanding this status is similar to opening the door to one’s financial responsibilities and rights. The residential status of an individual sets the parameters that determine how much of their total income is subject to the tax laws of a given country. It’s a complex concept that is defined by particular standards established by tax authorities. This crucial status divides people into three categories: resident, non-resident, and partially resident, each with its own financial consequences and duties.
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Tax residency: Meaning
Whether or not to pay taxes or not is based on an individual’s residence status during a specific fiscal year. The phrase should not be confused with Indian citizenship. It is a legal categorisation of a person or firm that establishes the tax liabilities under particular guidelines. Additionally, it symbolises the goal of remaining in a nation for the entire fiscal year and the status of living there. These obligations and regulations pertain to each individual and company in a different way.
Residential status
According to section 6(1) of the Income Tax Act of 1961, a person must meet one of the following requirements in order to be considered a resident of India in any prior year:
- An Individual has spent a minimum of 182 days in India over the course of the previous year.
- An Individual has spent 365 days or more in India during the four years that preceded the previous year, and he spent at least 60 days there the year before that. The person is considered a resident if he meets any one of the previously listed requirements. An individual is considered a non-resident if neither of the two above requirements is met.
There are other aspects of what it means to remain in India that also need to be clarified. It is not required that the stay be prolonged or active, nor is it necessary that it take place at the person’s regular home, place of business, or place of a job. Both the day of leave and the arrival date are counted as days spent in India for the purposes of calculating the total number of days spent there. A person’s place of residence for income tax purposes is independent of their citizenship, place of birth, or domicile.
It’s also crucial to remember that this law contains a few exceptions. Indian nationals who left the country in a previous year to work abroad or as passengers on Indian ships will not be regarded as residents of India. Any Indian citizen or person of Indian origins who is employed outside of India in a business, profession, or other profession and who visited the country in a previous year is also not eligible to live in India on a residential ship.
Categories of residential statusÂ
Residential status of India can be divided into three categories as mentioned below:
Non-Resident Indian (NRI)
An Indian citizen who resides outside of India for work, business, or other reasons that indicate an unclear length of stay is known as a non-resident Indian (NRI). A person is classified as an NRI for tax purposes if they spend more than 182 days out of India during a fiscal year. NRIs are subject to special tax laws; usually, they are taxed on income derived from or accumulated in India.
Person of Indian Origin (PIO)Â
A person who has ever held an Indian passport or who originates from parents or grandparents who were born in or made permanent residents of undivided India is referred to as a PIO. Furthermore, a PIO may also be the spouse of an Indian citizen or another PIO. PIOs can apply for a PIO card, which entitles them to a number of benefits like the ability to purchase real estate and enter the country without a visa.
Overseas Citizen of India (OCI)
An OCI is a foreign national who originates from parents or grandparents who were Indian citizens, or who was eligible for Indian citizenship at any point in time. OCIs and NRIs share many rights, including the capacity to own property, live and work in India indefinitely, and receive specific financial and educational advantages. They might, however, be excluded from some government or political positions in India.
These categories give people of Indian descent or citizenship particular rights and benefits when they live overseas or travel to India.
Residential criteria for individual
The residential status of assessee depends on the rules mentioned under the Act. There are three broad categories for any person classifies
- Resident and ordinarily resident
- Resident but not Ordinarily Resident
- Non-Resident
It is crucial to remember that an assessee’s residential status must be determined using the prior fiscal year as a guide.Â
The scope of income to determine the residential status classification has been provided by the Income Tax Act of 1961. Since taxes and income are closely linked, it is crucial to consider this when relating them to residential ships. Three key factors concerning the range of income are taken into account: the assessee’s residential status, the location of income receipt, and the duration within which income must be received by the assessee or on his behalf.
| Scope of Total Income | Resident and Ordinarily Resident | Resident but not Ordinarily Resident | NonResident |
| Money you got or are considered to have gotten in India in the last year. | Yes | Yes | Yes |
| Income you make or are supposed to make in India during the last year | Yes | Yes | Yes |
| Income you earn or make from sources outside India. | Yes, Even if you haven’t received or brought that money into India in the last year. | Yes, if the income comes from a business managed in or a profession practised in India, then it counts. Otherwise, it doesn’t. | No |
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Residential criteria for firms
Prior to determining a company’s residential criteria, it is necessary to ascertain the company’s nationality and whether or not its management and operations are conducted in India. Any business that is entirely or partially owned by Indians is considered an Indian resident. If a company is not Indian, it must be determined whether its POEM was in India during the pertinent prior year. If so, it will be regarded as an Indian resident; if not, it won’t.
Importance of residential status
Taxation
Residential status determines the tax liabilities of an individual in India. There are different tax treatments for residents and nonresidents. It create significant impact on tax planning and compliance obligations for individual as well government for collecting Taxes
Voting right
Voting in Indian elections is allowed for both NRIs and OCIs. Even though they are living abroad, NRIs are still eligible to register as Indian voters. Similarly, outsiders with Indian citizenship (OCIs) have substantial voting rights in Indian elections, subject to the regulations set forth by the Indian Election Commission, even though they do not hold full Indian citizenship.
Property ownershipÂ
In India, the eligibility to purchase immovable property is based on residential status. PIOs, OCIs, and NRIs are subject to particular limitations and permissions. There are no restrictions on the acquisition of immovable, commercial, or residential property by NRIs. However, PIOs are subject to certain limitations when it comes to purchasing plantations, farms, and other real estate in India. Additionally, OCIs are subject to PIOs’ conditions.
Banking and investments
In India, one’s residential status influences their ability to access different banking services and investment opportunities. PIOs, OCIs, and NRIs have access to specific banking and investment opportunities.Â
Visa and travel benefits
Different visa and travel benefits for NRIs, PIOs, and OCIs in India are given. Visa-free entry for OCI cardholders, while NRIs and PIOs require specific visas.
FAQs
A person is said to be of Indian origin if he or either of his parents or either of his grandparents were born in undivided India.
All assessees, whether resident or not, are chargeable to tax in respect of their income accrued, arisen, received or deemed to accrue, arise or to be received in India whereas residents alone are chargeable to tax in respect of income which accrues or arises outside India.
The citizenship of an individual has no role in determining the residential status of an individual. The residential status of resident, non-resident, etc. is determined on the basis of the number of days an individual actually stays in India during the previous year. What do you mean by an Individual of Indian Origin?
Is the income taxable even if it is not received for Indian residents?
Is citizenship a determining factor for the residential status of an individual?
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