Residential Status is one of the most fundamental concepts in the Income Tax Act, 1961. The tax liability of a person in India depends significantly on his residential status. The Income Tax Act taxes different categories of persons differently based on whether they are residents or non-residents of India. The concept of residential status determines the scope of total income that is taxable in India — a resident is taxed on his worldwide income while a non-resident is taxed only on income earned or received in India.
The provisions relating to residential status are contained in Section 6 of the Income Tax Act, 1961.
Why Residential Status is Important
The residential status of a person determines:
- What income is taxable in India
- Which deductions and exemptions are available
- Which Double Taxation Avoidance Agreements (DTAA) apply
Categories of Residential Status
Under Section 6 of the Income Tax Act, 1961, a person can have one of the following residential statuses:
For Individuals:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
For other persons (HUF, firms, companies):
- Resident
- Non-Resident
Residential Status of an Individual — Section 6(1)
An individual is considered a Resident in India for any previous year if he satisfies at least one of the following two basic conditions:
Basic Condition 1: He has been in India for 182 days or more during the previous year (1st April to 31st March).
Basic Condition 2: He has been in India for 60 days or more during the previous year AND 365 days or more during the 4 years immediately preceding the previous year.
Exception to Basic Condition 2: The 60-day limit is extended to 182 days for:
- An Indian citizen who leaves India during the previous year for employment outside India
- An Indian citizen or Person of Indian Origin (PIO) who comes on a visit to India from outside India
Finance Act 2020 Amendment: The Finance Act, 2020 reduced the 182-day limit to 120 days for Indian citizens or PIOs who visit India and whose total income (other than from foreign sources) exceeds ₹15 lakhs during the previous year.
Resident and Ordinarily Resident (ROR) — Section 6(6)
A resident individual is further classified as Resident and Ordinarily Resident (ROR) if he satisfies both of the following additional conditions:
Additional Condition 1: He has been a resident in India in at least 2 out of the 10 previous years immediately preceding the relevant previous year.
Additional Condition 2: He has been in India for 730 days or more during the 7 previous years immediately preceding the relevant previous year.
If a resident individual does not satisfy both additional conditions, he is classified as Resident but Not Ordinarily Resident (RNOR).
Scope of Total Income Based on Residential Status
Resident and Ordinarily Resident (ROR): Taxed on worldwide income — income received or accruing in India AND income received or accruing outside India.
Resident but Not Ordinarily Resident (RNOR): Taxed on:
- Income received or accruing in India
- Income from a business controlled or profession set up in India (even if received outside India)
- NOT taxed on foreign income unless it is from a business controlled in India
Non-Resident (NR): Taxed only on income:
- Received or deemed to be received in India
- Accruing or arising in India
- NOT taxed on any foreign income
Residential Status of HUF, Firm, and AOP — Section 6(2)
A Hindu Undivided Family (HUF), firm, or Association of Persons (AOP) is resident in India if the control and management of its affairs is situated wholly or partly in India during the previous year.
It is non-resident if the control and management of its affairs is situated wholly outside India.
Residential Status of a Company — Section 6(3)
A company is resident in India if:
- It is an Indian company (incorporated in India under the Companies Act), OR
- Its Place of Effective Management (POEM) is in India during the previous year
POEM means the place where key management and commercial decisions necessary for the conduct of the business as a whole are made.
Important Case Laws
1. CIT v. Padamchand Ramkrishna (1949) The court held that the residential status of a person must be determined for each previous year separately and a person can be a resident in one year and a non-resident in another.
2. Lysaght v. IRC (1928) This English case, frequently cited by Indian courts, held that a person can be a resident of a country even if he spends only a relatively small part of the year there, provided he maintains a regular and settled connection with that country.
Conclusion
Residential status is a cornerstone concept of Indian income tax law that determines the scope of a person's tax liability in India. The Income Tax Act, 1961 provides clear and specific tests for determining residential status for different categories of taxpayers. A thorough understanding of residential status is essential for tax planning, compliance, and avoiding double taxation. The Finance Act, 2020 has further refined the rules to prevent tax avoidance by high-income individuals who attempt to avoid Indian tax liability by staying outside India for specified periods.
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