Residential Status as per The Income Tax Act

As per Income Tax Act, 1961, the taxability of person depends upon the Residential Status of the individual for the previous year. Residential status of an Individual is to be checked every year. Section 6 of the Income Tax Act defines the criteria for determining residential of an Individual. Recently by The Finance Act, 2020, government made certain changes in the criteria to determine the Residential Status.

As per IT Act, residential status is divided in to 3 categories, we shall understand the each categories in this article:

1. Resident
2. Resident but not ordinary resident
3. Non-Resident

Section 6(1) of The Income Tax Act, 1961

Resident:

First we shall understand the provisions before amendment made as per The Finance Act, 2020 as per section 6(1), an individual is said to be resident if he fulfills either of below criteria:

1. Stay in India for 182 days or more in a previous year. OR
2. Stay in India for 60/182* days or more in a previous year AND stay in India for 365 days or more in the preceding 4 years.

* 60 days criteria shall become 182 days in following cases :

1. Where a citizen of India is leaving India as member of crew of Indian ship or for employment purpose
2. Where citizen of India or PIO comes on visit to India.

Now let us understand changes made during the Finance Act 2020.

Now new category introduced based on total income which is as below:

If an Individual who is Citizen or Person of Indian Origin (PIO) and having total income excluding income from foreign sources is exceeding Rs. 15 Lacs during the previous year then 60 days as mentioned in 2nd condition of Section 6(1) shall be replaced with 120 days.

Meaning of PIO – As per explanation to section 114C(e) PIO means an individual or either parents or any of his grand parents were born in Undivided India.

Now amended criteria for the resident shall be as follows:

1. Stay in India for 182 days or more in a previous year. OR
2. Stay in India for 60/182*/120** days or more in a previous year AND stay in India for 365 days or more in the preceding 4 years.

* 60 days criteria shall become 182 days in following cases :

1. Where a citizen of India is leaving India as member of crew of Indian ship or for employment purpose

* * 60 days criteria shall become 120 days in following cases :

1. Where a citizen of India or PIO having total income excluding income from foreign sources exceeds Rs. 15 lacs.

Newly Inserted Section 6(1A) – Deemed Resident

“Notwithstanding anything contained in Section 6(1), an Individual being a citizen of India, having total income excluding income from foreign sources during the previous year and person is not liable to tax in any country or territory by reason of his domicile or residence or other criteria of similar nature.”

Newly inserted Section – 6(1A)

Meaning:

This section overrides section 6(1), Person will be deemed to be India Resident irrespective of days spent in India if all of the conditions are filfilled:

Condition 1 – Individual is citizen of India AND

Condition 2 – His total income (excluding income from foreign sources) exceeds Rs. 15 Lacs AND

Condition 3 – He is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature (tax heaven countries).

Section 6(6) – Resident but Not Ordinary Resident (RNOR)

When conditions u/s 6(1) is fulfilled then individual is said to be resident, then we are required to check additional conditions as prescribed in u/s 6(6) to determine the status as RNOR or ROR.

Conditions to meet to qualify as Resident but Not Ordinary Resident.

1. Non Resident Status for at least 9 out of 10 Preceding Previous Year. OR
2. Physical stay in India is less 730 days in aggregate in 7 Preceding Previous Year.

Below 2 additional conditions are inserted by The Finance Act, 2020.

3. Citizen of India or PIO having total income excluding income from foreign sources in excess of Rs. 15 Lacs and his stay in India is for more than 120 days but less than 182 days.
4. Citizen of India who deemed to be resident of India as per section 6(1A).

If above conditions are not fulfilled than status would be Resident but and Ordinary Resident (ROR)

Meaning thereby if Individual who is Citizen of India or PIO who comes to India having total income more excluding income from foreign sources in excess of Rs. 15 Lacs and if he stays in India for less than 120 days then conditions u/s 6(1) itself is not fulfilled hence his status becomes Non Resident.

If his stay is more than 120 days then amended conditions u/s 6(1) are fulfilled hence we need to check additional conditions No. 3 as mentioned above u/s 6(6) to further determine the status. As per above newly inserted condition, person is RNOR if his stay is more than 120 days but less than 182 days.

If his stay is more than 182 days than 1st conditions u/s 6(1) is fulfilled and qualified as resident status then we need to check additional both existing conditions 1 and 2 u/s 6(6).

Taxability of Income

For Resident – Global Income is taxable

For Non Resident – Their foreign income is not taxable only Indian Income is taxable.

Conclusion

As per the recent amendment through The Finance Act, 2020 government intended to cover those Individual who are trying to keep their status Non Resident by leaving outside India in tax heaven countries and tries to avoid tax in India. However this amendment has also came with several anomalies and complexities which needs to be understand and addressed by CBDT.

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