BRIEF UNDERSTANDING OF THE RESIDENTIAL STATUS OF AN
INDIVIDUAL
Understanding the residential
status of individuals is crucial for effective tax assessment by the Income Tax
Department, especially during the tax filing season. This determination forms
the bedrock for evaluating a person's tax liability.
Meaning and Significance of
Residential Status
The taxability of an individual
in India is contingent on their residential status for a specific financial
year, a term defined under Indian income tax laws. It's vital to distinguish
this from an individual's citizenship. One can be a citizen of India but a
non-resident for tax purposes, and vice versa. This article delves into how the
residential status of an individual taxpayer is determined.
How to Determine Residential
Status
Under Indian income tax laws,
taxable persons fall into three categories:
- Resident
- Resident Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
The tax implications vary for
each category. Before exploring these implications, it's crucial to understand
the criteria for becoming a resident, an RNOR, or an NR.
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Residential
Status
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Qualifying
Conditions
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Exceptions
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Resident
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Stay
in India for 182 days or more in a financial year.
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Stay
in India for 365 days or more in the immediately preceding four years and 60
days or more in the relevant financial year.
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If
an Indian citizen or person of Indian origin leaves India for employment
during a fiscal year, they qualify as a resident only if they stay in India
for 182 days or more.
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From the financial year 2020-21, this period
is reduced to 120 days or more for individuals whose total income (excluding
foreign sources) exceeds Rs 15 lakh.
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Resident Not
Ordinarily Resident (RNOR)
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1-Been a resident of India in at least 2 out
of the 10 immediately preceding years.
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2- Stayed in India for at least 730 days in
the 7 immediately preceding years.
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From FY 2020-21, a citizen of India or a
person of Indian origin leaving India for employment will be a resident and
ordinarily resident if staying in India for 182 days or more, provided their
total income (excluding foreign sources) exceeds Rs 15 lakh.
(Note: Income from foreign
sources refers to income accruing or arising outside India, excluding income
derived from a business controlled in India or a profession set up in India.)
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Non-Resident (NR)
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An individual not satisfying the
conditions for being a resident would be an NR for the year. -
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Taxability
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Income Tax Liability
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Resident
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Tax is levied in India on the global income,
including income earned both in India and outside India.
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NR and RNOR
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Tax liability
is limited to income earned in India; individuals are not required to pay tax
in India on foreign income. In cases of double taxation, the Double Taxation
Avoidance Agreement (DTAA) can be utilized to prevent paying taxes twice.
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