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‘Residential Status’ of an Individual

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Introduction

‘Residential Status’ of an individual is an important criterion while determining the tax liability of a person in India. Residential status shall mean whether the person shall be taxable as normal resident or non-resident of India. Generally, tax rates are higher if the residential status of a person is determined to be non-resident.

Resident status is determined on the basis of number of days of stay in India during the previous year (‘Previous Year’ in Income-tax refers to the year for which taxability is determined. For instance, if return is filed on 30 June 2019 for the year April 1, 2018 – March 31, 2019, then the previous year is 2018-19). The residential status of a taxpayer is different from citizenship and it can change every year depending upon the number of days a person travels. A person shall assess his residential status if he travels out of India.

Period of stay of an individual in India or outside India decides his residential status in India, the immigration dates mentioned in his Passport are considered as conclusive proof. If an individual has taken multiple journeys then the number of days during which he has stayed in India are aggregated to determine his period of stay in India during a financial year.

Importance of Residential Status in taxation

Almost all countries follow two type of taxation system – Taxation on basis of Residence and Taxation on basis of Source of income. In the residence-based tax system, taxation authorities have right to charge tax from its resident persons on their global incomes (i.e. income earned in all countries). Thus, the scope of taxable income of an individual taxpayer is greatly influenced by his residential status in India. His citizenship in that country, for that purpose, is not relevant. In the source-based taxation system, a country may tax only that income which has been earned in that country.

For instance, Indian tax authorities shall charge tax on global income of an individual taxpayer if he is resident in India. However, if a person is non-resident then it shall charge tax only in respect of income which has been earned in India.

Thus, the total Income of a taxpayer cannot be computed unless his residential status is determined as per provisions of the Income-tax Act.

Types of Residential Status?

A taxpayer can be either ‘Resident’ in India or ‘Non-resident’ in India. If a person is a resident in India then the status is further categorized into the following:

  1. Ordinarily resident
  2. Not ordinarily resident

How to determine Residential Status?

Residential status of a taxpayer is determined in two steps. In the first step, it has to be determined whether he is a Resident or Non-resident in India. If he is deemed as Resident in India then it is determined whether he is ‘Ordinarily Resident’ or ‘Not Ordinarily Resident’.

Step 1: Criteria for Resident or Non-resident

A person is deemed as Resident in India if he satisfies any of the following conditions in the current financial year (i.e., Financial Year 2019-2020):

  1. He is in India for 182 days or more in that financial year (between April 1, 2019 and March 31, 2020); or
  2. He is in India for 60 days or more in that year (between April 1, 2019 and March 31, 2020) and for 365 days or more in last 4 years (between April 1, 2015 and March 31, 2019).

If an individual fulfils both the conditions referred below in the financial year, he shall be treated as Non-resident in India in that year:

  1. He is in India for 181 days or less in that financial year (between April 1, 2019 and March 31, 2020); and
  2. He is in India for 60 days or more in that year (between April 1, 2019 and March 31, 2020) but for 364 days or less in last 4 years (between April 1, 2015 and March 31, 2019).

The tax authorities get more tax revenue if an individual is deemed as Resident in India. Therefore, two thresholds have been provided to determine the residential status of an Individual wherein stay of an Individual is seen not only in the current year but in previous 4 years as well. This has been done to deem an individual resident in India even if he has a short stay in India in the current financial year but he has been in India for a longer period in earlier years.

However, the second condition of stay in India for 60 days or more during the previous year, shall not be applicable in the following cases, and he shall be deemed as a resident in India only if his stay in India during the previous year is for 182 days or more:

  1. A citizen of India leaving India for purpose of employment outside India
  2. A citizen of India leaving India as a crew member of an Indian ship
  3. A citizen of India or a person of India origin*, who was outside India, comes on a visit to India.

*A person is said to be of Indian Origin if he, or either of his parents or any of his grandparents were born in undivided India i.e., before the partition of India.

Step 2: Criteria for Ordinarily or Not-ordinarily Resident

A resident taxpayer will be treated as resident and ordinarily resident in India during the financial year if he satisfies both the conditions given below:

  1. He is resident in India (as per Step 1) in at least 2 out of last 10 years (i.e., for the financial year 2019-20, last 10 years shall be from 2009-10 to 2018-19)
  • His stay in India is for 730 days or more during the last 7 years (i.e., for the financial year 2019-20, last 7 years shall be from 2012-13 to 2018-19).

Where a taxpayer, who is resident as per Step 1, satisfies only one condition as per
Step 2, he shall be treated as ‘Resident but not Ordinarily Resident’.

Frequently Asked Questions

Q: Are days of journey included?

If number of days of stay of an individual in India is close to 182 days, he should calculate his stay in India during the days of journeys on an hourly basis. Thus, if a stay of 24 hours spread over two or more days, it has to be counted as equivalent to stay of one day.

Q: Which residential status is more beneficial?

Various tax benefits are allowed exclusively to a resident taxpayer. Such benefits come with a burden of tax on his global income. Thus, which residential status shall be beneficial for a taxpayer would depend on the ingredients of his taxable income. A resident taxpayer generally pays double tax on his foreign income, one in the country of source and another in the country of residence. However, the tax credit is allowed in India for the taxes paid by him in a foreign country. To claim the credit, the taxpayer is required to submit Form 67 on or before the due date of filing of Income-tax Return.

Example, an Indian employee posted abroad, receiving salary from a foreign employer, would pay lesser taxes in India if he is treated as non-resident in India. If his stay in India during the financial year exceeds 182 days, he shall be deemed as a resident in India and his salary income would be taxed both in the foreign country and in India. However, he would get the credit of taxes he pays in a foreign country to some extent.

Q: What to do if I am a tax resident of two countries?

Most countries consider ‘period of stay’ of an individual person while determining his residential status in that country. As two countries may prescribe different threshold period of stay, one individual may be considered as a resident of two countries in the same financial year. In such a situation, recourse shall be made to the ‘Tie-Breaker Rules’ under the Double Taxation Avoidance Agreement (DTAAs) or Comprehensive Treaties. India has entered into DTAA with the 90+ foreign countries. This Rule ensures that the tax residency of an individual is established only in one country.

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