Residential Status Under the Income Tax Act

The Income Tax Act of 1961 governs the direct taxation system in India. Residential status is one of the most fundamental concepts this act deals with. The residential status of an individual directly impacts the various taxation laws applicable to them. In this article, we will aim to understand the meaning of residential status, how it is determined, why it is considered crucial, and how taxation varies depending on your status.

What is Residential Status Under the Income Tax Act of 1961?

Residential status as per the Income Tax Act of 1961 refers to the classification of an individual based on their physical presence in India during a particular financial year. Depending on the length of stay in India, individuals can be classified into three residential status types: 

1. Resident and ordinarily resident (ROR)
2. Resident but not ordinarily resident (RNOR) 
3. Non-Resident (NR)    

Now, it is important to note that various aspects of taxation, from tax liability determination to compliance, will change depending on an individual’s residential status.   

How is the Residential Status of an Individual Determined?

Now that you know the meaning of residential status, let us look at the process of determining the residential status of an individual. 

• Step 1: Basic Conditions  

An individual will be considered a resident if they meet any one of the following two basic conditions: 

1. The individual stays in India for 182 days or more during the financial year.
2. The individual stays in India for 60 days or more during the financial year and 365 days or more during the four years preceding the financial year.   

However, there are certain exceptions to these basic conditions. Here is a closer look at the exceptions: 

Exception 1: If the individual who is an Indian citizen leaves India during a financial year for employment or as part of the crew of an Indian ship they will be considered a resident of India only if they stay in India for 182 days or more during the said financial year.

Exception 2: If an Indian citizen or a person of Indian origin (PIO) resides outside India but visits India during a financial year and has a total income (other than foreign income) of more than Rs. 15 lakhs, they will be considered a resident only if: 

• They stay in India for 182 days or more during the financial year.
• They stay in India for 120 days or more during the financial year and 365 days or more during the four years preceding the financial year.

If an individual does not meet any of the above-mentioned conditions, they are automatically classified as a non-resident (NR). 

• Step 2: Additional Conditions 

If an individual is classified as a resident based on the above basic conditions, they must satisfy two additional conditions to be classified as resident and ordinarily resident (ROR). These two conditions are as follows: 

1. The individual has been a resident of India for at least 2 out of the 10 previous financial years.  
2. The individual has stayed in India for 730 days or more during the 7 previous financial years.

If the resident individual does not satisfy both conditions, they will be automatically classified as a resident but not ordinarily resident (RNOR). 

Why is the Residential Status Important?

Determining an individual’s income tax residential status is crucial for several reasons. Let us quickly explore the significance of this process.

• For Determining Compliance Requirements 

The income tax compliance requirements vary depending on the residential status of an individual. For example, resident and ordinarily resident Indians must report Indian and foreign income, whereas non-resident Indians are only required to report Indian income.   

• For Assessing Tax Liability 

The residential status is an important factor for determining tax liability. The liability changes depending on whether an individual is classified as an ROR, an RNOR, or an NR. 

• For Avoiding Double Taxation 

If an Indian citizen is residing in another country, their income may be subject to tax twice; once in their resident country and once in India. By determining their residential status, however, they may avoid situations where their income is doubly taxed.

• For Claiming Tax Exemptions and Deductions

The Income Tax Act of 1961 provides plenty of deductions and exemptions for individuals to help lower their tax liability. However, some tax benefits are available only to RORs and RNORs. Identifying the residential status can help determine an individual’s ability to claim the various income tax exemptions and deductions.       

Also Read More About E-Filing Income Tax Returns

How Does the Taxation Laws Vary Depending on the Residential Status of an Individual?

The income tax residential status has a direct impact on how an individual is taxed. Let us explore how each of the three residential status categories is subject to taxation.    

• Resident and Ordinarily Resident (ROR)

Resident and ordinarily resident Indians are taxed on all kinds of income, including the following: 

• Income received or deemed to be received in India
• Income accruing or arising in India but received outside India
• Income accruing or arising outside India but received in India 
• Income accruing or arising outside India and received outside India

In addition to foreign income, RORs must report all of their foreign assets when filing their income tax returns.  

• Resident but Not Ordinarily Resident (RNOR)

Resident but not ordinarily resident Indians are only taxed on the following kinds of income: 

• Income received or deemed to be received in India
• Income accruing or arising in India 

If the income accrues or arises outside India, such income will not be taxable in the hands of an RNOR. Furthermore, such individuals will not be required to furnish details of their foreign assets in their income tax returns.

• Non-Resident (NR)

Non-resident Indians enjoy significant relaxations with respect to tax liability. They are only taxed on the following incomes: 

• Income received or deemed to be received in India
• Income accruing or arising in India 

If the income accrues or arises outside India, such income is not taxable in the hands of a non-resident. Non-resident Indians are also not required to furnish details of their foreign income or foreign assets in their income tax returns.  

Conclusion

Understanding the concept of residential status is crucial for every individual taxpayer, especially if they travel outside India frequently. As you have seen, the residential status of an individual determines the extent of their tax liability and compliance requirements.

If you travel to or stay in foreign countries for extended periods and have foreign income or assets, it is advisable to assess your status regularly. This way, you can plan your taxes more accurately and efficiently.  

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