Residential Status of Individuals, Firms, Companies As per Income Tax Act
The residential status of a person/ entity is what determines the scope of taxation on that person/ entity in India, as per out Income Tax Act. The determination of residential status is based upon certain conditions as specified in the Act (Section 6 of Income Tax Act). Based upon the fulfillment of these conditions, the residential status would vary. The term residential status has been coined under the income tax laws of India and must not be confused with an individual’s citizenship in India. An individual may be a citizen of India but may end up being a non-resident for a particular year.
According to the Income Tax Act, 1961, residential status of a person is one of the important criteria in determining the tax implications. The residential status of a person can be categorised into Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR) and Non- Resident (NR)
[su_note note_color=”#6aadd1″ text_color=”#ffffff”]NOTE: It is the ‘Residential Status’ which shall be considered and taken into account for the purpose of Income Tax Act and not the Citizenship or Place of Birth.[/su_note]
Summary Chart of Residential Status
An Individual can be either:
a. Resident in India; (or)
b. Non-resident in India (NRI)
Who is Resident ?
A resident is an individual who satisfies any one of the basic conditions mentioned below
Basic Conditions of Residential Status
- The person should have stayed in India at least for 182 days or more during the relevant previous year;
- The person should have stayed in India at least for 60 days or more during the relevant previous year AND at least for 365 days or more during 4 preceding previous years.
A resident individual can further be classified into:
- Resident and ordinary resident; (or)
- Resident but not ordinary resident
- One should stay in India at least for 730 days during 7 preceding previous years.
- One should be a resident at least for 2 years out of 10 preceding previous years.
Other points – Residential Status
One should stay in India at least for 730 days during 7 preceding previous years & should be a resident at least for 2 years out of 10 preceding previous years. (i.e., One should Satisfy both above two Conditions )
- BASIC CONDITION # 2 does not apply for an Indian citizen who leaves India for the purpose of employment or for the person who is working as a crew member of an Indian ship.
− Official tours abroad in connection with employment in India shall not be regarded as employment outside India.
- BASIC CONDITION # 2 does not apply for an Indian citizen or a for person of Indian origin who comes to India for the purpose of a visit.
− A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, were born in undivided India.
- The place of stay or the purpose of stay of the person is not relevant. Also, the stay need not be continuous.
- For the purpose of calculating the number of days stayed in India, both the day he enters India (date of arrival) and the day he leaves India (date of departure) should be taken into account.
- Stay in India includes stay in territorial waters of India (that is 12 nautical miles into the sea from Indian coastline). Even the stay in a ship or boat present with in the territorial waters of India would be taken into consideration for the purpose of determining the residential status of the person.
Residential Status of a Hindu Undivided Family:
- If control and management of affairs of HUF is wholly or partly situated in India: Resident
- If control and management of affairs of HUF is wholly situated outside India: Non-resident
[su_note note_color=”#6aadd1″ text_color=”#ffffff”]NOTE: Ordinary resident or not-ordinary resident depends upon the stay of “Karta” of the HUF (that is based upon fulfilment of additional conditions as mentioned above by the Karta)[/su_note]
Residential status of firm:
- If control and management of affairs of the firm is wholly or partly situated in India: Resident
- If control and management of affairs of the firm is wholly situated outside India: Non-resident
[su_quote]“Control & Management” refers to the central control and management and NOT to carrying on day to day business by employees or staffs or agents. A business may be done outside India and yet its Control & Management may be wholly in India. Therefore, Control & Management of a business is said to be situated at a place where the ‘Head & Brain’ of the business is situated.[/su_quote]
Residential status of a company:
The Residential Status of a company further classified into two types,
- Domestic Company
- Foreign Company
A domestic company is ‘always Resident’, irrespective of where the company’s place of control and management is situated.
A foreign company would be resident in India in any previous year, if its ‘Place of Effective Management’ is in India.
[su_quote]“Place of Effective Management” means a place where KEY MANAGEMENT AND COMMERCIAL DECISIONS that are necessary for the conduct of the business of an entity as a whole are made.[/su_quote]
[su_note note_color=”#6aadd1″ text_color=”#ffffff”]NOTE: A partnership firm, or a company can never be “ordinary” or “not ordinary resident”. Also, the individual residential status of the Partner of the firm or the Director/ MD/ CEO, etc. of the company has nothing to do with the residential status of the partnership firm or the company.[/su_note]
Indian Citizen as a Crew Member of a Foreign Bound Ship:
In case of foreign bound ships where the destination of the voyage is outside India, there is uncertainty regarding the manner and the basis of determining the period of stay in India for an Indian citizen, being a crew member.
According to Rule 126, in case of an individual, being a citizen of India and a member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the following period:
Period commencing from
The date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage
on The date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage.
MEANING OF CERTAIN TERMS:
What is Continuous Discharge Certificate:
This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate-cum Seafarer’s Identity Document) Rules, 2001 made under the Merchant Shipping Act, 1958.
What is Eligible Voyage
A voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where:
- For the voyage having originated from any port in India, has as its destination any port outside India; and
- For the voyage having originated from any port outside India, has as its destination any port in India.
How does the status of residency affect the taxability of income of the person/ entity?
As said at the beginning of the topic, it is the residential status of the person/ company which determines how the income earned by the person/ entity shall be taxed. Depending on the residential status, certain income earned shall be included as part of the ‘Total Income’.
Type of Income
Resident & Ordinary Resident
|Resident & Not||Non- Resident|
|Income received in India during previous year||Included as part of Total Income||Included as part of Total Income||Included as part of Total Income|
|Income accruing in India during previous year||Included as part of Total Income||Included as part of Total Income||Included as part of Total Income|
|Income accruing outside India during previous year||Included as part of Total Income||Included as part of Total Income, (Subject to certain Conditions)||NOT included as part of Total Income|