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Residential Status under the Income Tax Act

Venkat Raj 
on 17 December 2020

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Residential status is a vitally critical component under Income tax. It varies for various classes of assessees. The concept of residential status lies under Income tax and FEMA.

The nature of Income accruing purely depends on residential status. Way back in Finance act 2016 for companies POEM (place of effective management) was introduced in accordance with OECD (organization economic corporation development). This widely applicable for a foreign company having a turnover of above 50 crores as in a preceding year. A domestic company is always a resident as long as the place of incorporation is in India. For the residential status of an individual in the Finance Act, 2020 big-time changes have made. it is so vital as the entire scope changes. This change has been incorporated after the finance act 2004. Finance bill 2020 gave a big shocker however finance act 2020 gave relief after a ton of discussion.

To begin with, an individual residential status and citizenship are two parallel concepts. Both are independent of its existence. Section 6 of the Income-tax act is the governing section.

An Individual is said to be resident if he fulfills any one of the condition

  • Stays in India for a period of 182 days or more during the previous financial year.
  • Stays in India for a period of 60 days or more during the previous financial year and 365 days or more during 4 years preceding the relevant previous year.

If any one is satisfied then he becomes Resident. If both are not satisfied he is a non-resident.

Here there is an exception whereby only 1st condition is taken:

Residential Status under the Income Tax Act
  • An Indian citizen who goes outside India for purpose of carrying out employment outside India
  • An Indian citizen who is a member of the crew of Indian ship who is on a voyage the following days shall not be included the date entered into continuous discharge certificate in respect of joining the ship and date entered into continuous discharge certificate in respect of signing off by the individual in respect of ship.

The term total income has been defined which includes Indian income accruing or arising and deemed to accrue or arise in India and income from a business or profession controlled in India but income received outside India. Only these form part of total income the inclusion shall be done.

A person of Indian origin if he or his either of his parent or grandparents were born in Undivided India. (undivided India means India before Independence).

In the case of an Indian citizen or person of Indian origin who stays in India for a period of 60 days or more but less than 182 days will be non-resident. This is provided total income of assessee is less than 15 lakhs as on the previous year.

The resident is broken into

  • ROR (resident and ordinary resident)
  • RBNOR(Resident but not ordinary resident)

For simplicity, the next step can be to determine Resident but not ordinary resident considering the way provisions have been amended.

Any one condition should be satisfied

  • Stay in India should have been 729 days or less for 7 years preceding the relevant previous years.
  • Should have been non-resident for 9 out of 10 previous years preceding the relevant previous year.
  • An Indian citizen or person of Indian origin who is outside India comes to India for a visit (visiting parents, maternity leave) having total income exceeding 15 lakhs during the previous year has been in India for a period of 120 days or more but less than 182 days
  • If such Individual is an Indian citizen who is deemed resident under section 6(1A)
 

If not even one satisfies the status becomes non-resident.

Deemed Resident

A new concept which created heartbreak for Indian citizen who claimed to be non-resident across all parts of the globe thereby not declaring Income worldwide. Particularly people living in tax heavens. Therefore the department has found a loophole and introduced the concept.

As per section 6(1A) of Income Tax Act 1961, An individual whose total income (Indian income and income from business or profession in India but the money received outside India) exceed 15 lakhs as in the previous year would be deemed as a resident if such individual claim to not pay tax in other parts of the globe by way of domicile or residence or any other criteria of similar nature.

However, relaxation has been made where such an individual is called as a resident in the previous year then deemed resident won't apply.

This affects Lawyers a lot who are practicing abroad.

Conclusion

This created heartbreak for Indian citizen or a person of Indian origin who are outside India visit India frequently. this also creates turbulence for Individual having a high net worth earning Income in different parts of the world

At chartered accountancy academic portion, it impacts a lot on Income tax at IPCC level and extremely at Final level.

It nevertheless hurts international taxation at the final (elective). But if students understand the concepts properly it can be easy. this finance act 2020 applies for May 21 November 21 exam

Because of this very basic answers change and as residential status marks the backbone certainly one has to be careful conceptually clear.

 

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