Residential status Vs. Taxability of Income

The residential status of a person is required to be determined for each assessment year in order to determine the scope of total income. The basis of determination of residential status in respect of each person is laid down under the provisions of section 6 which are analysed hereinafter.

Resident: An individual is said to be resident in India in any previous year if he fulfills any one of the following two basic conditions:

i)   He is in India in that year for a period or periods amounting in all to 182 days or more;

ii) He is in India for a period or periods amounting in all to 60 days or more during the previous year and 365 days or more during the 4 years preceding that previous year.

Non-resident: If an individual does not satisfy any of the basic conditions, he shall be considered as non-resident.

Resident an not ordinarily resident: In addition to fulfilling one of the above basic conditions, in case an individual fulfils any of the following additional conditions, he will be treated as “not ordinarily resident’ in India in that previous year:

a)   He has been a non-resident in India in 9 out of the 10 preceding previous years; or

b)   He has been in India for a period not exceeding 729 days during the 7 preceding previous years.

Even if an individual satisfies one of the above mentioned additional conditions, he shall be resident but not ordinarily resident. The first additional condition implies that the assessee should not fulfill even one of the basic conditions in nine out of the ten preceding previous years.

Resident and ordinarily resident: In case an individual fails to satisfy both the conditions for not ordinarily resident, he shall be considered as resident and ordinarily resident.

Relation between residential status and incidence of tax [Section 5]

Under the Act, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual of receipt of income:

Indian Income and foreign income

Indian Income: Any of the following three is an Indian income:

i)   if income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year;

ii) If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year;

iii)     If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year;

Foreign income: If the following conditions are satisfied, then such income is foreign income:

i)   Income is not received (or not deemed to be received) in India; and

ii) Income does not accrue or arise (or does not deem to accrue or arise) in India.

The provisions of residential status are tabulated as below:

Not taxable

Incidence of tax for different taxpayers is as follows:

Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):

Any other taxpayer (like company, firm, co-operative society, association of persons, body of individuals, etc):

Conclusion:

Indian Income: Indian income is always taxable in India irrespective of the residential status of the taxpayer;

Foreign Income: Foreign income is taxable in the hands of resident in case of a firm, co-operative society, association of persons, body of individuals or resident and ordinarily resident in case of individuals and HUFs in India. Foreign income is not taxable in the hands of non-resident in India.

In the hands of resident but ordinarily resident taxpayer, foreign income is taxable only if it is

-     business income and business is controlled wholly or partly in from India; and

-     income from profession which is set up in India