Why is it essential to determine a person's status as Resident, Ordinarily resident and Not Ordinarily resident under Income Tax Act?

As we all must be aware about that an individual’s income taxability is depends upon his residential status, which is to be determined on a year to year basis.

Let us first see, when can an individual become a resident of India. An individual shall be deemed to be a resident of India if he satisfies any one of the following general conditions:-

1. Stay in a relevant previous year > 182 days, OR
2. Stay during 4 previous years preceding relevant previous years  > 365 days and stay during relevant previous years> 60 days.

However, there are two specific case-based conditions are also given for determining an individual’s residential status and whether he qualifies to be a resident of India or not:-

CASE 1: OUTBOUND CITIZEN

An individual who is a citizen of India leaving for employment outside India or leaving India as a crew member of Indian ship, he will be considered as a resident 

Condition: if his stay in the relevant previous year > 182 days.

CASE 2: INBOUND CITIZEN

An individual who is a citizen of India or Person of Indian Origin who being outside India comes on a visit to India, will be considered as a resident if he satisfies below given conditions:

Situation 1: Indian income (means excluding his income from foreign sources) < Rs. 15 lacs

• Condition: if his stay in relevant previous year > 182 days.

Situation 2: Indian income (means excluding his income from foreign sources) > Rs. 15 lacs

• Condition: if his stay in relevant previous year > 120 days but less than 182 days, AND stay during 4 previous years preceding relevant previous year > 365 days.

Note: If an individual doesn’t satisfy in any of the above-given condition for a relevant year, he will be considered as a NON-RESIDENT.

Now, once an individual’s qualify to be a resident, we must further check whether he is an ORDINARILY or NOT ORDINARILY resident.

First, we need to understand why we should determine whether an individual is an ordinarily resident or not ordinarily resident once he becomes a resident as per above conditions-

A crucial difference comes in the scope of taxability of his income. A person who qualifies to be an ordinarily resident, his global income will become taxable.

And if a person qualifies as Not ordinarily resident, his following income will be taxed in India:

1. Income earned/received or income deemed to be earned or received in India.
2. Income earned from the business controlled or from a profession set up in India.

In nutshell, his income earned outside India shall not be taxed in India provided it should not be controlled from India in the case of his business / professional income.

Now let us see when can a person be qualified to be an ORDINARILY RESIDENT or NOT ORDINARILY RESIDENT:

ORDINARILY RESIDENT

1. He is a resident at least in 2 previous years out of 10 previous years preceding the relevant previous year, AND
2. His stay during 7 years preceding the relevant previous year > 730 days

NOT ORDINARILY RESIDENT

If any or both of the conditions are not satisfied as stated above for an Ordinarily resident, he will be considered as a Not Ordinarily resident.

Therefore, while determining a person’s residential status as a resident, it is very much essential to check further, whether he is qualifying the conditions of becoming an Ordinarily resident too. As his scope of taxability of income will be highly effected.

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