Residential Status Under the Income Tax Act

The concept of residential status is an important aspect of the Indian Income Tax Act. It determines the taxability of an individual's income in India. Residential status refers to the status of an individual who is either a resident or a non-resident based on his or her physical presence in India during a financial year. 

It is essential to determine the residential status of an individual for tax purposes, as it affects the income tax liability and compliance requirements under the Income Tax Act. This blog post will provide an overview of the criteria used to determine residential status, the categories of residential status, and their tax implications.
 

What is Residential Status Under Income Tax Act?

Residential status under the Indian Income Tax Act refers to the status of an individual who is either a resident or a non-resident based on his or her physical presence in India during a financial year. An individual's residential status is important as it determines the taxability of his or her income in India.

The Income Tax Act categorizes residential status into three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). The determination of residential status is based on specific criteria prescribed by the Income Tax Act, such as the number of days spent in India during the financial year and the number of days spent in India in the preceding financial years. 

The tax implications of each category of residential status are different, and it is important for individuals to understand their residential status to comply with the tax laws and regulations.
 

Importance of residential status

Determining the residential status of an individual is important for several reasons. Here are a few reasons why understanding residential status is essential:

●    Tax Liability: The tax liability of an individual in India depends on their residential status. Resident individuals are taxed on their global income, while non-residents are taxed only on their Indian-sourced income. Therefore, it is crucial to determine the correct residential status to calculate the correct tax liability.

●    Compliance requirements: Different compliance requirements apply to individuals based on their residential status. For example, resident individuals are required to file their tax returns in India, while non-residents are not required to file tax returns if their income is below a specified limit. Therefore, it is essential to determine the residential status to comply with the tax laws and regulations.

●    Double Taxation: An individual who is a resident of more than one country may be subject to double taxation, i.e., being taxed twice on the same income in both countries. Understanding residential status can help individuals claim tax relief under the Double Taxation Avoidance Agreements (DTAA) that India has entered into with other countries.
 

How to determine residential status?

The determination of an individual's residential status is based on specific criteria prescribed by the Income Tax Act. The following are the criteria for determining residential status:

1.    The number of days spent in India during the financial year (1st April to 31st March). An individual will be considered a resident if he or she is present in India for:
a.    182 days or more during the financial year, OR
b.    60 days or more during the financial year AND 365 days or more during the preceding four financial years.
2.    If an individual meets either of the above criteria, he or she will be considered a resident. If not, the individual will be classified as a non-resident.
3.    In the case of an individual who is leaving India for employment abroad or is a member of a crew on an Indian ship, the 60-day period mentioned above is extended to 182 days.
4.    Once an individual's residential status has been determined, he or she will be classified as either a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR), based on their physical presence and stay in India during the financial year and the preceding years.

It is important to note that the determination of residential status is crucial, and individuals should maintain accurate records of their stay in India and abroad to avoid any confusion or disputes with the tax authorities.

Resident Status Classifications

The Indian Income Tax Act classifies residential status into three categories: 

●    Resident and Ordinarily Resident (ROR),
●    Resident but Not Ordinarily Resident (RNOR), 
●    Non-Resident (NR). 

ROR individuals are taxed on their global income, RNOR individuals on Indian-sourced income, and NR individuals only on income earned in India.
 

Resident (ROR)

Resident and Ordinarily Resident (ROR) is a residential status classification under the Indian Income Tax Act. An individual is considered a ROR if they have been present in India for 182 days or more in the financial year or for 60 days or more in the financial year and have been present in India for 365 days or more during the four years immediately preceding the relevant financial year. 

In addition, an individual will be considered an ordinarily resident if they have been a resident of India for at least two out of the ten previous years immediately preceding the relevant financial year. ROR individuals are taxed on their global income, i.e., income earned in India as well as income earned abroad.

Resident but Not Ordinarily Resident (RNOR)

Resident but Not Ordinarily Resident (RNOR) is a residential status classification under the Indian Income Tax Act. An individual is considered an RNOR if they have been a non-resident in India in nine out of the ten previous years immediately preceding the relevant financial year, or if they have been present in India for 729 days or less in the preceding seven financial years. 

RNOR individuals are taxed on their income earned in India, and income received or deemed to be received in India. However, income earned abroad is not taxed in India. The RNOR status benefits individuals who have returned to India after being a non-resident for a long period or those who intend to move abroad soon.

Non-Resident (NR)

Non-Resident (NR) is a residential status classification under the Indian Income Tax Act. An individual is considered an NR if they do not satisfy the criteria to be classified as a Resident or an RNOR. NR individuals are taxed only on income earned or received in India.

Income earned abroad is not taxed in India. NR individuals are required to file a tax return in India only if their income in India exceeds the basic exemption limit, which is currently Rs 2.5 lakhs per annum. Non-Resident Indians (NRIs) who earn income in India but are residents in another country may be eligible for tax benefits under the Double Taxation Avoidance Agreement (DTAA) between India and their country of residence.
Tax for Residents, NR, NROR 
Residents and Resident and Ordinarily Residents (ROR) are taxed on their global income, i.e., income earned in India as well as income earned abroad. They are eligible for all tax exemptions, deductions, and benefits available under the Indian Income Tax Act.

Non-Residents (NR) are taxed only on income earned or received in India. Income earned abroad is not taxed in India. NRs are required to file a tax return in India only if their income in India exceeds the basic exemption limit.

Resident but Not Ordinarily Resident (RNOR) individuals are taxed on their income earned in India, and income received or deemed to be received in India. However, income earned abroad is not taxed in India. RNOR status is beneficial for individuals who have returned to India after being a non-resident for a long period or those who intend to move abroad in the near future.
 

How to Calculate the Residential Status of an Individual?

The residential status of an individual can be determined based on the following criteria:

1.    The number of days the individual has been present in India during the relevant financial year.

2.    The number of days the individual has been present in India during the four years immediately preceding the relevant financial year.

3.    The individual's status as a citizen of India or a person of Indian origin.

4.    The individual's status as an employee of the Indian government or a public sector undertaking.

Based on the above criteria, an individual can be classified as a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR). It is important to note that the determination of residential status is crucial for tax purposes, as it affects the tax liability of the individual. Therefore, it is recommended to seek professional advice to determine the residential status of an individual.