Residential Status under the Income Tax Act
Recently, due to the ongoing COVID-19 pandemic, many NRIs got stranded in India, which triggered concerns about their residential status in the country. It is imperative to check the residential status of a person for every financial year because this is one of the key factors that determine the taxability of income.
The term “residential status” is defined under the Income Tax Act of India and has no relation to a person’s citizenship. An individual may be an Indian citizen and still be a non-resident for a particular financial year. Similarly, a foreign citizen may become a resident of India for income tax purposes in a specific year.
Types of Residential Status
The taxability of an individual varies based on their residential status. Before understanding tax implications, it is essential to know how a taxpayer is classified as:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Who is a Resident in India?
As per Section 6(1) of the Income Tax Act, an individual is considered a resident in India for a particular financial year if they satisfy either of the following conditions:
- The individual has been in India for at least 182 days during the previous year, or
- The individual has been in India for at least 365 days in the four financial years preceding the previous year and for a minimum of 60 days in the relevant previous year.
Who is a Non-Resident in India?
If an individual does not satisfy either of the above conditions, they are considered a non-resident for that financial year.
Exceptions
Certain individuals will be considered residents in India only if their stay in the relevant previous year is 182 days or more:
- Indian citizens leaving India as crew members of an Indian ship or for employment abroad.
- Indian citizens or persons of Indian origin residing outside India who visit India during the relevant previous year.
If such individuals have total income exceeding Rs. 15 lakhs (excluding foreign income), they will be considered residents if:
- Their stay in India during the relevant previous year is at least 182 days, or
- They have been in India for at least 365 days in the four preceding years and at least 120 days in the relevant previous year.
Deemed Resident (Section 6(1A))
An Indian citizen earning more than Rs. 15 lakhs (excluding foreign income) in a financial year will be deemed a resident in India if they are not taxable in any other country due to residence, domicile, or similar criteria, even if they do not meet the conditions of Section 6(1).
Resident and Ordinarily Resident (ROR) vs RNOR
A resident individual is further classified as ROR or RNOR. As per Section 6(6), a person is considered RNOR if they satisfy any of the following conditions:
- They were a non-resident in India for 9 out of the 10 preceding financial years.
- Their stay in India during the last 7 years is 729 days or less.
- They are an Indian citizen or person of Indian origin with income exceeding Rs. 15 lakhs and stayed in India for at least 120 days but less than 182 days during the relevant year.
- They are an Indian citizen deemed resident under Section 6(1A).