Residential status income tax
Residential Status Income Tax: Meaning, Rules & Importance
In this post, we will discuss the concept of residential status in income tax, its importance, and how it affects a person’s tax liability in India. Residential status is not the same as citizenship; it is determined by the number of days spent in India throughout the financial year. Understanding this classification is critical since it determines how your income is taxed. Let’s look at each section in detail:
What is Residential Status?
Residential status determines how much tax a person or organization must pay in India. It differs from citizenship. You can be an Indian citizen while remaining a nonresident for tax purposes in a particular year. Whereas a foreign citizen might be regarded as a resident for tax reasons in India.
Importance of Residential Status
In India, taxation is based on a person’s residential status for the current year, not their citizenship. Being an Indian citizen does not automatically make you a tax resident. You may still be considered a nonresident for tax purposes in any particular year. However, a foreign citizen may be declared a resident if certain circumstances are met.
It’s also worth noting that residential status is determined differently for people, companies, and groups.
How to Determine Residential Status?
Determining your residential status is important since it determines how much of your income is taxed in India. The Income Tax Act of 1961 establishes specific guidelines for this. Important factors for defining residential status are:
- Basic Conditions:
- Stay in India for 182 days or more: A person is considered a resident if they spend at least 182 days in India during the relevant financial year.
- If you have stayed for at least 60 days in the current year and 365 days in the previous four years, you are also a resident.
Exception: If you are an Indian citizen or of Indian origin visiting India and earn over ₹15 lakh (excluding foreign income), the 60-day rule becomes 182 days.
- Additional Conditions for ‘Resident and Ordinarily Resident’ (ROR):
- You must have been a resident for at least 2 of the last 10 years.
- You must have spent 730 days or more in India over the last 7 years.
- Non-Resident (NR):
If you don’t meet any of the above conditions, you are classified a Non-Resident (NR) for tax reasons.
Exceptions to Residential Status
Suppose an Indian citizen leaves India for employment or as a crew member on an Indian ship during the financial year. In that case, they are only considered a resident if they stay in India for at least 182 days.
When an Indian citizen or a Person of Indian Origin (PIO) visits India:
- If one’s total income (excluding foreign sources) exceeds ₹15 lakh, they are considered to be a resident if:
- They stay in India for at least 182 days in that year, OR
- They spent at least 365 days in India during the last 4 years, with 120+ days this year.
Additionally, An Indian citizen with a total income over ₹15 lakh (excluding foreign sources) and no tax liability in any other country will be considered a “deemed resident of India.”
How to Calculate the Residential Status of an Individual?
A person’s residence status is decided based on:
- Days spent in India during the particular financial year.
- Days spent in India throughout the last four years.
- Whether they are an Indian citizen or of Indian origin.
- Whether they work for the Indian government or another public sector organisation.
Conclusion
A person can be identified as Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Nonresident (NR) based on certain conditions. Knowing your residency status is important for taxes because it determines how much you must pay. It is usually a good idea to get professional advice to determine your status correctly.
With that, we conclude this post. Please leave any questions or comments in the space below; we will gladly answer them.
FAQs
1. Who is an Indian-origin individual?
Ans: A person is considered to be of Indian origin if his parents or grandparents were born in India when it was still a single nation.
2. What are the many types of residential status?
Ans: Residential status is divided into three groups under the Income Tax Act: non-resident (NR), resident but not ordinarily resident (RNOR), and resident and ordinarily resident (ROR).
3. How is an individual's residence status decided?
Ans: An individual’s residential status is decided based on their length of stay in India, and it is computed separately each year.
4. When does someone become a resident of India?
Ans: An individual is considered to be a resident of India if he spends 182 days or more in India in the previous year or if he spends 60 days in the previous year and 365 days in the four years before the previous year. If an individual fails to meet the above requirements, he will be declared a nonresident in India.
