Income Tax Act - Determining the Residential Status of an Individual

Determining the residential status is essential during the time of income tax filing. There are different taxable incomes and some exceptions regarding the residential status in India.
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Section 6 (1) of the Income Tax Act, 1961, offers two sets of parameters to determine whether a particular person is an Indian citizen or not. If the said individual falls under any one of the following criterias, he/she will be a resident of the country. These are:

  • If the individual has resided in India during the relevant financial year that amounts to a total of 182 days or more.
  • If the individual has resided in India for four consecutive years before the relevant financial year that amounts to a total of 365 days or more.

Meeting with the above mentioned parameters qualifies an individual as a resident of the country, however, in order to become an ordinary citizen of the country, one has to meet with the following standards:

  • If the individual has been an Indian citizen for two consecutive financial years out of ten financial years, that falls immediately before the relevant financial year.
  • If the individual has resided in India for seven consecutive financial years immediately before the financial year in question.

Why is the residential status of a person important for Income Tax?

Any salaried or self-employed individual residing in India will be subjected to the age-old Income Tax based on their residential status. At the time of Income Tax return filing, it is very important to determine the residential status of a person, since it is the most important component in the realm of taxation.

Multiple taxpayers are subjected to a wide range of taxable incomes. Let us look at them in detail with the help of the following table:

Details and Particulars Ordinary Resident and Resident A non-ordinary resident NRI
If the income is received in India, irrespective of whether it has its source in India or not Yes Yes Yes
Income ensuing in India or is expected to ensue in India during the relevant financial year, irrespective of whether it has its source in India or not Yes Yes Yes
If an individual is receiving his income anywhere outside India, but the business is being handled from India Yes Yes No
Income ensuing outside India and received in the same place in the relevant financial year from other sources Yes No No

What are some of the exceptions pertaining to a person’s residential status in India?

Two exceptions to the general rule can be applied here:

  1. If a person (a resident of India) leaves the country in order to take up another job outside India, during a financial year, the second provision mentioned above will be nullified, and only the first one will be valid.
  2. If a person of Indian origin who has been residing outside India, visits the country (India) during a particular financial year, then the second condition specified above will be nullified, and only the first one will be valid.

Residential Status in India: Things to Keep in Mind

  1. Income Receipt: To levy Income Tax, it is of utmost importance that you save the first receipt. If a certain amount of money received outside India is subsequently dispatched to India, it will be considered a foreign receipt. Merely because there is an issue of remittance involved, does not make the amount an income received in India.
  2. Citizenship Vs Residential Status: There is an enormous difference between the two notions. A citizen may not be a resident in the same country. In comparison with this, an individual being a citizen of a foreign country may still be an Indian citizen.
  3. Stay Period Calculation: Calculating an individual’s period of stay is essential to the concept of residential status. It is important to note here that the stay does not necessarily have to be ongoing in nature. Elements such as the total number of days spent at a time are important for computation. The individual’s stay can be at any location, and not necessarily in the same place.

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