Residential status is the starting point to determine:
Under Income Tax law, the purpose is to determine taxability of income. It is a revenue law. The income is determined for the full year. If a person is a resident, his global income is taxable in India. If a person is a non-resident, only his Indian income will be taxable. Income earned and received outside India is not taxable in India. For earning income, no approval is required under the Income tax act. Income tax law is only concerned with taxable income and the tax thereon.
The meaning under the ITA is based on number of days stay in India. Purpose and intention have almost no relevance.
A foreigner comes to India for tourism. He falls ill and has to stay longer. This results in his stay exceeding 182 days in a year. Such a person will become a resident under the ITA.
Different categories of residence under ITA:
- Under ITA, a person can be a (i) resident, (ii) non-resident or (iii) resident but not ordinarily resident.
- As a non-resident, a person can be a (i) Non-resident Indian (NRI) or (ii) Non-NRI (outright foreigner).
- As a non-resident, a person can be a (i) Non-resident Indian (NRI), (ii) Person of Indian Origin (PIO), or (iii) Non-NRI/PIO (i.e. outright foreigner).
Under ITA, tax treatment is different for different categories of residential status.
Residence under ITA:
- Residence is defined under S. 6(1). It is the number of days which determine the residential status. If any of the two conditions are satisfied, the person will be considered as an Indian resident.
i) A person stays in India for 182 days or more in a year (S.6(1)(a)).
ii) A person stays in India for 60 days or more in a year;
and stays for 365 days or more in the preceding four years (S.6(1)(c)). (cumulative conditions).
- This second test (which includes 365 days test) is generally forgotten by many people. It is a common belief amongst many people that if a person stays outside India for more than 181 days (more than half the year), he is a non-resident. This is a misconception.
- The definition is to determine “residence”. Therefore the converse of the conditions is the meaning of “non-resident”. A client will most of the times come and ask you “what should I do to become a non-resident?” We need to apply the converse test. If any of the following conditions are satisfied, a person will be a non-resident.
i) A person stays in India for less than 60 days.
ii) A per stays in India for less than 365 days in the preceding four years;
and stays for less than 182 days in the relevant year. (cumulative conditions).
Employment outside India of Indian citizen:
For an Indian citizen who is resident in India and he leaves India for the purpose of employment outside India, relief is provided in Explanation 1(a) to S.6(1). The number of days up to which a person can stay in India and still be a non-resident is increased to 181 days. In other words, if the person leaves India for employment in a year, even if he is India for up to 181 days in that year, he will be considered as a non-resident. The condition of 365 days in the preceding four years becomes irrelevant. S.6(1)(c) is equivalent to S.6(1)(a).
Similar relief has also been provided for Indian citizen who leaves India as a member of ship crew. This is discussed in para 7 below.
Visit to India:
For an Indian citizen or a Person of Indian Origin (PIO) who are outside India, relief is provided for visit to India (Explanation 1(b) to S.6(1)). Under S.6(1)(c), the number of days up to which a person can stay in India and still be a non-resident is increased to 181 days. In other words, if the person visits India in the previous year, even if he is in India for up to 181 days, he will be considered as a non-resident. The condition of 365 days in the preceding four years becomes irrelevant. S.6(1)(c) is equivalent to S.6(1)(a).
This relief is not available to an outright foreigner.
Intermediate Residential Status
Normally a person is either a resident or a non-resident. However under Income Tax Act, a person can be a “Resident but Not Ordinary Resident.
Resident but Not Ordinarily Resident (RNOR) under the ITA:
Under section 6(6), an individual can be a Resident but Not Ordinarily Resident (RNOR) if he satisfies any of the following conditions:
i) If a person is a non-resident for 9 preceding years concerning the relevant year, he can be a RNOR for 1 year.
ii) If a person is a non-resident for 10 years or more, he can be a RNOR for 2 years.
iii) If within the 7 preceding years, his stay in India is for less than 730 days, he will be a RNOR for the relevant year. Thus practically it is possible to be a RNOR for 3 years.
As a RNOR, foreign income received outside India, is exempt from tax. Once the RNOR status period expires, his foreign income will be taxable in India. Some other benefits like tax exemption on foreign currency deposits will be available till a person is a RNOR.