Filing Income Tax Return: Determination of Residential Status

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  • ITR Filing

The income earned from India and money routed through transactions is subject to taxes that can be direct or indirect tax. Indirect taxes are levied on execution of any transactions or point of supply, for example, the collection of Goods and Service Tax. Direct taxes are levied on the income earned in India by an individual or any organisation. Here, we are discussing about the income tax in India.

Collection of income tax is a key source of funds for the Central Government to fund projects, activities and serve the public.Income Tax in India is imposed on the income of person under five heads as mentioned below for which chargeability and tax rate are different:

  1. Income from House Property
  2. Profits & Gains from Business & Profession
  3. Income from Salary
  4. Income from Capital Gains
  5. Income from other sources

Levy of Tax:

Under Entry 82 of Union List, the Government of India is empowered to levy tax on income other than agricultural incomes. The Central Board of Direct Taxes (CBDT) is the apex body that administers the direct taxes in India.

Income Tax is imposed on taxable income of all persons mentioned below.

  • Individual;
  • Hindu Undivided Families (HUFs);
  • Firms;
  • LLP;
  • Companies;
  • Association of Persons (AoP);
  • Body of Individuals (BoI);
  • Local Authority; and
  • Other artificial Judicial Person

The income earned is subject to taxes however, the taxability depends on the residential status of the person. Further, deductions and exemptions under Income Tax Act can be claimed based on the residential status of person. Therefore, determining the residential status is first step to know which income is subject to tax.

How to decide the Residential Status of a Person?

The residential status of the person will decide the taxability of income earned by the person. The residential status of a person may be changed every financial year based on conditions prescribed. For every class of person prescribed above, the test of residential status prescribed is different. Number of days spent in India during Financial year will be considered for this test. For this test, the previous year to financial year in which the income arises will be taken into consideration.

For Example, for deciding residential status of F.Y 2017-18, duration of F.Y 2016-17 should be checked to decide whether person is resident/non-resident.

Tests for residential status of Individual:

Section 6 of the Income Tax Act prescribes the criteria to decide the residential status of an Individual as follows:

  • Total stay of an individual is 182 days or more in given financial year; or
  • During four years preceding the relevant previous year, the individual has stayed in India for period(s) of 365 days or more and he was in India for a period or periods amounting in all to 60 days or more in that relevant previous year.

In case the person does not fulfil any of the condition, the residential status will be Non-Resident of India (NRI).

If the individual fulfilled any of the above given condition, the status of the individual for concerned Financial Year will be Resident of India.If the person is resident of India, he has to decide whether he is ordinarily resident or non-ordinarily resident, as per below mentioned conditions:

  • He has been resident of India in at least 2 previous years out of 10 previous years immediately prior to the previous year in question; and
  • He has stayed in India for at least 730 days in 7 previous years immediately preceding the previous year in question.

If both of the above conditions are fulfilled, the person is said to be Ordinarily Resident (OR). However, if the person does not fulfil any one or both the conditions, he is considered as Resident but Not Ordinarily Resident (RBNOR).

Based the residential status, the income that is chargeable to income tax will be decided. The taxability of income for NRI, OR and RBNOR is different.

Tests for residential status of HUF:

For the purpose of deciding the residential status of HUF, the control and management of the affairs of HUF will be considered. If the control and management is situated wholly outside India, then HUF will be Non-Resident and in other case it will be considered as Resident.

The affairs and management of the HUF is handled by the Karta. Therefore residential status of Karta will be considered for this purpose (as provided for Individual).

If the control and management of HUF is managed wholly or partially from India, HUF will be considered as Ordinary Resident.

HUF will be considered as Non Ordinarily Resident, if the Karta fulfils any of the conditions u/s 6(6) of the Act i.e. conditions 1 and 2 provided above.

If the control and management of HUF is situated wholly outside India, HUF will be considered as Non Resident.

Tests for residential status of Company:

The residential status of the company is determined as below:

Resident in India:

  • Indian Company; or
  • control and management of its affairs is situated wholly in India during concerned previous year

If the company is does not fulfil any of above criteria, it will be Non-Resident Company i.e. If a company is non-Indian or its control and management is wholly or partially situated outside India, its residential status is Non-Resident in India.

Tests for residential status of Firm, AoP or BoI:

If the control and management of the concerned entity is situated wholly of partially in India, its residential status is Resident of India.

In every other case, the entity is Non-Resident in India, which means, an entity wholly controlled and managed outside India will be considered as Non-resident.

For the purpose of residential status, the duration of stay, if any to be considered can be a continuous stay of otherwise. Further, if the individual is arriving in India or departing from India, both, date of arrival and date of departure shall be included in duration of stay in India. To know about taxability of the income earned, please look forward for our next blog.

About the Author:

Shrijay Sheth
Shrijay, co-founder of LegalWiz.in, is best known for his business acumen. On this platform, he shares his experiences backed by a strong understanding of digital commerce businesses. His more than a decade-long career includes a contribution to some of the highly successful startups and eCommerce brands across the globe.

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