For a person moving outside India or Traveling frequently to India, residency is of paramount importance, as it determines what income is taxable and also what type of bank accounts he can open and operate. The residential status of the individual is the basis of the tax implications. For example, a non-resident may need to file returns in the country of residence as well as in India, but a resident Indian has to file returns only in India. This status primarily depends on the period of stay in the country and may change each year.
Resident & Non- Residential Status as per Income Tax Act
Income Tax Act does not clearly define a non-resident. Instead, it defines who is resident and not ordinarily resident. A person not falling into the category of a resident or not ordinarily resident, he/she will be non-resident.
As per Income Tax Act of India, an individual is said to be resident in India for the financial year, if he satisfies any of the following conditions:
- He stayed in India for a period of 182 days or more in the financial year OR
- He stayed in India for 365 days or more during the 4 previous years immediately preceding the relevant financial year and for at least 60 days or more in the financial year.
If these conditions are not satisfied, an individual is said to be a Non-Resident Indian (NRI).
There are exceptions to the 2nd condition stated above for residential status of an individual as follows:
- The 2nd condition will not apply to an individual, who is a citizen of India and leaves India in any FY for the purpose of employment outside India or as a crew member of an Indian Ship
- The 2nd condition will not apply to an individual, who is a citizen of India or a person of Indian origin and who resides outside India and comes on a visit to India in the financial year.
Note: A person shall be considered to be of an Indian origin if he, or either of his parents or any of his grandparents, were born in undivided India.
Any HUF, a company, an association of persons whose control and management are situated wholly outside India ( a company registered and managed outside India) for the whole financial year, is treated as non-resident in India. If a company is an Indian company or its control and management are situated wholly in India, it is treated as resident in India.
A resident individual is further classified as ‘Resident and Ordinarily Resident’ and ‘Resident but Not Ordinarily Resident.’ An individual is said to be a resident and ordinarily resident if he satisfies both the following conditions:
- He is resident in India for nine years out of 10 years preceding the relevant financial year, AND
- He stayed in India for at least 730 days during the seven years immediately preceding the relevant financial year.
If anyone of the above conditions is not satisfied, an individual is called resident but not ordinarily resident in India. He has to pay tax only on income generated in India and not on income earned outside India.
Note: Citizenship and residential status of a country are different concepts. For example, an individual may be a foreign citizen but may be a resident in India whereas; an individual may be an Indian citizen but may not be a resident in India.
Certain points to be remembered
- It is not compulsory that the stay in India should be for a continuous period, it may be intermittent. It is also not necessary that the stay in India should be only at one place. But instead, it can be anywhere in India.
- The day an individual enters India and the day he leaves India should both be treated as stay in India for the purpose of computing the stay period. In case if borderline, where stay in India is very close to 182 days, his stay in India is calculated on an hourly basis and a total of 24 hours should be taken as 1 day.
The following types of incomes are taxable by the different categories of a taxpayer as follows:
|Particulars||Resident and ordinarily resident||Resident but not ordinarily resident||Non-resident|
|Income earned in India||Yes||Yes||Yes|
|Income accrues or arises in India||Yes||Yes||Yes|
|Income accrues or arises outside India||Yes||No||