RESIDENTIAL STATUS OF AN INDIVIDUAL- SECTION 6
Section 5 & 6 of the Income Tax Act, 1961 are the guiding sections for taxability of income of any taxpayer in India. Section 5 of the Income Tax Act deals with the “Scope of Income” whereas section 6 helps in determining residential status of any taxpayer in India. Determination of the residential status under the Income Tax Act plays an important role in determining whether income of any person is taxable in India or not. In this article, we shall discuss the rules for determination of residential status of an individual taxpayer and also discuss various amendments relating to residential status made by Finance Act, 2020 & 2021.
Objective of determining residential status:
Determining the residential status of any assessee is the first and foremost task for ascertaining the taxable income of such assessee in India. As per section 6, the residential status of any taxpayer can be classified into two parts:
(a) Resident
(b) Non-Resident
In the case of Individual assessees, the Resident can be further classified as “Resident and Ordinarily Resident” (ROR) and “Resident but not ordinarily resident” (RNOR). However, in case of other assessees, there are only two categories i.e. Resident and Non-Resident. Finance Act, 2020 has introduced a concept of “deemed resident” for Resident Individuals which has been so introduced to curb the incidence of tax evasion. It is to be noted that residential status of any assessee is ascertained in respect of each previous year and not on a particular date. A person who is a ROR in a particular previous year may become RNOR or NR in next year or so.
Residential status in case of Individuals: [Section 6(1)/6(1A)/6(6)]
Taxability of an individual visiting India or going outside India has always been a matter of concern for the revenue authorities. Recent amendments made by the Government by Finance Act, 2020 are in this line to plug loopholes in the manner of determination of residential status of individuals & consequential taxability of their income. Residential status of an individual determines whether his global income shall be taxable in India or not.
Therefore, we will first determine the residential status of an individual based on number of days he stayed in India in accordance with section 6 of the Income Tax Act. On the basis of his residential status, section 5 of the Act will govern us how the income of resident will be taxable in India.
According to section 6(1), an individual is said to be a resident if he satisfies ANY of the following conditions:
(i) His period of stay in India during the previous year for 182 days or more; OR
(ii) His period of stay 60 days or more in the previous year + 365 days or more in preceding 4 previous years;
These are the PRIMARY CONDITIONS for a person being a resident. However, there are two exceptions to the above rule.
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Exception-1: If an Indian citizen who leaves India in any previous year as a member of the crew of an Indian ship or for the purposes of employment outside India, he will be considered as “Resident” if his period of stay in India is 182 days or more. The condition (ii) as above need not be checked. Exception-2: Indian citizen or a person of Indian origin (PIO), who being outside India, comes on a visit to India in any previous year, he will be considered as “Resident” if his period of stay in India is 182 days or more. The condition (ii) as above need not be checked. There has also been an amendment in section 6(1) of the Income Tax Act which we will discuss below in the article at appropriate place. |
Individual resident can further be classified into ROR and RNOR. For this purpose, the provisions are given by section 6(6) of the Income Tax Act as below:
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A person is said to be “Resident but not ordinarily resident” in India in any previous year if satisfies ANYONE of the following conditions- (a) If such individual has been a non-resident in India in any 9 out of 10 previous years preceding the relevant previous years, OR (b) If such individual has been in India for a period of 729 days or less during the 7 previous years preceding the relevant previous year.
To make it simple, an individual is said to be “Resident and ordinarily Resident” if he satisfies both the following conditions: (a) If such individual has been a resident in India in any 2 years or more out of 10 previous years preceding the relevant previous year AND (b) His period of stay in India is 730 days or more during the 7 previous years preceding the relevant previous year. If the individual satisfies both the conditions as above, he is a ‘Resident and ordinarily Resident’ but if he fails to satisfy any one of the two conditions he will be ‘Resident but not ordinarily Resident’. |
Notes:
- Residential status is to be determined on year-to-year basis.
- Person of Indian Origin (PIO): A person is said to be of Indian origin if he or either of his parents or any of his grandparents, was born in Undivided India.
- The term “Stay in India” includes stay in the territorial waters of India (i.e. 12 nautical miles in the sea from Indian coastal line). Thus, even stay on a ship or boat moored in the territorial water of India will be sufficient to make the individual as resident in India.
- It is not necessary that the stay in India must be continuous or active nor is it essential that the stay should be at the usual place of business, residence or employment of the individual.
- For the purpose of counting the number of days of stay in India, both the date of arrival and date of departure are considered to be in India.
- The residence of an individual has nothing to do with his domicile, place of birth or citizenship. An individual can therefore, be resident in more than one country even though he can have only one domicile.
How to determine period of stay in India for an Indian citizen, being a crew member
In case of foreign bound ships, whose destination of voyage is outside India, there was uncertainty regarding the manner of determining the period of stay in India for an Indian citizen who is a crew member of such ship. For this purpose, Explanation-2 to section 6(1) provides for determination of the stay period in the prescribed manner. Accordingly, CBDT has, vide Notification No. 70/2015 dated 17.08.2015, inserted Rule 126 in the Income Tax Rules, 1962.
According to Rule 126, in case of an Indian citizen who is a crew member of a ship, the period of stay in India shall, in respect of an eligible voyage, not include the following period:
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Period commencing from |
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Period ending on |
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Date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage. |
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Date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage. |
Meaning of certain terms:
(a) Continuous Discharge Certificate- This term has the meaning assigned to it in the Merchant Shipping (Continuous Discharge Certificate cum Seafarer’s Identity Document) Rules, 2001 made under the Merchant Shipping Act, 1958.
(b) Eligible Voyage- A voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where- for the voyage having originated from any port in India, has as its destination any port outside India; and for the voyage having originated from any port outside India, has destination of any port in India.
Amendments through Finance Act, 2020
AMENDMENT NO. 1:
Before Finance Act, 2020, Indian citizens or Person of Indian Origin (PIO) who were settled outside India and who visited India frequently in respect of business controlled from India could manage their visits in such a manner that their stay in India was less than 182 days. Thus, they retained their status as ‘Non-residents’. As a result, their income arising outside India from a business controlled from India remained untaxed in India. Therefore, Explanation 1(b) to section 6(1) as amended by Finance Act, 2020 read with section 6(6) is as below:
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Any person who is an Indian citizen or PIO, who being outside India, comes on a visit to India shall be considered as resident in India in the previous year if: (i) His period of stay in India during the previous year is for 182 days or more; OR (ii) His period of stay is 120 days or more in the previous year + 365 days or more in preceding 4 previous years; AND His total income other than the income from foreign sources is more than Rs. 15 Lakhs in the previous year
Further, as per section 6(6), such individual shall be “Resident but not ordinarily resident” if his stay in India in that previous year is 120 days or more but less than 182 days.
Analysis:
Effect of amendment: In case of Indian citizen/ PIO residing outside India and visiting India in a previous year shall be considered as RNOR if he fulfils the following conditions:
Due this amendment, such individuals shall be treated as “RNOR” therefore they will be liable for tax in India for any income arising outside India from a business controlled or profession set up in India. Meaning of Income from foreign sources: “Income from foreign sources” means income which accrues or arises outside India
Therefore, Total Income (other than foreign income) = Income deemed to accrue or arise in India as per section 9 + Income from business controlled or profession set up in India. To sum up, If an Indian citizen/ PIO residing outside India has a total income (other than foreign income) more than Rs. 15 Lakhs in India and his period of stay in India is 120 days or more but less than 182 days + 365 days or more in 4 preceding previous years, he shall be liable to pay tax on income arising outside India from any business controlled in India or profession set up in India. |
AMENDMENT NO.-2:
The concept of “Deemed Resident” has been introduced by the Finance Act, 2020 for avoiding tax abuse by the stateless persons. For this purpose, section 6(1A) has been inserted in the Income Tax Act. The ‘stateless persons’ are those individuals who arranges their business affairs in such a manner they are not liable to tax in any country or territory by reason of their domicile or residence or any other criteria. The aforesaid amendment is intended to tax the Indian citizen who are resident of a tax heaven country and they derive income outside India from business controlled in India.
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Section-6(1A): “Notwithstanding anything contained in section 6(1),
Explanation: Section 6(1A) shall not apply in case of an individual who is said to be resident in India in the previous year under section 6(1). Section-6(6): “A person is said to be “not ordinarily resident” in India in any previous year if such person is a citizen of India who is deemed to be resident in India under section 6(1A).”
Analysis of section 6(1A) read with section 6(6):
Effect of amendment: Indian citizen who has income accruing or arising outside India from business controlled or profession set up in India shall be liable to pay tax on such income even if his stay period in India is ‘nil’, if such individual is not liable to tax in any other country or territory and his total income (other than foreign income) is more than Rs. 15 Lakhs. |
Note: RNOR is considered to be ‘resident’ under the Income Tax Act for all the purposes except under section 92, 93 & 168 of the Act where these are to be considered as ‘non-residents’.
