All-About the Residential Status in Income Tax
- Blog|Income Tax|
- 36 Min Read
- By Taxmann
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- Last Updated on 28 November, 2023
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Table of Contents:
1. What is the relevance of residential status
2. Residential status – General norms
3. Residential status of an individual [Sec. 6]
4. Residential status of a Hindu undivided family [Sec. 6(2)]
5. Residential status of the firm and association of persons [Sec. 6(2)]
6. Residential status of a company [Sec. 6(3)]
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Residential Status – Landmark Ruiling; Announcements – Read More in Details Here
1. What is the relevance of residential status
There are two types of taxpayers—resident in India and non-resident in India. Indian income is taxable in India whether the person earning income is resident or non-resident. Conversely, foreign income of a person is taxable in India only if such person is resident in India. Foreign income of a non-resident is not taxable in India.
2. Residential status – General norms
One has to keep in mind the following norms while deciding the residential status of an assessee :
2.1 Different taxable entities
Section 6 lays down the test of residence for the following taxable entities :
a. an individual ;
b. a Hindu undivided family ;
c. a firm or an association of persons or a body of individuals ;
d. a company; and
e. every other person.
2.2 Different kinds of residential status
Assessees are either (a) resident in India, or (b) non-resident in India. As far as resident individuals and Hindu undivided families are concerned, they can be further divided into two categories, viz., (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. All other assessees (viz., a firm, an association of persons, a company and every other person) can simply be either a resident or a non-resident.
2.3 Different residential status in respect of different previous years of the same assessment year not possible [Sec. 6(5)]
If a person is resident in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year(s) relevant to the same assessment year in respect of each of his other sources of income [see problem 24-P9].
2.4 Different residential status for different assessment years
An assessee may enjoy different residential status for different assessment years. For instance, an individual who has been regularly assessed as resident and ordinarily resident, has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1) in that year.
2.5 Resident in India and abroad
It is not necessary that a person who is resident in India, cannot become resident in any other country for the same assessment year. A person may be resident in more than one country at the same time for tax purposes, though he cannot have two domiciles simultaneously. It is, therefore, not necessary that a person, who is resident in India, will be non-resident for all other countries for the same assessment year.
2.6 Onus of proof
Whether an assessee is a resident or a non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the Income-tax authorities—Rai Bahadur Seth Teomal v. CIT [1963] 48 ITR 170 (Cal.).
In the case of V.VR. N.M. Subbayya Chettiar v. CIT [1951] 19 ITR 168, the Supreme Court held that section 6(2) makes a presumption that a Hindu undivided family, a firm or association of persons has to be a resident in India and the onus of proving that they are not residents is on them. However, the burden of proving that an individual or a company is resident in India lies on the department—Moosa S. Madha & Azam S. Madha v. CIT [1973] 89 ITR 65 (SC).
Dive Deeper:
Residential Status of a Company and Tax Incidence under Income Tax Act
Residential Status under Income-tax Act and its Effect on Tax Incidence
Overview of Tax Residence in India under Income Tax
3. Residential status of an individual [Sec. 6]†
An individual may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident.
3.1 Resident and ordinarily resident [Sec. 6(1), 6(6)(a)]
To find out whether an individual is “resident and ordinarily resident” in India, one has to proceed as follows —
| Step 1 | First find out whether such individual is “resident” in India. |
| Step 2 | If such individual is “resident” in India, then find out whether he is “ordinarily resident” in India. However, if such individual is a “non-resident” in India, then no further investigation is necessary. |
3.1.1 Basic conditions to test as to when an individual is resident in India
Under section 6(1) an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions—
| Basic condition (a) | He is in India in the previous year for a period of 182 days or more. |
| Basic condition (b) | He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year. |
3.1.1a Exceptions
The aforesaid rule of residence is subject to the following exceptions—
- Exception one (Special Case 1) – In Special Case 1, the period of “60 days” referred to in (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is available in the case of an Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship‡. For this purpose, the requirement is not leaving India for taking employment outside India but leaving India for the purposes of employment (the employment may be in India or may be outside India). To put it differently, the individual need not be an unemployed person—British Gas India (P.) Ltd., In re [2006] 155 Taxman 326 (AAR – New Delhi). He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. Travelling abroad on business visa to take up any employment or for any business carried outside India, is sufficient to prove this condition—K. Sambasiva Rao v. ITO [2014] 42 taxmann.com 115 (Hyd.). Alternatively, he may be an unemployed person who goes outside India to take an employment outside India.
In Special Case 1, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days.
- Exception two (Special Case 2) – In Special Case 2, the period of “60 days” referred to in (b) above has been extended to 182 days# by virtue of Explanation 1(b) to section 6(1). However, Special Case 2 covers an Indian citizen or a person of Indian origin who comes on a visit to India during the previous year. A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India. It may be noted that grand-parents include both maternal and paternal grand-parents.
In Special Case 2, an individual will be resident in India only if he is in India during the relevant previous year for at least 182 days#.
- Exception three – Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22.
3.1.2 Additional conditions to test when a resident individual is ordinarily resident in India
Under section 6(6), a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions—
| Additional condition (i) | He has been resident† in India in at least 2 out of 10 previous years immediately preceding the relevant previous year. |
| Additional condition (ii) | He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year. |
In brief it can be said that an individual becomes resident and ordinarily resident in India if he satisfies at least one of the basic conditions and the two additional conditions [i.e., (i) and (ii)].
3.1.3 Other points
In determining the residential status of an assessee, the following settled propositions have to be borne in mind :
- Stay at the same place not necessary – It is not essential that the stay should be at the same place—Kinloch v. IRC 14 TC 736. It is equally not necessary that the stay should be continuous. Similarly place of stay or purpose of stay is not material.
- Stay in territorial waters – A stay by an individual on a yacht moored in the territorial waters of India would be treated as his presence in India for the purpose of this section—Baryard Brown v. Burt 5 TC 667.
- Presence for a part of a day – Where a person is in India only for a part of a day, the calculation of physical presence in India in respect of such broken period should be made on an hourly basis. A total of 24 hours of stay spread over a number of days is to be counted as being equivalent to the stay of one day—Walkie v. IRC [1952] 1 AER 92. If, however, data is not available to calculate the period of stay of an individual in India in terms of hours, then the day on which he enters India as well as the day on which he leaves India shall be taken into account as stay of the individual in India—Advance Ruling P. No.7 of 1995, In re [1997] 90 Taxman 62 (AAR – New Delhi).
- Involuntary stay – Involuntary stay of a person in India caused by unauthorized impounding of passport must be excluded for determining his residential status under section 6—CIT v. Suresh Nanda [2015] 233 Taxman 4 (Delhi).
3.2 Resident but not ordinarily resident [Sec. 6(1), 6(6)(a)]
An individual who satisfies at least one of the basic conditions but does not satisfy the two additional conditions [i.e., conditions (i) and (ii), is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances :
| Case 1 | If he satisfies at least one of the basic conditions but none of the additional conditions. |
| Case 2 | If he satisfies at least one of the basic conditions and one of the two additional conditions. |
3.3 Non-resident
An individual is a non-resident in India if he satisfies none of the basic conditions. In the case of non-resident, the additional conditions are not relevant.
3.3.1 Exceptions
Even if an individual satisfies none of the two basic conditions, he is deemed to be resident but not ordinarily resident in the cases given below –
- First exception – This exception is given under section 6(1A) read with section 6(6)(d) and applicable from the assessment year 2021-22. Under this exception an individual shall be deemed to be resident but not ordinarily resident in India, if he satisfies the following 3 conditions –
a. he is an Indian citizen;
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000† during the relevant previous year, and
c. he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
This exception is not applicable in the case of a foreign citizen, even if he is a person of Indian origin.
- Second exception – This exception is given by section 6(6)(c) read with Explanation 1(b) to section 6(1) and applicable from the assessment year 2021-22. Under this exception, an individual shall be deemed to be resident but not ordinarily resident in India if he satisfies the following 4 conditions –
a. he is an Indian citizen or a person of Indian origin;
b. his total income (other than the income from foreign sources) exceeds Rs. 15,00,000† during the relevant previous year;
c. he comes to India on a visit during the relevant previous year, and
d. he is in India for 120 days (or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.
3.3.1a Other Points
For the aforesaid two exceptions, the following should be kept in view –
- How to find out total income of Rs. 15,00,000 – Total income for the ceiling of Rs. 15,00,000 is calculated after ignoring income from foreign sources. “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). Income which is deemed to accrue or arise in India shall be included in computation of the ceiling of Rs. 15,00,000.
- Liable to tax – “Liable to tax” (in relation to a person and with reference to a country) means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently being exempted from such liability under the law of that country.
- Person of Indian origin – A person is deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
3.4 Rule of residence in brief
The Table given below summarises the rule of residence for the assessment year 2021-22—
Rule of Residence
| Who is resident and ordinarily resident in India | He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. At the same
time, he should also satisfy the two additional conditions. |
| Who is resident but not ordinarily resident in India | He must satisfy at least one of the basic conditions [i.e., (a) and/or (b)*]. He may satisfy one or none of the additional conditions. |
| Who is non-resident resident in India | He satisfies none of the basic conditions [i.e., he does not satisfy basic condition (a) and basic condition (b)*]. Additional conditions are not relevant in the case of a non-resident. |
*In the two special cases mentioned above, basic condition (b) is not relevant.
Basic Conditions at a Glance
| In the case of an Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian ship | In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous year | In the case of an individual [other than that mentioned in columns (1) and (2)] |
| (1) | (2) | (3) |
| a. Presence for at least 182 days in India during the previous year 2020-21
b. Not functional |
a. Presence for at least 182 days in India during the previous year 2020-21.
b. Not functional† |
a. Presence for at least 182 days in India during the previous year 2020-21.
b. Presence in India for at least 60 days during the previous year 2020-21 and 365 days during 4 years immediately preceding the previous year (i.e., during April 1, 2016 and March 31, 2020). |
Additional conditions at a Glance
| i. Resident in India in at least 2 out of 10 years immediately preceding the previous year [i.e., h must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., during previous years 2009-10 and 2018-19)].
ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year (i.e., during April 1, 2012 and March 31, 2019). |
3.5 Clarification in respect of residency under section 6
In order to avoid genuine hardship due to suspension of international flights, CBDT vide Circular No. 11/2020, dated May 8, 2020 has decided that for the purpose of determining the residential status under section 6 during the previous year 2019-20 in respect of an individual who has come to India on a visit before March 22, 2020 and –
a. has been unable to leave India on or before March 31, 2020, his period of stay in India from March 22, 2020 to March 31, 2020 shall not be taken into account; or
b. has been quarantined in India on account of outbreak of COVID-19 on or after March 1, 2020 and has departed on an evacuation flight on or before March 31, 2020 or has been unable to leave India on or before March 31, 2020, his period of stay from the beginning of his quarantine to his date of departure or March 31, 2020, as the case may be, shall not be taken into account; or
c. has departed on an evacuation flight on or before March 31, 2020, his period of stay in India from March 22, 2020 to his date of departure shall not be taken into account.
Problem 1: X, a foreign national (not being a person of Indian origin), came to India for the first time from USA on July 11, 2015. He stayed here for a stretch of 3 years and left for Japan on July 11, 2018. He returned to India on April 10, 2019 and remained here till August 17, 2019, when he went back to USA. He again came back to India on January 30, 2022 at 11.59 p.m. and continued to stay in India thereafter. Determine his residential status for the assessment year 2022-23.
Solution: For the assessment year 2022-23, financial year 2021-22 is previous year. During the previous year 2021-22, X is in India for a period of 60 days (i.e., January 2022 : 1 + February 2022 : 28 days + March 2022 : 31 days). Moreover, during 4 years immediately preceding the previous year 2021-22, he is in India for 597 days (i.e., 2017-18 : 365 days, 2018-19 : 102 days, 2019-20 : 130 days and 2020-21 : Nil). Thus, he satisfies condition (b) (namely, presence of at least 60 days during the previous year and 365 days during 4 years preceding the previous year). He, therefore, becomes resident in India. A resident individual may either be ordinarily resident or not ordinarily resident in India. To determine it, one has to apply the test of two additional conditions
During 7 years immediately preceding the previous year 2021-22, X is in India for 1227 days and during 10 years immediately preceding the previous year 2021-22, he is resident in India for 5 years as follows :
| Year | Presence in India (number of days) | Resident (R) or non- resident (NR) | Which of the condition (a), or (b) is satisfied to become resident or non-resident |
| 2020-21 | Nil | NR | None |
| 2019-20 | 130 | R | (b) |
| 2018-19 | 102 | R | (b) |
| 2017-18 | 366 | R | (a) as well as (b) |
| 2016-17 | 365 | R | (a) |
| 2015-16 | 264 | R | (a) |
| 2014-15 | Nil | NR | None |
| 2013-14 | Nil | NR | None |
| 2012-13 | Nil | NR | None |
| 2011-12 | Nil | NR | None |
Thus, he satisfies one of the basic conditions and the two additional conditions. He will, therefore, be treated as resident and ordinarily resident in India for the assessment year 2022-23. If X comes to India at any time after zero hour on January 30, 2022, he will be non-resident for the assessment year 2022-23.
Problem 2: X, a chief executive of a company had undertaken foreign tour on various occasions for company’s work and was out of India for a total number of 255 days during the previous year ending March 31, 2022. He submits his return of income for the assessment year 2022-23 in the status of non-resident. Is he justified? He visited a foreign country for the first time during May 2020.
Solution: By virtue of section 6(1)(c), an individual will be resident in India in any previous year if he has been in India for a period of at least 60 days during the previous year and at least 365 days during 4 years preceding the previous year. However, as per Explanation (a) where an Indian citizen leaves India for the purpose of employment outside India, the above period of 60 days has been extended to 182 days.
In the given problem, X had left India for purposes of employment outside India. In other words, Explanation (a) will be applicable. Accordingly, X will be treated as non-resident for the assessment year 2022-23. Hence, the submission of his return of income for the assessment year 2022-23 in the status of non-resident is justified.
Problem 3: During his 196 days’ stay in India in the previous year 2021-22, X, a citizen of U.K. is all the time moving from one place to another. He claims that he is non-resident in India for the assessment year 2022-23 on the following grounds :
- He had never visited India before April 1, 2021.
- During 2021-22, though he is in India for 196 days, he could not spend two consecutive nights at any one place.
- For the assessment year 2022-23, he is resident in U.K. according to the English Income-tax Act. He insists that he cannot be resident of two countries for the same assessment year. Do you agree with him?
Solution: The claim of X is not tenable, as he is in India for 196 days during the previous year 2021-22. He satisfies one of the two basic conditions (namely, presence of 182 days or more during the previous year 2021-22) and none of the additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2022-23. The fact that he could not spend two consecutive nights at any one place is immaterial. Moreover, a person who is resident in India, may become resident of any other country according to the tax laws of that country for the same or a different assessment year.
Problem 4: X, after about 30 years’ stay in India, returns to America on January 29, 2019. He returns to India in June 2021 to join an American company as its overseas branch manager. Determine his residential status for the assessment year 2022-23.
Solution: For the assessment year 2022-23, the year 2021-22 is the previous year. During 2021-22, X is in India for more than 275 days. He is, therefore, resident in India. He is resident in India for 2 years out of 10 years (i.e., 2011-12 to 2020-21), and he has stayed for more than 730 days during the seven years preceding the previous year 2021-22. He is, therefore, resident and ordinarily resident in India for the assessment year 2022-23.
Problem 5: X sets up a new profession on January 14, 2021 and keeps his books of account on the basis of financial year. Though he has never gone out of India, he claims that he is resident and not ordinarily resident for the assessment year 2022-23. For the support of his claim, he submits that he does not fulfil one of the additional conditions (i.e., he is not resident in India for at least 2 out of 10 preceding years), as he has not been assessed as resident during 2 out of the preceding 10 years due to absence of taxable income. Comment on the claim of X and determine his residential status for the assessment year 2022-23.
Solution: The claim of X is not acceptable. Section 6(6) prescribes additional conditions for deciding whether or not a resident individual is ordinarily resident. These conditions are based upon physical presence in the preceding 7 years and residential status during preceding 10 years. Residential status during preceding 10 years is to be determined, whether or not an individual is assessed as resident in the past. In other words, an individual who does not have taxable income during preceding 10 years, does not become non-resident (in preceding 10 years) merely because of the fact that he was not assessed as resident during these years. Claim of X is, therefore, not justified. As X has never gone out of India, he will satisfy basic as well as additional conditions and, accordingly, he will be resident and ordinarily resident for the assessment year 2022-23.
Problem 6: X is a foreign citizen, not being a person of Indian origin. Determine his residential status for the assessment year 2022-23 on the assumption that during financial years 2007-08 to 2021-22 he was present in India as follows :
| 2007-08 | 221 days | 2014-15 | 160 days |
| 2008-09 | 22 days | 2015-16 | 96 days |
| 2009-10 | 50 days | 2016-17 | 286 days |
| 2010-11 | 72 days | 2017-18 | 100 days |
| 2011-12 | 130 days | 2018-19 | 182 days |
| 2012-13 | 340 days | 2019-20 | 85 days |
| 2013-14 | 30 days | 2020-21 | 280 days |
| 2021-22 | 86 days |
Solution: For the assessment year 2022-23, financial year 2021-22 is the previous year. During 2021-22, X is in India for a period of 86 days and during four years preceding the previous year 2021-22, he is in India for 647 days. Thus, he satisfies one of the two basic conditions laid down by section 6(1) [i.e., condition (b)] and, consequently, he becomes resident in India. A resident individual may either be an ordinarily resident or not ordinarily resident. To determine whether X is ordinarily resident or not ordinarily resident, one has to test the two additional conditions as laid down by section 6(6)(a) [see conditions (i) and (ii)]. Information presented in the Table given below may be used to test the additional conditions :
| Year | Presence in India (number of days) | Status | Which of condition (a) or (b) is satisfied to become resident or non-resident |
| 2020-21 | 280 | Resident | (a) or (b) |
| 2019-20 | 85 | Resident | (b) |
| 2018-19 | 182 | Resident | (a) or (b) |
| 2017-18 | 100 | Resident | (b) |
| 2016-17 | 286 | Resident | (a) or (b) |
| 2015-16 | 96 | Resident | (b) |
| 2014-15 | 160 | Resident | (b) |
| 2013-14 | 30 | Non-resident | None |
| 2012-13 | 340 | Resident | (a) |
| 2011-12 | 130 | Resident | (b) |
| 2010-11 | 72 | ||
| 2009-10 | 50 | ||
| 2008-09 | 22 | Not necessary to determine | |
| 2007-08 | 221 |
Condition (i) – This condition requires that an individual should be resident in India for at least 2 out of 10 years immediately preceding the relevant previous year. X, in the present case, is resident in India in 9 years out of 10 years (i.e., during 2011-12 to 2020-21, he is resident in India in all the years except 2013-14). He, thus, satisfies this condition.
Condition (ii) – This condition requires that an individual should be present in India for at least 730 days during 7 years immediately preceding the relevant previous year. X is in India for 1189 days during 2014-15 to 2020-21. He, thus, satisfies this condition.
X satisfies one of the two basic conditions and the two additional conditions. He is, therefore, resident and ordinarily resident in India for the assessment year 2022-23.
Problem 7: X, an Indian citizen, who is appointed as Senior Taxation Officer by the Government of Iran, leaves India, for the first time on September 10, 2020 for joining his duties in Iran. During the previous year 2021-22, he comes to India on a visit for 119 days. Determine the residential status of X for the assessment years 2021-22 and 2022-23.
Solution: During the previous year 2020-21, X is in India for 163 days (and during four years immediately preceding the previous year 2020-21, he was in India for more than 365 days). Though he satisfies one of the conditions laid down in section 6(1), yet by virtue of Explanation to section 6(1), he will be non-resident for the assessment year 2021-22 (an Indian citizen, leaving India for the purpose of employment, will be treated as resident in India only if he has been in India in that year for at least 182 days).
During the previous year 2021-22 (for the assessment year 2022-23), X comes to India for 119 days. Therefore, X does not satisfy one of the conditions laid down by section 6(1) [read with Explanation to section 6(1)]. He will, accordingly, be treated as non-resident in India for the assessment year 2022-23.
Problem 8: X is a foreign citizen (not being a person of Indian origin). Since 1981, he visits India every year in the month of April for 100 days. Find out the residential status of X for the assessment year 2022-23.
Solution: During the previous year 2021-22, X is in India for 100 days and during 4 years preceding the year 2021-22 (i.e., 2017-18 to 2020-21), he is in India for 400 days. Thus, he satisfies basic condition (b) to become resident in India. To determine, whether a resident individual is ordinarily resident or not ordinarily resident, one has to test two additional conditions as laid down by section 6(6)(a).
Condition (i) – Every year X satisfies basic condition (b), as he is in India for 100 days during the relevant previous year and 400 days during 4 years preceding the previous year. Therefore, he satisfies this condition.
Condition (ii) – X is in India for 700 days during 7 years prior to the previous year 2021-22. He does not satisfy this condition.
X satisfies one of the basic conditions and one of the two additional conditions. He is, therefore, resident but not ordinarily resident in India for the assessment year 2022-23.
Problem 9: X (a foreign citizen, not being a person of Indian origin) comes to India for the first time on September 1, 2021. On September 15, 2021, he joins a company on monthly salary of Rs. 60,000, as a part-time production consultant (duty hours : 6.30 PM to 9.30 PM). Prior to September 15, 2021, X does not have any source of income. On October 9, 2021, he starts a trading business in computer hardware after obtaining approval of his employer. For the previous year ending March 31, 2022, he has the following income :
Salary from the part-time employment : Rs. 3,90,000, income from the business of trading in computer hardware in India : Rs. 7,86,000 ; and foreign income from the same business : $ 40,000. Find out the residential status of X for the assessment year 2022-23.
Solution: For the assessment year 2022-23, X has the following sources of income in India:
| Sources of income | Previous year | Number of days when X was in India |
| Salary income | September 15, 2021 to March 31, 2022 | 198 days |
| Business income | October 9, 2021 to March 31, 2022 | 174 days |
For the first source of income, X becomes resident in India by satisfying one of the basic conditions. As he comes to India for the first time in 2021, he is unable to satisfy any of the additional conditions. Thus, he is a resident but not ordinarily resident in India for the first previous year.
For the second source of income, X is a non-resident, as he satisfies none of the basic conditions. It may be noted that he is non-resident in India for the business income and resident but not ordinarily resident for the salary income. In view of section 6(5), if a person is resident in India for one of the sources of income, he will be deemed to be resident in India for all other sources of income in the same assessment year. In respect of the assessment year 2022-23, X will, therefore, be regarded as resident but not ordinarily resident for all sources of income.
Problem 10: X is an Indian citizen. Currently, he is in employment with an overseas company located in Dubai. During different years, he is in India as follows –
| Previous year | Presence in India | Previous year | Presence in India | Previous year | Presence in India |
| 2021-22 | 55 days | 2018-19 | 170 days | 2015-16 | 70 days |
| 2020-21 | 190 days | 2017-18 | 200 days | 2014-15 | 71 days |
| 2019-20 | 200 days | 2016-17 | 250 days | 2013-14 | 72 days |
For the previous year 2021-22, X is not taxable in Dubai or in any other country/territory by reason of his domicile or residence. Income of X (other than income from foreign sources) for the previous year 2021-22 is Rs. 16,00,000. Find out the residential status of X for the assessment year 2022-23.
Solution: X is in India for 55 days during the previous year 2021-22. He is unable to satisfy any of the basic condition given by section 6(1). However, he satisfies the following 3 conditions given by section 6(1A) –
- X is an Indian citizen;
- his total income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year, and
- he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
He is deemed to be resident but not ordinarily resident in India [as per section 6(1A) read with section 6(6)(d)]. The information given in the above table pertaining to earlier years, is not relevant in this case.
Problem 11: X is an Indian citizen. Currently, he is in employment with a multinational company and posted in Singapore. During the previous year 2021-22, he comes to India for a visit of 145 days. In earlier 4 years, he is in India for more than 900 days. X wants to know his residential status for the assessment year 2022-23. His annual income for the previous year 2021-22 is as follows –
| Rs. | |
| Income from salary, rent, consultancy and interest earned and received in Singapore | 29,00,000 |
| Income from business (accrued and received outside India, controlled from Singapore) | 21,00,000 |
| Income from another business (accrued and received outside India, controlled from India) | 8,00,000 |
| Interest on bank fixed deposits in India | 11,00,000 |
| Any other income in India or outside India | Nil |
| Life insurance premium paid in India | 2,60,000 |
Solution: In the previous year 2021-22, X is in India for 145 days. Total income of X (other than income from foreign sources) is Rs. 17,50,000 (i.e., Rs. 8,00,000 + Rs. 11,00,000 – deduction under section 80C : Rs. 1,50,000). X satisfies 4 conditions of second exception as follows –
- X is an Indian citizen or a person of Indian origin;
- total income of X (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year;
- he comes to India on a visit during the previous year 2021-22, and
- he is in India for 145 days (i.e., his Indian visit is for 120 days or more but less than 182 days) during the relevant previous year and 365 days (or more) during 4 years immediately preceding the relevant previous year.
Consequently, for the previous year 2021-22 (i.e., assessment year 2022-23), X is resident but not ordinarily resident in India.
Problem 12: X is an Indian citizen (or he is a person of Indian origin). He wants to know his residential status in India for the previous year 2022-23 in the following different possible situations –
- if he visits India during the previous year 2022-23 for less than 120 days; or
- if he visits India during the previous year 2022-23 for 150 days; or
- if he visits India during the previous year 2022-23 for 180 days or more.
Solution: The table given below highlights the impact of amendment made by the Finance Act, 2021 in the case of an Indian citizen or person of Indian origin who visits India during the relevant previous year –
| How many days an Indian citizen/a person of Indian origin visits India during the relevant previous year | ||
| Less than 120 days | 120 days or more but not more than 181 days | 182 days or more |
| Non-resident in India |
– During preceding 4 years, he was in India for 365 days or more; and – His taxable income (other than the income from foreign sources) exceeds Rs. 15,00,000 during the relevant previous year |
– He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year; and – He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year. |
|
|
|
4. Residential status of a Hindu undivided family [Sec. 6(2)]
A Hindu undivided family (like an individual) is either resident in India or non-resident in India. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident.
4.1 When a Hindu undivided family is resident or non-resident
A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.
The table given below highlights the same proposition —
| Place of control | Residential status of family | Ordinarily resident or not |
| Control and management of the affairs of a Hindu undivided family is — | ||
| Wholly in India | Resident | |
| Wholly out of India | Non-resident | — |
| Partly in India and partly outside India | Resident |
Note – In order to determine whether a Hindu undivided family is resident or non-resident, the residential status of the karta of the family during the previous year is not relevant. Residential status of the karta during the preceding years is considered for determining whether a resident family is “ordinarily resident”.
4.1.1 What is “control and management”
Different courts have defined the term “control and management” as follows —
- De facto control – Control and management means de facto control and management and not merely the right to control or manage—CIT v. Nandlal Gandalal [1960] 40 ITR 1 (SC).
- Place of control and management – Control and management is situated at a place where the head, the seat and the directing power are situated. The head and brain is situated where vital decisions concerning the policies of the business, such as, raising finance and its appropriation for specific purposes, appointment and removal of staff, expansion, extension, or diversification of business, etc., are taken—San Paulo (Brazilian) Railway Co. v. Carter [1886] AC 31 (HL).
- Residence of HUF in India – The mere fact that the family has a house in India, where some of its members reside or the karta is in India in the previous year, does not constitute that place as the seat of control and management of the affairs of the family, unless the decisions concerning the affairs of the family are taken at that place. The mere fact of the absence of karta from India does not make the family non-resident—Annamalai Chettiar v. ITO [1958] 34 ITR 88 (Mad.).
- Broad propositions – The following propositions can be stated on the basis of the rulings given in Subbayya Chettiar v. CIT [1951] 19 ITR 163 (SC) and Narasimha Rao Bahadur v. CIT [1950] 18 ITR 181 (Mad.)—
1. Generally, HUF shall be taken to be resident in India unless control and management of its affairs is situated wholly outside India.
2. HUF may be residing in one place and doing a great deal of business in other place.
3. Occasional visit of a non-resident karta to the place of HUF’s business in India would be insufficient to make HUF ordinarily resident in India.
4.2 When a resident Hindu undivided family is ordinarily resident in India
A resident Hindu undivided family is ordinarily resident in India if the karta or manager of the family (including successive karta) satisfies the following two additional conditions as laid down by section 6(6)(b) :
| Additional condition (i) | Karta has been resident in India in at least 2 out of 10 previous years [according to the basic condition] immediately preceding the relevant previous year |
| Additional condition (ii) | Karta has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year. |
If the karta or manager of a resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India.
Problem 1: The Head Office of XY, a Hindu undivided family, is situated in Hong Kong. The family is managed by Y (since 1980) who is resident in India in only 3 out of 10 years preceding the previous year 2021-22 and he is present in India for more than 729 days during the last 7 years. Determine the residential status of the family for the assessment year 2022-23 if the affairs of the family’s business are (a) wholly controlled from Hong Kong, (b) partly controlled from India.
Solution: If affairs of a Hindu undivided family are controlled from a place outside India, the family will be non-resident. Accordingly XY Hindu undivided family is non-resident for the assessment year 2022-23 under situation (a). Under situation (b), affairs of the family’s business are partly controlled from India during the previous year 2021-22. Therefore, the family is resident in India. However, it would be ordinarily resident in India if karta satisfies the following two conditions laid down by section 6(6)(b) :
- He has been resident in India in at least 2 out of 10 years preceding the previous year.
- He has been present in India for at least 730 days during seven years preceding the previous year.
As the karta is resident in India in 3 out of 10 years preceding the previous year, the family would be resident and ordinarily resident in India for the assessment year 2022-23 in situation (b).
Problem 2: A Hindu undivided family (X is karta, A, B and C are other coparceners) carries on cloth business in Burma. A comes to India and starts a cloth business at Bombay in partnership with some other persons. The capital supplied by A to this firm is found to have come from the family. Subsequently, B joins the firm as partner. Later on another business is started at Banaras with the same persons and one outsider as partner. C joins this firm. The Assessing Officer wants to treat the family as resident on the ground that its coparceners are partners in the firms, financed out of the family funds, and the firms are resident in India. Is the Assessing Officer legally correct ?
Solution: A case on similar facts was examined by the Supreme Court of India in the case of CIT v. Nandlal Gandalal [1960] 40 ITR 1, wherein the Court pointed out that both under the Hindu law and under the law of partnership, the Hindu undivided family as such could exercise no control over the management of a firm in which some of its coparceners were partners, even if capital contributed by coparceners was found to have come from the family.
The position in Hindu law with regard to coparcener who has entered into partnership with others is well settled. The partnership is a contractual partnership and is governed by the Indian Partnership Act, 1932. The partnership is between the coparcener individually and partners and not between the family and other partners. This remains so even if the coparcener is accountable to the family for the income received. Thus, control and management over the firm’s business lies in the hands of individual coparceners and not in the hands of the family. The Assessing Officer is, therefore, not justified while holding the Hindu undivided family as resident in India.
5. Residential status of the firm and association of persons [Sec. 6(2)]
A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year. They are, however, treated as non-resident in India if control and management of their affairs are situated wholly outside India.
The above rule may be summarised as follows —
| Place of control | Residential status |
| Control and management of the affairs of a firm/association of persons is — | |
| Wholly in India | Resident |
| Wholly outside India | Non-resident |
| Partly in India and partly outside India | Resident |
Note – A firm/an association of persons cannot be “ordinarily” or “not ordinarily resident”. The residential status of the partners/members of the firm/association is not relevant in determining the status of the firm/association.
5.1 What is “control and management”
While in the case of a firm, control and management is vested in partners, in case of an association of persons it is vested in the principal officer. Control and management means de facto control and management and not merely the right to control or manage. Control and management is usually situated at a place where the head, the seat and the directing power are situated. Where the partners of a firm are resident in India the normal presumption is that the firm is resident in India. This presumption can, however, be effectively rebutted by showing that the control and management of the affairs of the firm is situated wholly outside India. The onus of rebutting the presumption is on the assessee.
6. Residential status of a company [Sec. 6(3)]
Residential status of a company is determined as follows –
| Section | Company | Residential status |
| 6(3)(i) | Indian company | Always resident in India [Note 1] |
| 6(3)(ii) | A foreign company (whose turnover/grossreceipt in the previous year is more than Rs. 50 crore) | It will be resident in India if its place of effective management (POEM), during the relevant previous year, is in India [Note 2] |
| 6(3)(ii) | A foreign company (whose turnover/gross receipt in the previous year is Rs. 50 crore or less) | Always non-resident in India [Note 3] |
Notes –
1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in India. An Indian company can never be non-resident.
2. A foreign company (with effect from the assessment year 2017-18) is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance made. For this purpose, a set of guiding principles (to be followed in determination of POEM) have been issued by the Board in Circular No. 6/2017, dated January 24, 2017.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year – Circular No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be resident in India from the assessment year 2017-18 onwards.
6.1 Place of effective management (POEM) as per Circular No. 6/2017
“Place of effective management” (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Any determination of the POEM will depend upon the facts and circumstances of a given case. The POEM concept is one of substance over form. An entity may have more than one place of management, but it can have only one place of effective management at any point of time. Since “residence” is to be determined for each year, POEM will also be required to be determined on year to year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India.
6.2 Company engaged in active business outside India
The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India.
- Active business outside India – A company shall be said to be engaged in “active business outside India” if –
a. the passive income is not more than 50 per cent of its total income;
b. less than 50 per cent of its total assets are situated in India;
c. less than 50 per cent of total number of employees are situated in India or are resident in India; and
d. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure.
- Passive income – “Passive income” of a company shall be aggregate of, —
a. income from the transactions where both the purchase and sale of goods is from/to its associated enterprises; and
b. income by way of royalty, dividend, capital gains, interest or rental income;
However, any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.
6.3 Management power exercised in India
If on the basis of facts and circumstances it is established that the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India, then the place of effective management shall be considered to be in India. For this purpose, merely because the Board of Directors follows general and objective principles of global policy of the group laid down by the parent entity which may be in the field of Payroll functions, Accounting, Human resource (HR) functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures, and not being specific to any entity or group of entities per se; would not constitute a case of Board of Directors of companies standing aside.
Moreover, the Board has clarified in its Circular No. 25/2017, dated October 23, 2017 that if the Regional Headquarter operates for subsidiaries/group companies in a region within the general and objective principles of global policy of the group laid down by the parent entity in the field of Pay roll functions. Accounting, HR functions, IT infrastructure and network platforms, Supply chain functions, Routine banking operational procedures (and not being specific to any entity or group of entities per se); it would, in itself, not constitute a case of Board of Director of companies standing aside and such activities of Regional Headquarter in India alone will not be a basis for establishment of POEM for such subsidiaries/group companies†.
Other Cases – In cases of companies other than those discussed above, the determination of POEM would be a two stage process, namely –
- First stage would be identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company’s business as a whole.
- Second stage would be determination of place where these decisions are in fact being made.
The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM it is the substance which would be conclusive rather than the form.
Guiding principles – Some of the guiding principles which may be taken into account for determining the POEM are as follows –
1. The location where a company’s Board regularly meets and makes decisions may be the company’s place of effective management provided, the Board –
a. retains and exercises its authority to govern the company; and
b. does, in substance, make the key management and commercial decisions necessary for the conduct of the company’s business as a whole.
2. If a board has de facto delegated the authority to make the key management and commercial decisions for the company to the senior management or any other person including a shareholder, promoter, strategic or legal or financial advisor, etc., and does nothing more than routinely ratifying the decisions that have been made, the company’s place of effective management will ordinarily be the place where these senior managers or the other person make those decisions.
3. A company’s board may delegate some or all of its authority to one or more committees such as an executive committee consisting of key members of senior management. In these situations, the location where the members of the executive committee are based and where that committee develops and formulates the key strategies and policies for mere formal approval by the full board will often be considered to be the company’s place of effective management.
4. The location of a company’s head office will be a very important factor in the determination of the company’s place of effective management because it often represents the place where key company decisions are made.
5. The use of modern technology impacts the place of effective management in many ways. It is no longer necessary for the persons taking decision to be physically present at a particular location. Therefore, physical location of board meeting or executive committee meeting or meeting of senior management may not be where the key decisions are in substance being made. In such cases the place where the directors or the persons taking the decisions or majority of them usually reside may also be a relevant factor.
6. The decisions made by shareholder on matters which are reserved for shareholder decision under the company laws are not relevant for determination of a company’s place of effective management. Such decisions may include sale of all or substantially all of the company’s assets, the dissolution, liquidation or deregistration of the company, the modification of the rights attaching to various classes of shares or the issue of a new class of shares etc. These decisions typically affect the existence of the company itself or the rights of the shareholders as such, rather than the conduct of the company’s business from a management or commercial perspective and are therefore, generally not relevant for the determination of a company’s place of effective management.
7. Day to day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM.
8. The determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management, as illustrated by the following examples –
- The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
- The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
- The fact that one or some of the directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
- The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not, by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied.
- The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
6.4 Prior approval of Principal CIT/CIT required
In case the Assessing Officer proposes to hold a foreign company, on the basis of its POEM, as being resident in India then any such finding shall be given by the Assessing Officer after seeking prior approval of the collegium of three members consisting of the Principal CITs or CITs, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to the foreign company before issuing any directions in the matter.
Special provisions pertaining to foreign company which becomes resident in India on the bases of POEM [Sec. 115JH] -In a case where a foreign company is said to be resident in India on account of its POEM being in India (and such foreign company has not been resident in India in any of the preceding years), then a few special provisions are applicable for the computation of total income, treatment of unabsorbed depreciation, set off or carry forward and set off of losses, collection and recovery, etc. Such modifications are given in section 115JH read with Notification No. SO 3039(E), dated June 22, 2018.
Problem: X Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident in India. The business of the company is fully controlled from outside India. Find out the residential status of X Ltd. for the assessment year 2021-22.
Solution: X Ltd. is an Indian company. An Indian company is always resident in India. This rule is equally applicable even if shareholders are foreign citizens as well as non-resident or even if business is controlled from outside India.
Problem: Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 crore). It has 10 shareholders who are Indian citizens and resident in India. The company has active business outside India and is controlled wholly from outside India by a team of professionals. What is the residential status of Y Ltd. for the assessment year 2021-22.
Solution: Y Ltd. is a foreign company. It is controlled wholly from outside India (POEM is outside India). It is, therefore, non-resident in India for the assessment year 2021-22. Residential status of shareholders is irrelevant. Likewise, the nationality of shareholders is not taken into consideration.
Problem: Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian citizens and resident in India). The company has no active business in Japan. Gross annual turnover of the company for the previous year 2020-21 is Rs. 48 crore mainly from operations conducted from Korea, Sri Lanka and India. The company is managed by a team of professionals from India. Find out the residential status of Z Ltd. for the assessment year 2021-22.
Solution: Z Ltd. is a foreign company. Gross turnover of the company for the relevant previous year is Rs. 48 crore. A foreign company (whose turnover/gross receipts is not more than Rs. 50 crore) is treated as non-resident in India.
Problem: B Ltd. is an Indian company. A Ltd. is a Mauritius company and it is 100 per cent subsidiary of B Ltd. The assets of A Ltd. are situated in Mauritius. All employees of A Ltd. are also located in Mauritius. The average income wise break-up of total income of A Ltd. for the current year and last 2 years is as follows –
- 32 per cent of income is from transaction where purchases are made from parties which are non-associated enterprises and sold to associated enterprises;
- 34 per cent of income is from transaction where purchases are made from associated enterprises and sold to associated enterprises;
- 27 per cent of income is from transaction where purchases are made from associated enterprises and sold to non-associated enterprises; and
- 7 per cent of the income is by way of interest, royalty, dividend, capital gain and rent.
Find out the residential status of A Ltd. for the assessment year 2021-22 (turnover of A Ltd. is more than Rs. 100 crore).
Solution: Passive income of A Ltd. is 41% (i.e., 34% + 7%). Passive income of A Ltd. is not more than 50% of its total income. Besides, A Ltd. satisfies the following condition –
a. less than 50 per cent of its total assets are situated in India;
b. less than 50 per cent of total number of employees are situated in India or are resident in India; and
c. the payroll expenses incurred on such employees is less than 50 per cent of its total payroll expenditure.
A Ltd. is engaged in active business outside India. POEM of A Ltd. is outside India. Consequently, A Ltd. is non-resident in India.
Problem: A Ltd. has 90 employees. 87 employees manage accounts, store and warehouse in Mauritius. Managing director, Chief Executive Officer and Sales Head are posted in Mumbai. Total payroll expenditure of 87 employees is Rs. 3.3 crore. Annual payroll expenditure of managing director, Chief Executive Officer and Sales Head is Rs. 3.8 crore. Tax is deducted under section 192 out of salary of Rs. 3.8 crore.
Solution: Only 41% of total income of A Ltd. is passive in nature. Further, more than 50% of the employees are also situated outside India. All the assets are situated outside India. However, the payroll expenditure in respect of the managing director, Chief Executive Officer and Sales Head (being employees resident in India) exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged in active business outside India. The Assessing Officer may conclude that POEM of A Ltd. is situated in India and, consequently, A Ltd. is resident in India. However, before recording this finding the Assessing Officer will have to take prior approval of the collegium of three members consisting of the Principal CITs or CITs, as the case may be, to be constituted by the Principal Chief Commissioner of the region concerned, in this regard. The collegium so constituted shall provide an opportunity of being heard to A Ltd. before issuing any directions in the matter.
† Vide Circular No. 2/2021, dated March 3, 2021, CBDT has provided that if any individual is facing double taxation even after taking into account the relief provided by the relevant Double Taxation Avoidance Agreement (DTAA), he/she may furnish the specified information by March 31, 2021 in Form-NR annexed to the said Circular. This form is to be submitted electronically to the Principal Chief CIT (International Taxation).
‡In the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, not include the period given in rule 126. Under rule 126, the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage, shall not be included in the period of stay in India.
# This provision is subject to one exception. It is applicable from the assessment year 2021-22.
†According to basic conditions given
† For computing Rs. 15,00,000, only taxable income shall be considered. If income is exempt, it shall not be taken into consideration even if it is derived/received in India.
† However, this condition has been activated from the assessment year 2021-22, in a few cases.
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Excellent post, Very informative.