Residential Status under Income-tax Act and its Effect on Tax Incidence

The Residential Status under the Income-tax Act, 1961 in India is crucial for determining the tax liability of an individual or a legal entity. It specifies how income earned both within and outside India will be taxed. The residential status of a person is based on their physical presence in India during a given financial year (April 1st to March 31st) and the preceding years. The determination of residential status is essential at the start of each financial year to ensure correct tax filing and compliance with the Income-tax Act.

Table of Contents

1. Relevance of residential status
2. What one must know for deciding residential status?
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)]
7. Residential status of every other person [Sec. 6(4)]

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1. 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. What one must know for deciding residential status?

The following norms one has to keep in mind while deciding residential status of an assessee:

• Different taxable entities – All taxable entities are divided in the following categories for the purpose of determining residential status:

a. an individual;

b. a Hindu undivided family;

c. a firm or an association of persons;

d. a joint stock company; and

e. every other person.

• Different residential status – An assessee is either:

a. resident in India, or

b. non-resident in India.

However, a resident individual or a Hindu undivided family has to be

a. resident and ordinarily resident, or

b. resident but not ordinarily resident.

Therefore, an individual and a Hindu undivided family can either be:

a. resident and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company and every other person) can either be:

a. resident in India; or

b. non-resident in India.

The table given below highlights the same—

• Residential status for each previous year – Residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year.
• Different residential status for different previous years in same assessment year not possible – 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 [sec. 6(5)].
• 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.
• 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 two (or more) countries at the same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other countries for the same assessment year.

3. Residential status of an individual [Sec. 6]

An individual may be

(a) resident and ordinarily resident in India,

(b) resident but not ordinarily resident in India, or

(c) non-resident in India.

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 —

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—

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 Basic condition (b) above has been extended to 182 days by virtue of Explanation 1(a) to section 6(1). However, Special Case 1 is available only 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. He may be employed in India and leave India during the previous year on a foreign assignment of his employer company. 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 days².

• Exception two (Special Case 2) – In Special Case 2, the period of “60 days” referred to in Basic condition (b) above has been extended to 182 days by virtue of Explanation 1(b) to section 6(1). However, Special Case 2 covers only 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 days³.

• Exception three – Exception three is given by section 6(1A). It is applicable from the assessment year 2021-22. For the provisions of this section, see para 3.3.1.

3.1.2 Additional conditions to test as to 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 —

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 [i.e., (a) or (b)] and the two additional conditions [i.e., (i) and (ii)].

3.1.3 Other Points

It is worthwhile to note the following propositions –

• It is not essential that the stay should be at the same place. It is equally not necessary that the stay should be continuous. Similarly, the place of stay or the purpose of stay is not material.
• 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. 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.

3.2 Resident but not ordinarily resident [Sec. 6(1), (6)(a)]

An individual who satisfies at least one of the basic conditions [i.e., condition (a) or (b) mentioned in para 3.1.1] but does not satisfy the two additional conditions [i.e., conditions (i) and (ii) mentioned in para 3.1.2], 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:

3.3 Non-resident

An individual is a non-resident in India if he satisfies none of the basic conditions [i.e., condition (a) or (b)]. In the case of non-resident, 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. 15,00,000⁵ 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.

The rule given by above exception is not applicable in the case of an individual who becomes resident in India by satisfying any of the basic conditions given by section 6(1) [see para 3.1]. Moreover, the above 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. 15,00,000⁶ 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 for an individual in brief

The tables given below summarise the rule of residence for the assessment year 2024-25:

Note – Besides the provisions summarised in the above table, an individual becomes resident but not ordinarily resident in India if he comes within the two exceptions mentioned in para 3.3.1.

Basic Conditions at a Glance

Additional Conditions at a Glance

1. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year [or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 2013-14 to 2022-23)].
2. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during April 1, 2016 and March 31, 2023).

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 —

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”.

• What is “control and management” – Control and management is situated at a place where the head, the seat and the directing power are situated. 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.

4.2 When a resident Hindu undivided family is ordinarily resident in India

A resident Hindu undivided family is an ordinarily resident in India if karta or manager of the family (including successive kartas) satisfies the following two additional conditions as laid down by section 6(6)(b) :

If 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.

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—

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.

• 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 principal officer. Control and management means de facto control and management and not merely the right to control or management. Control and management is usually situated at a place where the head, the seat and the directing power are situated.

6. Residential status of a company [Sec. 6(3)]

Residential status of a company is determined as follows –

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 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.

7. Residential status of every other person [Sec. 6(4)]

Every other person is resident in India if control and management of its affairs is, wholly or partly, situated within India during the relevant previous year. On the other hand, every other person is non-resident in India if control and management of its affairs is wholly situated outside India.

1. 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, in respect of such voyage, 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.
2. This provision is subject to one exception. It is applicable from the assessment year 2021-22.
3. This provision is subject to one exception. It is applicable from the assessment year 2021-22.
4. According to the basic conditions.
5. 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.
6. 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.
7. However, this condition has been activated from the assessment year 2021-22, in a few cases.