Residential Status Income Tax Act: The residential status of a tax-paying person or company is an essential factor in determining the taxability of that person/company. The residential status of an individual/company is calculated based on the number of days of their stay in India during the relevant financial year. An assessee can either be a resident or a non-resident of India. Classification of residents falls under two categories-
- Resident and ordinarily resident
- Resident but not ordinarily resident.
Table of Content
- Residential Status of an Individual
- Tax Planning concerning the Residential Status of an Individual
- Residential Status of HUF
- Residential Status of a Firm of Associations or Persons (AOP)
- Residential Status of a Company
Any person who has never gone abroad and is a resident of India obtains the residential status of an individual.
How to determine whether an individual is a resident of India or not
An individual is a resident of India if they fulfill one or more of the following criteria-
- They have stayed in India for a continuous period of 182 days or more in a year
- They lived in India for 60 or more days in a year and lived for a total of 365 days in four years, which directly precede the previous year.
- 60 days extends to a total of 182 days for Indian citizens who need to leave India for the sole purpose of finding employment outside India. They are also exempt if their employer requires them to work abroad. The location of employment may or may not be in India.
- As mentioned above, for Indian citizens visiting India or visitors of Indian origin, the period of 60 days is extended to 182 days. Individuals are of Indian origin if they, their parents, or their grandparents were born in undivided India.
If an individual cannot meet any one of the given two criteria, they cannot be deemed an Indian resident and will be considered a non-resident.
Determining whether an individual is ordinarily or non-ordinarily Resident
An individual is a resident and an ordinary resident of India if they can satisfy any of the above criteria. They must also satisfy both of the following conditions-
- They have been a resident of India for a minimum of 2 out of 10 years which immediately precedes the relevant year.
- They have lived in India for 730 days or more during the seven years preceding the relevant year.
Anyone who does not satisfy these conditions can be considered a resident but is a non-ordinarily resident.
The residential status of the assessee determines the individual bear the income tax.
Special conditions to determine the residential status
Thus, an individual who lives outside India for the majority of a year and its preceding year must take note of some exceptional conditions so that they will be able to modify their routines to save themselves from paying a considerable amount of tax. The special needs are as follows-
- An individual visiting India for a business trip or any other reason should not stay in India for longer than 181 days within a year. Their stay should also not extend 364 days in the four years before the relevant year to qualify for non-resident status.
- If an individual remains in India for longer than 364 days for four years, they should not stay in India for more than 59 consecutive days per year. For instance, they can stay in India for 30 days, return to their residential place, and come back to India later to not live there for more than 59 days each year.
- A citizen of India or any person of Indian origin should modify their trip to avoid staying in India for more than 181 days in a year.
- A non-resident individual should not be receiving any income from India, even if their Indian headquarters directly control their employer. The income should be received outside India and then remitted to India. By doing so, the individual will have to pay no leviable tax.
- A non-ordinarily resident of India should also receive their income outside India. The individual should earn income outside India, and non-Indian headquarters should also control the employers.
A Hindu family is a resident of India if all the family affairs are controlled and managed entirely or partly while staying in India.
Conditions for HUF to be treated as Resident
A HUF is treated as resident and ordinarily resident in India if the family head, including the successors, satisfies both of the following conditions-
- He has resided in India for at least 2 out of 10 years, which immediately precede the relevant year.
- He has stayed in India for 730 days or more during seven years previous to the relevant year.
Suppose the Family head does not satisfy any of the above conditions. In that case, HUF is not an ordinarily resident, even if it is a Resident.
If the location of the control and management of HUF affairs outside India, it will be treated as a non-resident.
A partnership firm, also known as an Association Of Persons (AOP), is considered a resident if its affairs are managed and controlled while entirely or partially situated in India for a year before the year in question.
It is, however, treated as non-residential if the location of management and control of its affairs is outside India.
The location of an Indian company is always in India.
Residential status of foreign companies assessment 2016-17
A foreign company is considered a resident of the Place Of Effective Management (POEM) during the prior years was India. Effective management is where most critical decisions are made regarding management and other commercial affairs. Since POEM is responsible for conducting business, they set a set of guidelines. These guidelines would help determine the POEM. The Board issues these guidelines for the benefit of the taxpayers and tax administration.