Residential Status of a person in India (Companies Act & Income Tax Act) and Deemed Resident Concept

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  • May 04,2020
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Position as per Income Tax Act, 1961:

Residential status is all about to know or to determined taxability of income earned in a particular country. Section 6 of Income Tax Act is all dealt with residential status of an individual or a entity. Let’s have a look on a person’s residential status and their taxability in India in best possible summarized way.

  1. Position as per Law:

To read the exact wording of Section 6 of Income Tax act, 1961, you can visit at https://bit.ly/3cQ1vdV (source: incometaxindia.gov.in).

  1. Type of persons and their position of residential status in India:
  1. Status for Individuals: An individual residential status can be determined by his/her physical presence in India. An individual can be a resident or non-resident person, further if said individual is resident in India then we need to find out about ordinary resident (R-OR) or not ordinary resident (R-NOR). Scope of taxability of income is different for all three types.

Resident (Check A)

    • Ordinary Resident (Check B)
    • Not Ordinary Resident

Non-Resident

Conditions to become resident in India: (Check A)

    1. Total stay in India during the relevant financial year is 182 days (including day of arrival & departure) or more;

OR

b. Total stay in India is 60 days or more during the relevant financial year and 365 days or more during the 4 previous financial years.

Exception: In case of second mentioned condition, total number of days will be replaced by 182 days or more (instead of 60) in case of an individual who is a citizen of India/person of Indian origin leaves India for employment during a financial year or leaves as a member of the crew of an Indian ship.

Also applicable for an individual being a citizen of India, or a person of Indian origin, who being outside India, comes on a visit to India in any financial year.

Additional changes made from FY 2020-21, amended by Finance Act 2020:

In case of an individual being a citizen of India, or a person of Indian origin, who being outside India, comes on a visit to India in any financial year whose total income in India exceeds Rs 15 lakh, period of 182 days as mentioned in above exception will be considered as 120 days or more.

Conditions to become ordinary resident in India: (Check B)

If you are confirmed as a resident in India, then Now status to be checked for Ordinary resident or Not Ordinary resident. To become ordinary resident in India, you must satisfy following two conditions:

a. Your total stay in India as resident should be at least 2 previous financial years out of 10 previous financial years immediately prior to the financial year in question.

AND

b. Your total stayed in India must be for at least 730 days in 7 previous financial years immediately prior to the financial year in question.

Resident- Not ordinary resident- If you are not able to satisfy any of the condition mentioned above (Check B) then your status for the financial year concerned will be Resident- Not ordinary resident in India.

Conditions to become Non-resident in India:

A resident who are not falling any of the above category, will be called a NR for the financial year. i.e. If you are not able to satisfy neither of the condition (‘a’ or ‘b’) mentioned in check A then your status for the financial year concerned will be Non-resident in India.

ii. Status for HUF: An HUF is said to be resident in India all time except their control and management is wholly situated outside India. In short, HUF will be called Non-Resident only if control and management is wholly situated outside India.

A resident HUF can also avail the status of ‘Resident but not Ordinarily Resident’ by satisfying the following conditions:

a. Manager/Karta’s total stay in India as Non-resident should be at least 9 previous financial years out of 10 previous financial years immediately prior to the financial year in question.

OR

b. Manager/Karta’s total stayed in India must be in total 729 days or less in 7 previous financial years immediately prior to the financial year in question.

iii. Status of Firm/AOP/BOI: A Firm/AOP/BOI is said to be resident in India all time except their control and management is wholly situated outside India. In short, Firm/AOP/BOI will be called Non-Resident only if control and management is wholly situated outside India.

iv. Status of Company:

A company is said to be a resident in India in any previous year, if—

    1. It is an Indian company; or
    2. For any other type of company if its place of effective management, in that year, is in India.

Like in case of foreign company, will be treated resident in India if place of effective management in particular year is in India.

"Place of effective management" means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are being made. 

3. Status not to be Income Source wise (One Residential status for all source of Income)

If a person status is resident in India in a financial year in respect of any source of income, then that person is deemed to be resident in India in respect of all other sources of income. This is not allowed to claim different status for different source of income of a person. Therefore, before preparing computation of income during the year, this is most important to calculate the residential status of a person during the previous year.

4. Deemed Residential Status for NRI (added by FA 2020)

Deemed resident concept has been introduced to tax those people who does not have any fix residency in other countries and because of this escaped to tax in India as well. Government just need to ensure that tax has been settled on the income earned in India by these persons.

As per this provision, an individual, being a citizen of India, having total income (income from only Indian sources), exceeding fifteen lakh rupees (Rs. 15,00,000) during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residential status or any other criteria of similar nature, is said to be deemed resident in India.

This is clarified by CBDT that in case of an Indian citizen who is deemed resident of India under this provision, income earned outside India by him shall not be taxed in India unless it is derived from an Indian business or profession.

5. Examples of Residential status:

For resident:

Case: Let consider the case of Mr X, Senior manager for India & outer regions for a private company. Mr X, an Indian citizen was born and raised in India. He has to travel to various locations outside India for business purposes. He has spent 195 days travelling in the current financial year. Also, he has been travelling foreign from the past two and half years and has stayed out of India for about 444 days in this period.

Now, have a look on the both of the condition given in point 2 above, after considering the above information to know the resident status of Mr X, you will understand that he has only spent 170 days in India during the current financial year. That proves the first condition wrong. It is given that Mr X has been travelling only from the past two & half years.

As per second condition, Mr X has been in India for more than 60 days in previous year and Mr X has also stayed in India for more than 365 days (469 days) in last four years.

Therefore, the second condition have matched to become an resident in India. Mr X is a resident Indian for this financial year.

6. Residential Status calculator (source: www.incometaxindia.gov.in)

https://www.incometaxindia.gov.in/Pages/tools/residential-status-calculator.aspx

7. Taxability of Income as per residential status of a Person:

S. N.

Nature of Income

Resident

Not Ordinary R.

Non-Resident

1

Income received or deemed to be received in India

Taxable

Taxable

Taxable

2

Income accrues or arises in India

Taxable

Taxable

Taxable

3

Income deemed to accrue or arise in India

Taxable

Taxable

Taxable

4

Income accrues or arises outside India

Taxable

Not Taxable*

Not Taxable

‘*Taxable in case of business controlled or profession set up in India

 

Position as per Companies Act, 2013:

In the companies act, there is no as such requirement for residential status. Point about appointment of resident director is given below.

As per the provisions of sub section (3) of section 149 of companies Act, 2013, Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two (182) days in the previous calendar year. Means as per the provision, One resident director is must to be appointed in every company.

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