Introduction:

The question of residential status for income tax is something you need to be familiar with. This will make it much easier to determine your tax obligation.

Residential status is essential in the computation of tax and it can substantially influence how much you pay or get back. This is especially critical during this tax filing season. In reality, it is among the elements used to evaluate a person’s taxability for a particular financial year.

Why Residential Status is important?

An individual’s taxability is computed by his residency status in the country for any particular accounting year. A person may be an Indian citizen but get a non-resident status for a particular financial year. Likewise, an international citizen can get resident status in India for taxation purposes in a particular financial year. Residential statuses of different categories of entities are decided separately.

How to determine if someone is an Indian Resident?

A person is considered to be a resident of India if he meets one of these criteria:

  1. He spends at least 182 days of the accounting year in India.
  2. He spends 60 or more days in India during the accounting year and 365 or more days in the 4 years preceding the current previous year.

The aforementioned 60-day limit is increased to 182 days for an Indian citizen leaving India during the accounting year for the intention of seeking work outside the nation or as a crew member of any Indian ship. The need, for this reason, is to leave India for the sake of work.

If an Indian citizen or someone of Indian descent comes to visit India, the aforementioned term of 60 days is increased to 182 days. A person is considered to have Indian descent if he, his parents, or his grandparents were born in India before 1947.

If a person fails to meet any of these two criteria, he is considered a non-resident.

How to determine if someone is ordinarily resident or not?

A resident person is classified to be an ordinarily resident in the nation if he meets the above-mentioned resident criterion as well as both of these following requirements:

  1. He has lived in the nation for a minimum of two years out of the ten years before the relevant accounting year.
  2. He has spent at least 730 days in the nation in the seven years prior to the relevant accounting year.

A person who fails to meet both of the above-mentioned characteristics is considered to be a not-ordinary resident.

HUF Residential Status

A HUF (Hindu Undivided Family) is considered to be an Indian resident if it controls and manages its affairs entirely or partially in India.

A HUF is considered to be an ordinarily resident in the nation if the Karta (including consecutive Karta) meets both of these following requirements:

  1. He has resided in the nation for at least two of the ten years before the relevant accounting year.
  2. He has spent at least 730 days in the nation in the seven years before the relevant accounting year.

If Karta fails to meet any of the aforementioned criteria, HUF is termed as a not-ordinary resident.

If a HUF’s control and administration are entirely located outside of India, it is considered a non-resident.

Partnership Firm or AOP (Association of Persons) Residential Status

A partnership company or AOP (Association of Persons) is considered to be resident the nation if management and control of the business were entirely or partially located within the geographical boundaries of India during the previous year. It is, nevertheless, considered a non-resident in the nation if the management and administration of its business are entirely located outside of the Indian boundaries.

Company Residential Status

An Indian corporation is always considered to be an Indian Resident.

A foreign corporation is considered to be a resident of the nation if its POEM (Place of Effective Management) was in India during the previous year. For this reason, the POEM of a firm is defined as a location where critical management and commercial choices that are required for the operation of an organization are made. The Board of Taxation may provide a list of guidelines to be used in determining POEM for the advantage of taxpayers and tax operations.

Taxability

Persons are taxed according to their respective residential status for a financial year. Here are the tax liability depending on the residential status.

  • Ordinarily Residents:

    Ordinarily, Indian residents need to pay taxes on their entire income, which includes earnings from within and outside of the nation.

  • Non-Residents and Not Ordinarily Residents:

    The tax responsibility in India of non-residents and not ordinarily residents are confined to the money they generate in the nation. The entities classified as not ordinarily resident and non-residents do not need to pay any amount of tax on their earnings sourced from outside the geographical boundaries of India. In the situation of double income taxation, when the exact same revenue is taxed both in India and the taxpayer’s homeland,one may count on the DTAA to avoid double tax payments.

Conclusion

The place where you currently reside in India– is that alone enough to establish you as a permanent resident of the nation? Not necessarily. If you fail to meet the necessary requirements for establishing residents, you will be termed as a not-ordinarily resident or even as a non-resident. The level of your tax due is entirely determined by your residential status. As a result, it is critical to thoroughly understand the regulations as well as the residential status.


FAQ’s

No. You cannot change your residential status for a financial year. However, you can take precautions according to your preferred residential status in the following years.


Yes. Non-residents need to pay taxes on the amount they have directly earned from India.


In case you are eligible for double taxation i.e. liable for paying tax in India as a non-resident as well as your home country, you can depend on the DTAA (Double Taxation Avoidance Agreement) to solve your problem.