Residential status plays a significant role in determining the tax liability of an individual or entity in a particular country. In India, the residential status of an assessee (taxpayer) is determined based on certain rules outlined in the Income Tax Act, 1961.
Residential Status
- Residential status refers to the classification of an individual or entity as a resident or non-resident for income tax purposes.
- The residential status determines the taxability of income earned by the assessee in India and the tax rates applicable to them.
Chargeability
- Chargeability refers to the liability of an individual or entity to pay income tax in a particular country, in this case, India.
- The chargeability of income is based on the residential status and the source of income, i.e., whether it is earned in India or abroad.
Meaning of Residential Status
- In India, the residential status is categorized into three types: Resident, Non-Resident, and Resident but Not Ordinarily Resident (RNOR).
- The classification is determined by the physical presence of the assessee in India during the relevant financial year and preceding financial years.
Rules for determining Residential Status
Rule 1: Rule of Physical Presence
- An individual is considered a resident if they are present in India for 182 days or more during the relevant financial year.
- Alternatively, if an individual is present in India for 60 days or more during the financial year and 365 days or more during the preceding four financial years, they are also treated as a resident.
Rule 2: Non-Resident Status
- An individual who does not meet the criteria mentioned in Rule 1 is considered a non-resident.
Rule 3: Resident but Not Ordinarily Resident (RNOR) Status
- An individual who qualifies as a resident under Rule 1 but has been a non-resident in India for nine out of ten preceding financial years, or has been in India for a total of 729 days or less in the preceding seven financial years, is treated as an RNOR.
Tax implications based on Residential Status
- Residents are subject to tax on their global income, i.e., income earned both in India and abroad.
- Non-residents are generally taxed only on income earned in India or income deemed to be accrued or received in India.
- RNORs enjoy certain tax benefits, and their foreign income is not taxable in India, except for income derived from a business or profession controlled or set up in India.