How is the residential status of an individual determined for income tax : 16-10-2019

The residential status of taxpayers plays a key role in determining the scope of taxable income for a financial year in India and there by the tax payable.

For an individual the residential status is determined solely by his/her physical presence in India during the financial year.

Why the residential status of a person is important for income tax purposes?
Shalini Jain, Tax Partner, People Advisory Services, EY India says, “Any income earned by a taxpayer from sources in India or received in India (first receipt) is taxable in India. While this is the generally known principle, another critical factor that determines the scope of taxability (and therefore, determines the total income) of an individual taxpayer is the residential status of the taxpayer from sources in India or received in India (first receipt) is taxable in India. While this is the generally known principle, another critical factor that determines the scope of taxability (and therefore, determines the total income) of an individual taxpayer is the residential status of the taxpayer during the financial year.”

She said, “The residential status is determined based on the number of days of physical presence of the taxpayer in India (irrespective of the purpose of stay) during the financial year and preceding ten financial years. A Non-Resident/Resident but not ordinarily resident taxpayer is taxable only on India sourced income/income received in India whereas a Resident and Ordinarily Resident is taxable on worldwide income.”

Classification of residential status of an individual
The income tax laws classify the residential status of an individual into three categories, depending on the individual’s stay in India in the relevant financial year as well as his/her stay in the previous years. These categories are:
1. Resident and Ordinarily Resident (ROR)

2. Resident but Not Ordinarily Resident (RNOR); and
3. Non-Resident (NR)

1. Resident and Ordinarily Resident (ROR)
An individual qualifies as a ROR in India if he/she fulfils the following basic conditions:
His/her cumulative stay in India during the relevant financial year is 182 days or more; Or his/her cumulative stay in India is 60 days or more during the financial year and 365 days or more during the 4 previous financial years.

The taxpayer must also satisfy the following additional conditions in order to be treated as ROR in India in the relevant financial year
a. His/her cumulative stay in India is 730 days or more during the 7 financial years immediately preceding the current financial year and;
b. He/she was a resident in India in at least 2 out of 10 previous financial years immediately preceding the current financial year.
If either of condition (a) or (b) are not met, then individual does not qualify as  ROR.

Aarti Raote, Partner, Deloitte India explains, Mr A who has left India for the first time in November 2018 (i.e. his stay in India during the FY 2018-19 was 220 days) qualifies as ROR for tax purpose as his stay in India exceeds 182 days during the previous year 2018-19 and his stay in the 7 previous years more than 730 days as well as he is a resident of India in all the earlier previous years. “In such case, his global income would be subject to tax in India,” she said.

2. Resident but Not Ordinarily Resident (RNOR)
The individual qualifies as RNOR in India if he/she meets the following basic conditions:
His/her cumulative stay in India during the financial year is 182 days or more; or his/her cumulative stay in India is 60 days or more during the financial year and 365 days or more during the 4 previous financial years.
However, the taxpayer will be treated as RNOR in India during the financial year only if he/she satisfies one of the .additional conditions mentioned below:

a.) His/her cumulative stay in India is 730 days or more during the 7 financial years immediately preceding the current financial year or;
b.) He/she was a resident in India at least 2 out of 10 previous financial years immediately preceding the current financial year

Raote explains Mr B stayed in India for 185 days during the FY 2018-19. Therefore, he meets condition 1. However, his stay in India has not crossed more than 730 days during the period 1st April 2011 to 31st March 2018 immediately preceding the FY 2018-19. So, in this case, he does not meet condition A. Hence, Mr B qualifies as ‘Resident but Not Ordinarily Resident’ (RNOR). “In such case, only income that accrues and arises in India or that is deemed to accrue or arise in India is liable to be taxable in India,” she said.

3. Non-Resident (NR)
The individual qualifies as NR in India if he/she meets all the following conditions:
His/her cumulative stay in India during the financial year is less than 181 days and
His/her cumulative stay in India does not exceed 60 days or more during the financial year
His/her cumulative stay in India exceeds 60 days or more during the financial year but does not exceed 365 days or more during the 4 previous financial years

In such a scenario, say if Mr C stayed in India was for 40 days during the financial year, so he qualifies as ‘Non-Resident’ (NR) in India as he meets 3 conditions above. In case if the person has NR status, only India-sourced income and income received directly in India bank account, would be taxable.

Points to note
It may be noted that the period of 60 days, as mentioned in the case of ROR, RNOR and NR, would stand enhanced to 182 days for the determination of residential status in the following situations, Raote explains:

  • A citizen of India, leaving India for the purpose of taking up employment outside India during the year.
  • A citizen of India or a Person of Indian Origin (PIO), who is staying outside India, comes on a visit to India.

Source : PTI