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It is critical for the Income Tax Department to establish a taxable individual’s or company’s residence status. It is especially important during the tax filing season. In reality, this is one of the variables used to determine a person’s taxability.

Residential Status for Income Tax

An individual’s taxability in India is determined by his residential status under the income tax act in India for any given fiscal year. The phrase “residential status” was coined by India’s income tax rules and should not be confused with an individual’s citizenship in India. An individual may be an Indian citizen but become a non-resident for a certain year. Similarly, a foreign citizen may become a resident of India for income tax purposes in a given year.

It is also worth noting that the residential status as per income tax differs to sorts of people, such as an individual, a corporation, a company, and so on, is decided differently. 

Resident Status Classifications

Income Tax Law has divided the residence status of an individual in India into three categories based on the length of time he or she has lived in India. An individual’s residential status will include his or her current fiscal year as well as previous years of stay.

The following categories are used to classify an individual’s residence status.

  • Resident (ROR)
  • Resident but Not Ordinarily Resident (RNOR)
  • Non-Resident (NR)

Resident and Ordinarily Resident

Individuals are deemed to be residents of India under Section 6(1) of the Income Tax Act if they meet the following conditions: If he/she stays in India for 182 days or more in a fiscal year, or if he/she stays in India for 60 days or more in a fiscal year, and if he/she stays in India for 365 days or more in the four years immediately before the previous year and comes under ordinary resident in income tax.

According to section 6(6) of the Income Tax Act of 1961, there are two criteria under which an individual will be considered as a “Resident and Ordinarily Resident” (ROR) in India.

  • If he or she spends 730 days or more in India in the seven years preceding the current year.
  • If he/she has resided in India for at least two of the ten prior fiscal years before the current year.

Resident but Not Ordinarily Resident

When an assessee meets the following fundamental requirements, he or she will be regarded as RNOR: If an individual stays in India for a time of 182 days or more in a fiscal year; or if he/she stays in India for a period of 60 days in a fiscal year and 365 days or more in the four preceding fiscal years.

Invest in elss funds

An Assessee, on the other hand, will be classified as a Resident but Not Ordinarily Resident (RNOR) if they meet one of the following fundamental conditions:

  • If he/she stays in India for 730 days or more in the previous fiscal year.
  • If he/she was a resident of India for at least 2 out of 10 days in the previous fiscal year.

Non Resident

An individual will be eligible for Non-Resident (NR) status if he or she meets the following criteria:

  • If an individual spends less than 181 days in India within a fiscal year.
  • If an individual stays in India for no more than 60 days in a fiscal year.
  • If an individual stays in India for more than 60 days in a fiscal year but does not remain for 365 days or more in the preceding four fiscal years.

Tax

For a Resident: A resident will be taxed in India on his total income, which includes money generated in India as well as an income obtained outside of India.
For NR and RNOR: Their tax burden in India is limited to the income they make in the country. They are not required to pay any tax in India on their international earnings. Also, in the event of double taxation of income, when the same income is taxed in India and overseas, one may rely on the Double Taxation Avoidance Agreement (DTAA) that India would have signed into with the other nation to avoid paying taxes twice.

FAQs

Q1. What is residential status in income tax?

According to the Income Tax Act of 1961, a person’s residence status is an essential criterion in assessing tax consequences. A person’s residential status can be classified as Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non- Resident (NR).

Q2. What types of residential statuses are there?

A person’s residential status may be roughly divided into three categories: Resident, Non-Resident, and Deemed Resident. The Resident is further divided into Ordinary Resident and Non-Ordinary Resident. The Finance Act of 2020 introduces the notion of the considered resident.

Q3. What is the proof for NRI status?

A photocopy of a valid passport is required as identification. 

Identity Documentation – Copy of Permanent Account Number (PAN)/Form 60 (in absence of PAN).

Proof of NRI Status – A copy of a valid visa, work permit, or Overseas Resident Card is required. 

Address Proof – The address on the document must match the address on the application form.

Q4. What does an Indian residential status of a company mean?

An Indian corporation is always based in India. Even if an Indian business is controlled from a location outside India (or if the shareholders of an Indian company with more than 51% voting power are non-residents and/or situated outside India), the Indian company is a resident of India.

Q5. What is the importance of residential status in terms of tax?

The residence of taxpayers is important in establishing the scope of taxable income for a fiscal year in India, and hence the tax payable. Individuals’ residence status is entirely established by their actual presence in India during the fiscal year.

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