Residential Status: A Complete Breakdown of Section 6
Residential Status: Understanding the private status of people, companies, and other substances is vital for deciding how they are saddled in India. Area 6 of the Wage Assess Act 1961 clarifies the concept of private status. A person’s tax liability (whether individual, HUF, firm, company, etc.) is primarily determined by their residential status in India.
This study material will explain the residential status of individualsand special provisions forHUFs, firms, companies, and other entities. We will break down the rules and provideillustrationsto help you understand.
Before you start to read Chapter#2: Career As A Tax Consultant Right for You? Chapter#1
Content Summarized:
This content explains how residential status affects tax liability in India under Section 6 of the Income Tax Act 1961. The status categories are:
- Individuals: Can be Resident, Non-Resident, or Resident but Not Ordinarily Resident (RNOR) based on the number of days spent in India.
- Deemed Resident: An Indian citizen living abroad but earning income in India can be considered a deemed resident if not taxed in the foreign country.
- HUFs, Firms, AOPs, BOIs: Their residency is based on their stay or control in India.
- Companies: A company is a resident if incorporated in India.
- Local Authorities & Artificial Persons: Residency depends on the place of control and management.
Understanding these rules is crucial for determining tax obligations in India.
Residential Status of Individuals [Section 6]
Residential Status of Individuals
An individual’s residential status determines their liability to pay tax in India. There are three categories:
- Resident
- Non-Resident
- Resident but Not Ordinarily Resident (RNOR)
The tax status depends on how many days an individual stays in India during a financial year (April to March). The Income Tax Act sets specific criteria for determining whether an individual qualifies as a Resident or Non-Resident.
Key Factors to Determine Residential Status
To determine whether an individual is a resident or non-resident, two tests are applied:
- Basic Condition Test (for Resident)
- Additional Condition Test (for Ordinary Resident)
Basic Condition:
An individual will be a resident if they satisfy any one of the following two conditions:
- The person is in India for at least 182 days during the financial year or
- The person is in India for at least 60 days during the financial year and 365 days during the 4 preceding years.
Note: The 60 days is increased to 182 days if an Indian citizen or a person of Indian origin who is outside India and comes back to India for business or employment reasons. This rule applies only to Indian citizens and persons of Indian origin.
Additional Condition (for Ordinary Resident):
Once the individual is considered a Resident, they must further qualify as an Ordinarily Resident (OR). An individual is an ordinary resident if they fulfill both conditions:
- They have been a resident in India for at least 2 out of the last 10 years and
- They have been in India for at least 730 days during the 7 years immediately preceding the financial year.
Resident but Not Ordinarily Resident (RNOR):
If an individual satisfies the resident condition but does not meet the ordinary conditions, they are classified as Resident but Not Ordinarily Resident (RNOR).
Exceptions: Period of Stay in India
Some exceptional cases are excluded from the general rule, especially for Indian citizens who are crew members of ships or aircraft. Such individuals’periods of stay in Indiawill not be counted when determining their residential status.
Example:
An Indian citizen working as a crew member on a foreign ship may not be considered a resident for tax purposes if their stay in India is less than the required days.
Guidelines by Income Tax Authority for Non-Resident Individuals for AY 2024-2025
Deemed Resident [Section 6(1A)]
![Deemed Resident [Section 6(1A)]](https://www.tfincareer.com/wp-content/uploads/2024/11/5-8-1024x538.webp)
Under certain circumstances, an individual may be deemed a resident even if they do not meet the general residency conditions.
Deemed Resident:
A person who is an Indian citizen and has been staying outside India but has something is taxable in India will be considered a deemed resident if:
- They are not liable for taxes in the country where they reside.
This concept is essential for individuals who earn income from sources in India but reside outside the country.
Illustration 1:
Mr. Raj, an Indian citizen, works in the USA. He has a compensation of ₹5,00,000 from an Indian company. He remains in the USA for the entire budgetary year but comes to India for 50 days. Is he an inhabitant or a non-resident?
Solution:
Since Mr Raj was in India for only 50 days, he still needed to meet the essential stay condition of 182 days. Therefore, he is a Non-Resident.
Illustration 2:
Mr. Ajay, an Indian citizen, works in Canada. His total income of ₹10,00,000 is derived from Indian sources (salary from an Indian company, rental income from property in India). He has stayed outside India for 2 years and has no other income in Canada.
Solution:
As Mr Ajay is an Indian citizen, and his total income is taxable in India, he will be considered a Deemed Resident under Section 6(1A), even though he does not stay in India for 182 days.
Residential Status of HUF (Hindu Undivided Family)
A HUF (Hindu Undivided Family) is a separate entity for tax purposes. The rules for determining the residential status of a HUF are similar to that of an individual. The HUF can be:
- Resident: If the family satisfies the essential condition of being in India for the required number of days.
- Non-Resident: If the family fails to meet the required stay in India.
- Resident but Not Ordinarily Resident (RNOR): If the family is in India but does not meet the criteria to be an ordinary resident.
Illustration 3:
Amit HUF stayed in India for 180 days in the financial year, but in the last 10 years, the HUF was in India for only 1 year and stayed for 600 days. What is the HUF’s residential status?
Solution:
The HUF has not been in India for 2 out of the last 10 years, and the total stay is less than 730 days, so it will be considered Resident but Not Ordinarily Resident (RNOR).
Residential Status of Firms, AOPs, and BOIs
For firms (Partnerships), AOPs (Associations of Persons), and BOIs (Bodies of Individuals), the rules for residential status are similar to those of individuals. A firm or AOP/BOI is a Resident if managed or controlled in India. It will be a Non-Resident if managed or controlled outside India.
Residential Status of Companies
The residential status of a company is determined based on its place of incorporation:
- A company is considered a resident if it is incorporated in India.
- A foreign company is regarded as a non-resident in India.
The place of control and management is not a deciding factor for a company; instead, the place of incorporation governs its residential status.
Residential Status of Local Authorities and Artificial Juridical Persons
Local authoritiesandartificial juridical persons(e.g., trusts, societies, etc.) residential status is typically determined based on their place of control and management. If the power is within India, they are considered residents; otherwise, they are non-residents.
Conclusion
Private status plays a vital part in deciding to assess obligations in India. Whether a person, HUF, firm, or company is an inhabitant or non-resident depends on the number of days they remain in India, their pay sources, and other criteria. Understanding these rules is fundamental to guarantee appropriate compliance with charge laws in India.
This study material covered the critical concepts related to residential status, including the status of individuals, HUFs, firms, companies, and other entities under the provisions of Section 6 of the Income Tax Act.
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