Residential Status and Incidence of Tax

CONCEPT OF RESIDENTIAL STATUS

The following norms one has to keep in mind while deciding the residential status of an assessee:

1. Different taxable entities - All taxable entities are divided in the following categories for the purpose of determining residential status:

a. An individual;

b. A Hindu undivided family;

c. A firm or an association of persons;

d. A joint stock company; and

e. Every other person.

2. Different residential status - An assessee is either: (a) resident in India, or (b) non-resident in India.

However, a resident individual or a Hindu undivided family has to be (a) resident and ordinarily resident, or (b) resident but not ordinarily resident. Therefore, an individual and a Hindu undivided family can either be:

a. resident and ordinarily resident in India; or

b. resident but not ordinarily resident in India; or

c. non-resident in India

All other assessees (viz., a firm, an association of persons, a joint stock company and every other person) can either be:

a. resident in India; or

b. non-resident in India.

3. Residential status for each previous year - Residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year.

4. Different residential status for different assessment years - An assessee may enjoy different residential status for different assessment years. For instance, an individual who has been regularly assessed as resident and ordinarily resident has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1).

5. Resident in India and abroad - It is not necessary that a person, who is "resident" in India, cannot become "resident" in any other country for the same assessment year. A person may be resident in two (or more) countries at the same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other countries for the same assessment year.

 

Determining residential status of an Individual Assessee

The residential status can be determined in following steps -

Step	Conditions		Condition satisfied	Resident Status
Step 1 – To find Resident Status	Basic Conditions 1	He is in India in the previous year for a period of 182 days or more	If satisfy any one of the 2 conditions	Resident in India
	Basic Conditions 2	He is in India for a period of 60 days or more during the previous year and 365 or more during 4 years immediately preceding the previous year	If satisfy none of the 2 conditions	Non Resident
Step 2 – To find out resident status as ordinary resident and non ordinary resident	Additional Condition (i)	He has been resident in India in at least 2 out of 10 previous years immediately preceding relevant previous year according to basic condition mentioned above	If satisfy both the additional conditions	Resident and ordinary resident
	Additional Condition (ii)	He has been in India for a period of 730 days or more during 7 years preceding the relevant previous year	If does not satisfy both the conditions	Resident but not ordinarily resident

 

Note – In basic condition 2 the clause of "60 days" has been extended to 182 days in following cases

1. An Indian citizen who leaves India during the previous year for the purpose of employment outside India or an Indian citizen who leaves India during the previous year as a member of the crew of an Indian Ship.
   
2. Indian citizen or a person of Indian origin who comes on a visit to India during the previous year.
   

Determining residential status of a HUF Assessee [Sec. 6(2)]

The residential status can be determined in following steps -

Step	Conditions		Condition satisfied	Resident Status
Step 1 – To find Resident Status	Basic Conditions 1	Control & Management of affairs of a HUF is wholly in India or Partly in India & partly outside India	If Basic Condition 1 is satisfied or 2 is not satisfied	Resident
	Basic Conditions 2	Control & Management of affairs of a HUF is wholly outside India	If Basic Condition 2 is satisfied or 1 is not satisfied	Non Resident
Step 2 – To find out resident status as ordinary resident and non ordinary resident	Additional Condition (i)	Karta or Manager has been resident in India in at least 2 out of 10 previous years immediately preceding relevant previous year according to basic condition mentioned above	If satisfy both the additional conditions	Resident and ordinary resident
	Additional Condition (ii)	Karta or Manager has been in India for a period of 730 days or more during 7 years preceding the relevant previous year	If does not satisfy both the conditions	Resident but not ordinarily resident

 

Determining residential status of a Firm and AOP [Sec. 6(2)] and every other person[Sec.6(4)]

The residential status can be determined in following steps -

Conditions		Condition satisfied	Resident Status
Basic Conditions 1	Control & Management of affairs is wholly in India or Partly in India & partly outside India	If Basic Condition 1 is satisfied or 2 is not satisfied	Resident
Basic Conditions 2	Control & Management of affairs is wholly outside India	If Basic Condition 2 is satisfied or 1 is not satisfied	Non Resident

 

Determining residential status of a Company [Sec. 6(3)]

The residential status can be determined as following –

Place of Control	Residential Status
	An Indian company	A company other than Indian company
Wholly in India	Resident	Resident
Wholly outside India	Resident	Non – Resident
Partly in India and partly outside India	Resident	Non – Resident

 

 

RESIDENTIAL STATUS AND INCIDENCE OF TAX

As per section 5, incidence of tax on a taxpayer depends on his residential status and also on the place and time of accrual or receipt of income.

 

INDIAN AND FOREIGN INCOME

In order to understand the relationship between residential status and tax liability, one must understand the meaning of "Indian income" and "foreign income".

 

"INDIAN INCOME" - Any of the following three is an Indian income —

1. If income is received (or deemed to be received) in India during the previous year and at the same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

2. If income is received (or deemed to be received) in India during the previous year but it accrues (or arises) outside India during the previous year.

3. If income is received outside India during the previous year but it accrues (or arises or is deemed to accrue or arise) in India during the previous year.

 

FOREIGN INCOME - If the following two conditions are satisfied, then such income is "foreign income" —

a. Income is not received (or not deemed to be received) in India; and

b. Income does not accrue or arise (or does not deemed to accrue or arise) in India.

 

INCIDENCE OF TAX FOR DIFFERENT ASSESSEES

Assessee - Individual and HUF
Income /Residential Status	Resident and ordinarily resident	Resident but not ordinarily resident	Non Resident
Indian Income	Taxable in India	Taxable in India	Taxable in India
Foreign Income
If it is business income and business is controlled wholly or partly from India	Taxable in India	Taxable in India	Not Taxable in India
If it is income from profession which is set up in India	Taxable in India	Taxable in India	Not Taxable in India
If it is business income and business is controlled from outside India	Taxable in India	Not Taxable in India	Not Taxable in India
If it is income from profession which is set up outside India	Taxable in India	Not Taxable in India	Not Taxable in India
Any other foreign income (like salary, rent, interest, etc.)	Taxable in India	Not Taxable in India	Not Taxable in India

 

INCIDENCE OF TAX FOR DIFFERENT ASSESSEES

Any other taxpayer (like company, firm, co-operative society, association of persons, body of individual, etc
Income /Residential Status	Resident	Non Resident
Indian Income	Taxable in India	Taxable in India
Foreign Income	Taxable in India	Not Taxable in India

 

MEANING OF RECEIPT OF INCOME

Income received in India is taxable in all cases irrespective of the residential status of an assessee. The following points are worth mentioning in this respect:

 

1. RECEIPT vs. REMITTANCE

The "receipt" of income refers to the first occasion when the recipient gets the money under his control. Once an amount is received as income, any remittance or transmission of the amount to another place does not result in "receipt" at the other place.

2. ACTUAL RECEIPT vs. DEEMED RECEIPT

It is not necessary that an income should be actually received in India in order to attract tax liability. An income deemed to be received in India in the previous year is also included in the taxable income of the assessee. The Act enumerates the following as income deemed to be received in India:

• Interest credited to recognized provident fund account of an employee in excess of 9.5 per cent.
  
• Excess contribution of employer in the case of recognized provident fund (i.e., the amount contributed in excess of 12 per cent of salary).
  
• Transfer balance.
  
• Contribution by the Central Government to the account of an employee under a pension scheme referred to in section 80CCD.
  
• Tax deducted at source.
  
• Deemed profit under section 41.
  

 

MEANING OF ACCRUAL OF INCOME

Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The words "accrue" and "arise" are used in contradistinction to the word "receive". Income is said to be received when it reaches the assessee; when the right to receive the income becomes vested in the assessee, it is said to accrue or arise.

 

MEANING OF INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or arise outside India. Section 9 applies to all assessees irrespective of their residential status and place of business. The categories of income which are deemed to accrue or arise in India are as under:

 

Nature of income			Whether income is deemed to accrue or arise in India
Income from business connection in India			Yes
Income from any property, asset or source of income in India			Yes
Capital gain on transfer of a capital asset situated in India			Yes
Income from salary if service is rendered in India			Yes
Income from salary (not being perquisite/allowance) if service is rendered outside India (provided the employer is Government of India and the employee is a citizen of India)			Yes
Income from salary if service is rendered outside India (not being a case stated above)			No
Dividend paid by the Indian company			Yes
Nature of Income	From whom Income is received	Payer's source of Income	Whether income is deemed to accrue or arise in India
Interest	Government of India	Any	Yes
Interest	A person resident in India	Borrowed capital is used by the payer for carrying on business/profession outside India or earning any income outside India	No
		Borrowed capital is used by the payer for any other purpose	Yes
Interest	A person non – resident in India	Borrowed capital is used by the payer for carrying on business/profession in India	Yes
		Borrowed capital is used by the payer for any other purpose	No
Royalty/Fees for technical services	Government of India	Any	Yes
Royalty/Fees for technical services	A person resident in India	Payment is relatable to a business or profession or any other source carried by the payer outside India	No
		Payment is relatable to any other source of income	Yes
Royalty/Fees for technical services	A person non – resident in India	Payment is relatable to a business or profession or any other source carried by the payer India	Yes
		Payment is relatable to any other source of Income	No

 

GLOSSARY

Incidence of tax: Tax incidence means the final burden of tax. In other words, incidence of tax is on person who actually bears/pays the final tax liability.

Remittance: Remittance is transmission of income after its first receipt.