Residential Status

How to determine Residential Status – Section 6

Residential Status (Section 6 of Income Tax)

Determination of Residential Status in Income Tax Act,  are updated for June 2023 and Dec 2023 Exams. These notes are beneficial for CS Executive New Syllabus of ICSI.  

Introduction

According to section 4 of income tax act, 1961, total income of a person is taxable. It means to find out the tax liability of any person, we must know its total income.

According to section 5 of income tax act, 1961, scope of total income of a person depends upon its residential status in India. Thus, which income of a person shall become the part of the total income for the purpose of income tax, it depends upon the residential status of a person.

So, determining residential status of a person is the first and most important step while calculating income tax of such person.|

Section 6 of Income tax Act, deals with the ‘determination of residential status of a person’. According to Section 6, individuals and HUF can have any one out of following 3 residential statuses:

  • Resident and ordinary resident (ROR)
  • Resident but not ordinarily resident (RNOR)
  • Non resident (NR)

But persons other than individuals and HUF (like firms, companies, AOP, BOI, co-operative societies and other AJPs) can be either resident or non-resident. Thus there is no concept of ROR or RNOR in case of persons other than individuals and HUF.

Determination of residential status of an individual

Step 1: Find out whether an individual is resident or non-resident

Step 2: If an individual is resident, than find out whether he/she is ROR or RNOR

Step 1: According to Section 6(1), an individual is said to be a resident in India in any previous year if he

  • is in India in that previous year for a period or periods amounting in all to 182 days or more; or
  • having within the four years preceding that previous year been in India for a period or periods amounting in all to 365 days or more, is in India for a period or periods amounting in all to 60 days or more in that previous year.
Residential Status Section 6

To be resident in India, an individual shall satisfy any one out of above stated 2 conditions. An individual is said to be Non Resident in India, if none of the above 2 conditions are satisfied.

 

Special Cases (where only condition 1 is applicable)
In the following cases we have to consider only condition 1; condition 2 shall be ignored:

  • In the case of an individual, being a citizen of India, who leaves India in any previous year
      • as a member of the crew of an Indian ship, or
      • for the purposes of employment outside India
  • In the case of an individual, being a citizen of India, or a person of Indian origin, who, being outside India, comes on a visit to India in any previous year.

It means, in special cases, an individual shall be considered as resident in India in any previous year only if such individual is in India in that P.Y for a period of 182 days or more.

Note: (w.e.f A.Y 21-22)

Case 1: In the case of an individual, being a citizen of India, or a person of Indian origin, who, being outside India, comes on a visit to India in any previous year

  • If such person is having total income, other than the income from foreign sources, exceeding Rs. 15 lakh rupees during the previous year, for the words “sixty days” occurring in condition 2, the words “one hundred and twenty days” had been substituted.

Case 2: An individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. Here period of stay in India in P.Y does not matter.

Individuals stated in Case 1 and Case 2 above shall be Resident but not Ordinarily Resident in India (RNOR)

Person of Indian origin (Explanation to clause (e) of section 115C)

A person shall be deemed to be of Indian origin if

  • he, or
  • either of his parents or
  • any of his grandparents,

was born in undivided India.

Note:
Generally, while calculating the period of stay for the purpose of residential status, we include the arrival day as well as departure day.

But in case of an individual, being a citizen of India and a member of the crew of a ship, while calculating the period or periods of stay in India, following period shall be excluded

  • Period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship.

 

Residential status shall be determined every year separately

  • If an individual is resident in India in respect of 1 year, it doesn’t mean he will be automatically considered as resident in any other year. We have to ascertain the residential status every year.
  • An assessee’s residential status must be determined with reference to the previous year in respect of which the income is sought to be taxed (and not with reference to the assessment year).
  • A person resident in one year may become non-resident or not ordinarily resident in another year and vice versa.

Period of stay need not to be continuous or at a specific place

  • The period of stay in India need not necessarily be continuous or consecutive.
  • The period of stay in India need not to be at the usual place of residence, business or employment of the individual.
  • The stay may be anywhere in India and for any length of time at each place in cases where the stay in India is at more places than one, what is required is the total period of stay should not be less than the number of days specified in each condition.

Note:

  • An individual may be resident in more than 1 country in the same previous year.
    For example, Mr. Jonny is a green card holder of America. During previous 2019-20, he was in India for 190 days. Now as per American Tax Laws, Mr. Jonny is resident of America due to “Green Card Holder” and as per Income Tax Laws of India, he is resident in India due to stay of “190 days” in India during previous year.
  • In Indian, the residential status of an individual for tax purposes is neither based upon nor determined by his citizenship, nationality and place of birth or domicile.

Step 2: According to Section 6(6), if an individual is resident in India as per provisions of Section 6(1), such individual is said to be “ordinarily resident” in India in any previous year if such individual

  • has been a resident in India in at least 2 out of the 10 previous years preceding that previous year, and
  • has during the seven previous years preceding that previous year been in India for a period of, or periods amounting in all to, 730 days or more
Residential Status of Individual

An individual is said to be not ordinarily resident, if any of the above 2 conditions is not satisfied.

Determination of residential status of an HUF

Step 1: Find out whether an HUF is resident or non-resident

Step 2: If an HUF is resident, than find out whether it is ROR or RNOR

 Step 1: According to Section 6(2), a Hindu undivided family is said to be resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

It should be noted that any HUF is generally managed and controlled by the karta (the senior most male member of such HUF). But In order to determine whether a Hindu Undivided Family is a resident or a non-resident, the residential status of the karta during the previous year is not relevant.

Here control and management means “real control and management”. There may be cases where the karta is not in the position to take the decisions and in such cases any other member of HUF is authorized to take the decisions on behalf of HUF. Therefore, from residential status point of view, we are concerned with the decision making authority of HUF only. Such decision making authority may be the Karta or may be some other coparcener.

Where, during the last 10 years, there are more than 1 kartas, the total period of stay of all kartas should be aggregated to determine the residential status of the karta and consequently the HUF.

Step 2: According to Section 6(6), if an HUF is resident in India as per provisions of Section 6(2), such HUF is said to be “ordinarily resident” in India in any previous year if its manager (generally karta)

  • has been a resident in India in at least 2 out of the 10 previous years preceding that previous year, and
  • has during the 7 previous years preceding that previous year been in India for a period of, or periods amounting in all to, 730 days or more

Note:

  • It is immaterial whether manager (Karta) is Resident or Non-Resident during relevant previous year, for the purpose of determining whether HUF is ROR or RNOR.
  • If manager (Karta) satisfies both the additional conditions, then HUF will be ROR, otherwise RNOR.

Determination of residential status of a Company

Determine Residential Status

A company can be either resident or non-resident. There is no concept of ROR and RNOR in case of companies.

According to Section 6(3), a company is said to be resident in India in any previous year, if—

  • it is an Indian company; or
  • its place of effective management, in that year, is in India.

Explanation.—For the purposes of this clause (3) of Section 6 “place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.

Thus,

  • an Indian Company shall always be considered as company resident in India, whether or not control and management of its affairs is wholly situated in India.
  • a company other than Indian company shall be considered as company resident in India in any previous year only if its place of effective management, in that year, is in India.

 

Guiding Principles for Determination of Place of Effective Management (POEM) of a Company

Place of effective management (POEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction.

Company engaged in active business outside India
The process of determination of POEM would be primarily based on the fact as to whether or not the company is engaged in active business outside India. The place of effective management shall be presumed to be outside India if

  • a company is engaged in active business outside India and
  • the majority meetings of the board of directors of the company are held outside India.

A company shall be said to be engaged in “active business outside India” if the passive income is not more than 50% of its total income (whether in India or outside India); and

  • less than 50% of its total assets are situated in India; and
  • less than 50% of total number of employees are situated in India or are resident in India; and
  • the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure.

“Passive income” of a company shall be aggregate of, income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and income by way of royalty, dividend, capital gains, interest or rental income;
Note: Any income by way of interest shall not be considered to be passive income in case of a company which is engaged in the business of banking or is a public financial institution, and its activities are regulated as such under the applicable laws of the country of incorporation.

Company not engaged in active business outside India
Here, the determination of POEM would be a two stage process as follows:

First Stage: Identification or ascertaining the person or persons who actually make the key management and commercial decision for conduct of the company business as a whole.

Second Stage: Determination of place where these decisions are in fact being made.

If the above factors do not lead to clear identification of POEM then the following secondary factors can be considered:

  1. Place where main and substantial activity of the company is carried out; or
  2. Place where the accounting records of the company are kept.

Certain factors which may not be considered as conclusive for establishing POEM in India

  1. The fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
  2. The fact that there exists a Permanent Establishment of a foreign entity in India would itself not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.
  3. The fact that one or some of the Directors of a foreign company reside in India will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied
  4. The fact of, local management being situated in India in respect of activities carried out by a foreign company in India will not , by itself, be conclusive evidence that the conditions for establishing POEM have been satisfied.
  5. The existence in India of support functions that are preparatory and auxiliary in character will not be conclusive evidence that the conditions for establishing POEM in India have been satisfied.

Determination of residential status of persons other than Individuals, HUF and Company (like firms, AOP, BOI, AJPs, Local Authorities etc)

Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

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