Income Tax - What is Residential Status?

by CCH Online CCH Tax Online

While filing an income tax return, an assessee whether an individual, company or any other person is obligatorily required to disclose the residential status. But have you ever thought why there are three categories even for individuals, what is their criteria and importance? Does it play an important role while deciding the tax liability? Let’s understand these terms better:

Determining the status of an Individual

As per section 6 of Income Tax Act, 1961 (IT Act) an individual is deemed to be resident in India if he/she satisfies any of the following conditions

1. If he/she is in India for a period of 182 days or more during the previous year (‘PY’); or

2.  If he is in India for a period of 60 days or more during the previous year and 365 days or more for four years immediately preceding the previous year.

However, an individual is considered as a Non-Resident (NR) in any year if he does not fulfil any of the above-mentioned conditions.

Two exceptions to above rule where the second provision mentioned above will be nullified, and only the first one will be valid are, if a person

• Being Resident of India leaves the country in order to take up another job outside India, during a financial year,

• Of Indian origin who has been residing outside India, visits the country (India) during a particular financial year
  

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.

After qualifying as a resident, next step is to determine if he/she is a Resident ordinarily resident (ROR) or Resident but not Ordinarily Resident (RNOR). ROR if assessee meets both of the following conditions:

• Has been a resident of India in at least 2 out of 10 years immediate previous years, and

• Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if an individual fails to satisfy even one of the above conditions, he would be considered as RNOR.

Determining the status of a Company

The residential status of a company is to be determined based on its incorporation or registration. A company is a resident in India if:

1.  It is an Indian company, or

2. Place of effective management (POEM), during that year, is in India

With effect from FY 2016-17, companies not incorporated under the corporate laws of India would be determined by the concept of “POEM”. If the control and management of a company’s affairs for a year are located wholly outside India or whose POEM is outside India shall be a non-resident company.

A Hindu undivided family (HUF), firm or other association of persons is said to be resident in India in every case except where during that year the control and management of its affairs are situated wholly outside India.

Why is the Residential status important for Income Tax?

Taxpayers are subjected to different tax rates, slab rates and surcharges based on their residential status under Direct tax regime, unlike the Indirect tax regime where GST rates or service tax rates in India were standard for all. Thus, determining the correct Residential Status is of utmost importance for any person under IT ACT.

Sponsor Ads

• Ad Space Available - Rent it Now!

Created on Dec 11th 2018 01:04. Viewed 297 times.

Comments