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Types of residence under Income Tax Act,1961


Authored by Harsh Raj


Abstract

The Income tax in India is collected by the Income Tax department which is empowered by the the parliament by enacting the Income Tax Act,1961 to levy the income tax in India. The Act provides the process of calculation and levying of taxes in India. The tax collection is based on the residential status of assessee. In this article, different types of residential status of the asessee has been discussed which will decide who will pay the tax in the concerned accounting year.


Introduction

The residential status of the person is very important while assessing the tax under Income tax Act,1961. Section 6 of the Income Tax Act,1961 deals with the residential status of an individual and based on the provision of the Act it is decided whether an individual is entitled to pay tax or not.The Act is not only binding to the Indian citizens, it is also binding on foreigners who are earning in India. The Act checks the eligibility of the individual as taxpayer by checking their residential status.


Under this Act, even the foreigners can be considered as residents of India based on the number of days they are physically present in India. The residential status of individuals, firms and companies are determined in their own unique way. Each of them has a different time period for their determination of residential status. Any person earning in India or receiving payment from outside will be subject to the Act and hence will be entitled to pay tax.

For the sake of assessment , the assesses are divided into 4 categories:

  1. Individual

  2. Hindu undivided family (HUF)

  3. Company

  4. Every other body

Determination of residential status of individual assessee

The residential status of the individual will be decided as per the provision of 6(1) of Income tax Act. An individual assessee can be divided into two group based on their residential status during the previous year:

  1. Resident in India

  2. Non-Resident in India

Test for residents in india: Anyone who fulfills the elements of the test will be called a resident in India.

1. If any person has been living in India for 182 days or more in the previous year.

Or

2. a. If any person lived 365 days or more in the 4 years preceding the previous year and

b. He has been residing in India for 60 days or more during the previous year in question.


Note:- Under section 2(30) of the Income-tax Act, 1961 an assessee who does not fulfill any of the two conditions given in section 6(1) will be non residents in India for all the functions of the said Act.


Exception:- In these exceptional cases, 60 days has been substituted with 182 days during the previous year in question.

● If any indian citizen is going outside India for the employment purpose and has been approved by the Government of India.

● If anyone is a crew member of any ship.

● If an individual of indian origin lives outside india comes to visit india in any previous year.

The resident in India is further classified into 2 groups:-

  1. Resident (ordinary resident) 'ROR'.

  2. Resident (not ordinary resident) 'RNOR'

Test for ROR (Ordinary resident):- Anyone who already fulfills the test of residence in India will be further segregated as an ordinary resident in India through this test if he fulfills both the conditions.

  1. Anyone who previously been a resident in India for 2 out of 10 preceding years prior to the previous year in question. And Anyone who stayed in India for at least 730 days in 7 preceding years prior to the previous year in question.

Test of RNOR (not ordinary resident):- Anyone who fulfils the condition of resident indian can benefit by checking their eligibility of not ordinary resident by this test.

  1. Anyone who was non-resident in India for 9 out of 10 previous years prior to the previous year in question.

OR

  1. Anyone who is in India for the period 729 days or less in the 7 preceding years prior to the previous year in question.

Determination of residential status of other assessee

  1. Hindu undivided family (HUF):- Section 6(2) of Income tax Act deals with HUF. HUF is said to be resident in every case except when even his managerial decisions are taken outside india, then it will be called as resident but not ordinary resident. The residential status of HUF is wholly based on the location of karta.

HUF will resident but not ordinary resident when:-

a. karta is not in India in 9 out of 10 preceding years prior to the accounting year.

b. Karta is not present in India for 7 preceding years or less than 729 days in aggregate, prior to the accounting year.

  1. Company:-The determination of residential status of company is determined by the place of incorporation. Section 6(3) of Income tax Act,1961 deals with the test of residential status of the company.

A company is said to be resident in india if it follows two conditions:-

a. If it is an indian company,

b. If it is not incorporated under corporate laws of india but its all important and managerial decisions are taken in India.

  1. Other body:- Other bodies include firms, Association of persons(AOA) and body of individuals (BOI). This is discussed under section 6(4) of Income Tax Act. All these institutions will be resident of India in all cases except their all decisions are taken from outside India.

Burden of proof

In the case of dispute for the residential status of an individual, HUF, company or other bodies. The burden of proof will be on the assessee and hence the assessee would be required to produce all the necessary documents to the income tax department in case of dispute of residential status of assessee. Now the latest updates says that even the date of departure and arrival would also be counted as stay in India while counting the number of stay of assessee in India.

Conclusion

The calculation of taxes in India is not based on nationality, even if the assessee is not indian he will be forced to pay the taxes since he is using the resources of the country to earn money. The criteria of tax is not only limited to people earning in India, the assessee will have to pay taxes on money earned by him from any part of the world. The taxation system heavily relies on the number of stays of the individual in India.

So, In nutshell it could be said as residence of the assessee is backbone for collection of taxes in India

References

  1. Income Tax Act, 1961.

  2. https://taxguru.in/income-tax/residential-status-under-income-tax-act1961-revisited.html?amp.

  3. https://www.taxmann.com/blogpost/2000001951/residential-status-under-income-tax-act.aspx.

  4. https://www.google.com/amp/s/blog.ipleaders.in/residential-status-income-tax-act/amp/.

  5. https://www.google.com/amp/s/m.economictimes.com/wealth/tax/how-is-the-residential-status-of-an-individual-determined-for-income-tax/amp_articleshow/71377045.cms.

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