7 Key Things You Need to Know About Residence Status under Indian Tax Law

India’s tax system is designed to ensure that individuals, companies, and other entities are taxed fairly based on their residence status. For an individual, the tax liabilities depend largely on whether they are considered a resident of India during a particular financial year. This blog breaks down the different types of residency and what they mean under Indian tax law (Section 6 of the Income Tax Act, 1961).

Criteria for Being a Resident in India

1. Resident Status for Individuals (Section 6(1))

To be classified as a resident of India in any previous year, an individual must satisfy at least one of the following conditions:

• Condition 1: Stay in India for 182 days or more in the relevant year.
• Condition 2: Stay in India for a total of 365 days or more in the four years preceding that year and at least 60 days in the current year.

However, in specific cases, the stay period might be adjusted. For example, an Indian citizen who leaves India for employment or as a crew member of an Indian ship may have to stay 182 days or more, instead of just 60 days, to qualify as a resident.

Special Considerations for Citizens of India and Persons of Indian Origin (PIO)

2. Special Provisions (Explanation 1)

• For Indian citizens employed abroad: If a citizen of India is working outside India, the required stay period of 60 days in Condition 2 may be increased to 182 days.
• For Persons of Indian Origin (PIOs): If you are a PIO visiting India, the minimum required stay is 182 days. However, if your income (other than income from foreign sources) exceeds ₹15 lakh, the minimum stay required changes to 120 days.

Deemed Residency for High-Income Individuals

3. High-Income Earners (Section 6(1A))

If a citizen of India has a total income exceeding ₹15 lakh (excluding foreign income) during the previous year, they will be considered a resident in India, regardless of their stay, provided they are not a resident of another country due to their domicile or any similar status. This clause ensures that individuals with substantial income are taxed in India even if they spend less time in the country.

Residence of Hindu Undivided Families (HUFs), Firms, and Other Associations

4. Residence of HUFs or Firms (Section 6(2))

For a Hindu Undivided Family (HUF), firm, or other associations, they are considered a resident in India unless the control and management of their affairs are located entirely outside India during the year. This ensures that businesses and families with significant ties to India are taxed here.

Residency of Companies

5. Resident Status for Companies (Section 6(3))

A company can be classified as a resident in India if:

• It is an Indian company.
• Its place of effective management (POEM) is in India during the year.

The Place of Effective Management refers to the location where key decisions necessary for the company’s business are made. This provision ensures that companies conducting substantial operations in India or benefiting from the Indian market are taxed here.

Other Individuals and Entities

6. Other Individuals (Section 6(4))

If none of the above conditions apply to an individual, they may still be classified as a resident in India unless the control and management of their affairs is situated outside India. This provision broadens the scope of who qualifies as a resident, ensuring that individuals with significant business or personal ties to India are taxed accordingly.

Not Ordinarily Resident (NOR)

7. Non-Ordinarily Resident (Section 6(6))

The tax law also defines the term “not ordinarily resident” (NOR). An individual can be classified as NOR if:

• They have been a non-resident for 9 out of the previous 10 years.
• They have spent 729 days or less in India during the last 7 years.

This category ensures that individuals with strong foreign ties or who live outside India for long periods are not subject to the same tax liabilities as regular residents.

Additionally, if a citizen of India or PIO stays in India for more than 120 days but less than 182 days and their income exceeds ₹15 lakh, they are also considered NOR.

What Is Income from Foreign Sources?

8. Income from Foreign Sources (Explanation 2)

For tax purposes, income from foreign sources includes any income that accrues or arises outside India. This does not include income from a business or profession controlled or set up in India, which is deemed to be income from Indian sources. This distinction helps clarify which incomes are taxable in India for residents and non-residents.

Frequently Asked Questions (FAQs)

1. What is the minimum number of days I need to stay in India to be considered a resident?

To be considered a resident, you must stay in India for at least 182 days in a given financial year or have stayed in India for at least 365 days over the past four years and 60 days in the current year.

2. Does my income affect my residency status in India?

Yes, if your total income (excluding foreign income) exceeds ₹15 lakh during the year, you may still be considered a resident in India, even if you do not meet the stay conditions. This is especially true for citizens of India and Persons of Indian Origin (PIOs).

3. Can I be a resident in India if I stay for less than 60 days?

Yes, under certain circumstances. If you are a citizen of India working abroad or a member of the crew of an Indian ship, the required period of stay may be extended to 182 days instead of 60 days.

4. What is the ‘place of effective management’ for a company?

The Place of Effective Management (POEM) refers to where the key management and commercial decisions necessary for the conduct of business are made. If the POEM is in India, the company will be considered a resident in India.

5. How do I determine if I am “not ordinarily resident”?

An individual may be classified as not ordinarily resident (NOR) if they have been a non-resident for 9 out of the last 10 years or have stayed in India for 729 days or less during the last 7 years.

6. Does my business income affect my residency status?

Yes, if you have a business or profession controlled or set up in India, the income from that business will be considered Indian income, regardless of your residency status.

Conclusion

Understanding your residence status is critical for determining your tax liabilities in India. The Income Tax Act, 1961, provides clear guidelines based on the number of days you stay in India, your income level, and your connections to the country. By being aware of these provisions, individuals, companies, and families can ensure that they comply with tax regulations and avoid any surprises when filing returns. Whether you are an Indian citizen, a PIO, or a foreign national, understanding these residency rules will ensure that you are taxed fairly based on your unique circumstances.

By ensuring proper residency status determination, you can navigate India’s tax system efficiently and make informed decisions for your personal and business finances.