The residential status of an individual or an entity plays a pivotal role in determining the taxability of income under the Indian Income Tax Act, 1961. Various sections and clauses within the Act precisely lay out the different categories of residential status and their tax implications.
Determination of Residential Status
The residential status under the Indian Income Tax Act is based on the duration of stay in India. The Act designates individuals or entities as Resident or Non-Resident based on criteria outlined under Sections 6 and 9. The Act further divides the resident status into two subcategories:
Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).
As per Section 6 of the Income Tax Act, an individual is considered a resident of India if they satisfy either of the following conditions:
If they have been in India for a period of 182 days or more during the previous year.
If they have been in India for 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.
However, for an individual of Indian origin visiting India or a citizen of India leaving India for employment, the 60 days are replaced by 182 days.
An individual or an entity is considered a non-resident if they do not meet the conditions of being a resident. Thus, if a person stays in India for less than 182 days during the previous year, they are termed a non-resident.
3. Resident and Ordinarily Resident (ROR)
A resident individual is classified as ROR if they satisfy both these additional conditions:
They have been a resident in India for at least 2 out of 10 years immediately preceding the relevant previous year.
They have been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
4. Resident but Not Ordinarily Resident (RNOR)
If a resident individual does not meet the conditions to be classified as ROR, they are considered RNOR.
The taxation rules vary based on the residential status of the taxpayer:
Resident and Ordinarily Resident (ROR): All income, whether earned or accrued in India or outside India, is taxable.
Resident but Not Ordinarily Resident (RNOR) & Non-Resident: Income earned or accrued in India is taxable. Income earned outside India is not taxable unless it is derived from a business controlled or profession set up in India.
Understanding the residential status becomes clearer with relevant case laws.
In the landmark case of CIT vs. Amarchand N. Shroff (1963) 48 ITR 59 (SC), the Supreme Court held that to ascertain the residential status of an individual, one must look at the stay during the previous year, and the taxpayer's intention or motive is irrelevant.
In another case, CIT vs. Ramniklal Kothari 62 ITR 234, the court reiterated that the taxpayer's intent or purpose of stay does not alter the applicability of tax based on their residential status.
In conclusion, the residential status under the Indian Income Tax Act, 1961, is primarily determined based on the individual's stay duration in India. This classification directly impacts the taxability of their income in India and overseas. The Act carefully differentiates residents into ordinarily and not ordinarily residents, ensuring that the taxation system remains just and equitable.