Chapte-4r: Residential Status and Incidence of Tax for Individual Assessee

Introduction

 

In the Indian tax system, the residential status of an individual plays a crucial role in determining the scope and extent of their taxable income. The Income Tax Act, 1961, defines the criteria for determining an individual's residential status, which in turn affects the tax liability.

 

 Residential Status of an Individual

 

The residential status of an individual is classified into three categories:

 

1. Resident and Ordinarily Resident (ROR)

2. Resident but Not Ordinarily Resident (RNOR)

3. NonResident (NR)

 

1. Resident and Ordinarily Resident (ROR)

 

An individual is considered an ROR if they satisfy both the basic and additional conditions:

 

Basic Conditions:

 The individual is in India for at least 182 days during the financial year, or

 The individual is in India for at least 60 days during the financial year and at least 365 days in the four preceding financial years.

 

Additional Conditions:

 The individual has been a resident in India for at least 2 out of the 10 preceding financial years, and

 The individual has been in India for at least 730 days during the 7 preceding financial years.

 

2. Resident but Not Ordinarily Resident (RNOR)

 

An individual is considered an RNOR if they satisfy one of the basic conditions but fail to meet both additional conditions.

 

3. NonResident (NR)

 

An individual is considered an NR if they do not satisfy any of the basic conditions.

 

 Incidence of Tax

 

The residential status determines the tax incidence on an individual's income, which can be broadly categorized into three types:

 

1. Income Received or Deemed to be Received in India

2. Income Accrued or Arising or Deemed to Accrue or Arise in India

3. Income Accrued or Arising Outside India

 

1. Income Received or Deemed to be Received in India

 

This includes income that is directly received in India or is considered to be received in India by virtue of certain provisions of the Income Tax Act.

 

Example: Salary received by an individual in their Indian bank account.

 

2. Income Accrued or Arising or Deemed to Accrue or Arise in India

 

This includes income that is earned or arises in India, or is considered to accrue or arise in India under certain circumstances.

 

Example: Interest earned on fixed deposits held in an Indian bank.

 

3. Income Accrued or Arising Outside India

 

This includes income that is earned or arises outside India.

 

Example: Salary received by an individual for services rendered abroad.

 

 Taxability Based on Residential Status

 

The taxability of income based on the residential status is as follows:

 

1. Resident and Ordinarily Resident (ROR):

    Taxable on all income received or deemed to be received in India.

    Taxable on all income accrued or arising or deemed to accrue or arise in India.

    Taxable on all income accrued or arising outside India.

 

2. Resident but Not Ordinarily Resident (RNOR):

    Taxable on all income received or deemed to be received in India.

    Taxable on all income accrued or arising or deemed to accrue or arise in India.

    Taxable on income accrued or arising outside India only if it is derived from a business controlled in or a profession set up in India.

 

3. NonResident (NR):

    Taxable on all income received or deemed to be received in India.

    Taxable on all income accrued or arising or deemed to accrue or arise in India.

    Not taxable on income accrued or arising outside India.

 

 Examples

 

Example 1: Mr. A, an ROR, earns a salary of ₹10 lakh in India and ₹5 lakh in the USA. Both incomes will be taxable in India.

 

Example 2: Mr. B, an RNOR, earns ₹8 lakh in India and ₹3 lakh from a business controlled from India but situated in the UK. Both incomes will be taxable in India.

 

Example 3: Mr. C, an NR, earns ₹7 lakh in India from a rented property and ₹4 lakh from a job in Canada. Only the ₹7 lakh rental income will be taxable in India.

 

 Conclusion

 

Understanding the residential status is crucial for determining the tax liability of an individual. The criteria set by the Income Tax Act help categorize individuals accurately, ensuring that the correct amount of tax is levied based on their income sources and residential status.

 

 References

 

1. Singhania, V.K. (2021). Direct Taxes Law & Practice. Taxmann Publications.

2. Ahuja, G., & Gupta, R. (2021). Systematic Approach to Income Tax. Bharat Law House.

3. Income Tax Act, 1961. Government of India.

4. Official website of the Income Tax Department of India (incometaxindia.gov.in).