How to calculate Residential Status for Tax Purposes in India

A person’s residential status as per the tax law of a particular jurisdiction has a huge impact on the taxability of income of a person in that jurisdiction.

Many a times, I see past tax returns of my NRI clients where incorrect residential status is mentioned and a result, they get a tax notice as to a particular income not disclosed etc. Ascertaining the residential status is the first step in proper tax compliance especially for NRIs returning back to India or resident Indians moving outside India for employment etc. In case of doubt, it is better to consult a CA who specialises in these issues rather than invite penalty notice from IT department.

In the Indian Income Tax Act, 1961, Section 6 deals with residential status of the person and Section 5 deals with the taxability of incomes on the basis of residential status.

In this post, I am trying to explain the provisions of Section 6 as well as important judicial pronouncements so that you can calculate your residential status and file your tax returns correctly and in full compliance to the Income Tax Law.

Before moving forward, let us understand that Section 6 of the Income Tax Act, 1961 governs provisions on residential status. A few pointers will help us understand the provisions better.

How to calculate residential status for a particular year

Calculation of residential status is a 2 step process.

First step is to ascertain if you are a resident or a non-resident.

If the conclusion of first step is that you are a “Non-Resident”, matter ends there.

However, if as per Step 1, you are a “Resident”, we have to further check in Step 2 if you are a “Resident and Ordinarily Resident” (ROR) or a “Resident and Not Ordinarily Resident” (RNOR).

Step1:

You are a “Resident” if you satisfy ANY ONE of the following conditions:

  1. You are in India in the previous year for a period of 182 days or more
  2. You are in India in the previous year for a period of 60 days or more AND 365 days or more in 4 years immediately preceding the previous year.

If any one of the above two conditions is satisfied, you will qualify as a resident.

So, if a person is > = 182 days in India for a previous year, he is a Resident. Period.

However, some NRIs smartly try to plan their residential status by keeping their stay in India < 182 days however they need to also note Condition (b) whereby if they are > 60 days in India for that financial year and > = 365 days in 4 years prior to previous year, they will still qualify as resident.

However, there is some relaxation for following persons whereby condition (b) does not apply:

  • Indian citizen (not PIO)- Leaves India in that financial year as crew member of INDIAN ship or for purposes of employment outside India
  • Indian citizen/PIO – Has come on a visit to India in that financial year

Special point: For seafarers, vide new Income Tax Rule 126, the period mentioned in Continuous Discharge Certificate will not be counted as stay in India. (I will take this topic later on as a specific post on seafarers)

Step 2:

Once you qualify as “Resident” as per Step 1, we come to Step 2 to find whether you are a ROR/RNOR)

You are a “Resident and Ordinary Resident” if you satisfy BOTH of the following conditions:

  • You are a “Resident” (as per Step 1) for atleast 2 of 10 years immediately preceding the previous year
  • You are in India for a period of 730 days or more in 7 years immediately preceding the previous year.

If both conditions are satisfied, only then do you qualify as an ROR otherwise your residential status is RNOR.

Now, these calculations are not easy and that is why I have created a calculator below. Please note that it is a simple calculator and does not cover all scenarios – Please check with a CA before taking any tax or investment decision.

TAX RESIDENTIAL STATUS CALCULATOR

Some prima facie conclusions from the above

Though it is not easy to give offhand conclusions or generalised principles on someone’ residential status, a few pointers are given below:

  1. If you are going out of India for the first time (say on an overseas deputation by your Indian employer), it is not possible for getting qualified as an NR in the first year unless you are sent at start of financial year & your stay in India for that financial year is < 182 days.
  2. If you are returning to India “permanently”, then the second condition DOES apply to you (exemption from condition (b) is available ONLY If you come for a visit to India) & in such a case, if you’re in India for > 60 days in the previous year & your total stay in India becomes 365 days in 4 years immediately preceding previous year, you straightaway lose your NR status – so there is some scope for planning there.
  3. If you have been staying for long term overseas say 7-8 years & returning to India, you’ll most likely be RNOR for 2 years or maximum 3 years & then become a full fledged Resident (ROR). The transition from NR to RNOR to ROR will depend on how long you’ve been an NR & living outside India, but in no case it should exceed 3 years post return to India.

How your income is taxed as per your residential status

Now, you may ask me a question – how does it matter if I am a ROR vs. an RNOR vs. an NR – and you must have wondered why people try to stick to their NR status.

I will tell you why.

Income Tax Act taxes your income as per your residential status for that year in India. Please refer below table for more clarity:

<Table>

As you can see from above, the highest tax impact is on ROR, a bit less to RNOR and the least to NR.

So, if you are an NRI, you need to ensure that your investments in India are so positioned so that you stay below the qualifying limit of INR 2.5 lacs so that Indian taxation does not get attracted. This requires a careful planning.

Also read:

NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI

How NRI should disclose their foreign income/ assets in Indian tax return

Important points on residential status and taxability of income

  • Citizenship & tax residency are two completely different things. Unlike US tax law, Indian tax law does not take into consideration a person’s citizenship for calculating residential status – the only factor that is relevant is period of stay in India. For e.g. you may be a Canadian national, but if you stay in India for > = 182 days in a particular financial year, you qualify as a Resident for tax purposes & if you also satisfy Step 2 conditions and qualify as ROR, your Canadian income will also be taxed in India.
  • Place of stay, purpose of stay, visa type etc. are immaterial for calculation of residential status.
  • A person can be a resident of multiple countries at the same time and in such case, he has to follow rules relating to residents under tax laws of both countries.
  • Residential status as per ITA and FEMA is different. ITA is for taxation of income & FEMA is for other procedural compliances by non-residents. Here, we are focussing only on Income Tax Act & taxation aspects. Read more on this: NRI Definition: FEMA Act VS Income Tax Act
  • It is not necessary that the stay has to be in one stretch, it can be in multiple stretches.
  • On a conservative note, both days – the day you come to India and day you leave India in a financial year should be used for calculation of number of days stay in India.
  • Period w.r.t. visit to India shall be excluded while computing period of 60 days. Manoj Kumar Reddy v. Income-tax Officer (International Taxation) Ward-1(3), Bangalore [2009] 34 SOT 180 (BANG.)
  • If a person leaves India for purposes of employment, he can claim 182 rule benefit only for that particular financial year in which he has left India.Manoj Kumar Reddy v. Income-tax Officer (International Taxation) Ward-1(3), Bangalore [2009] 34 SOT 180 (BANG.)
  • If assessee returns to India after resigning from abroad, then it cannot be termed as a “visit” even though assessee had family and kids back abroad and 60 day rule will continue to apply in such case – AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI Mrs. Smita Anand, China, In re [2014] 42 taxmann.com 366 (AAR – New Delhi)
  • Person leaving for employment will include apart from unemployed person going out of India in search of job, but also a person who is presently employed but going out of India for a deputation outside India – British Gas India Pvt. Ltd. [2006] 155 Taxman 326 (AAR New Delhi).
  • If a person receives income in India for services rendered out of India, in such cases and his residential status is NR/RNOR, income cannot be taxed in India.  – [2001] 115 TAXMAN 536 (BOM.) HIGH COURT OF BOMBAY Commissioner of Income-tax v. Avtar Singh Wadhwan
  • If a person receives income in India for services rendered out of India and the person is a ROR, income will be taxed in India.  However, person can claim credit of foreign taxes under DTAA or Section 91 of Income Tax Act in the tax return.
  • It is my belief that even if a person is having NR/RNOR status and income in India is below exemption limit, he should file tax return in India – read more: Why Returning NRIs should continue filing tax returns even if no taxable income

Residential status & taxation issues for seafarers

As regards seafarers who serve on international waters however receive salary in Indian bank account; there have been instances where Income Tax Department has tried to tax it as Indian income.

However, there are ample judgements, most notably Avtar Singh Wadhwan case decided by Hon’ble High Court, where it is a clearly settled principle that income received in India for services rendered in India is NOT taxable in India.

However, my advice to such seafarers is that to avoid litigation, try receiving your salary income outside India say in UAE or Singapore and then remit it to India.

Read these detailed posts to get more clarity:

Taxability of salary received by an NRI seafarer in India

NRI Seafarer Taxation: Way forward after 2016 ITAT Tapas Kr. judgement

Some ideas on how to plan your stay in India to reduce tax liability

If you do not have substantial foreign assets/incomes out of India, then don’t take too much stress on planning your residential status as anyways your Indian income will be taxable after your return to India despite your NR/RNOR status.

However, if you do have substantial foreign assets/incomes out of India, planning to elongate the NR+RNOR period after return to India makes sense because in this window, your foreign incomes are not taxable: you can return to India, consult an investment adviser, and take the right decision to sell some or all of those assets in line with your financial goals and long term plans without any tax incidence in India.

While planning pointers will vary w.r.t. facts of each case, some general tips are as follows:

  • If you are leaving India for purpose of employment/business, try to manage it in such a way that your stay in India for that year is less than 182 days. That way, you’ll qualify as non resident from the first year itself. Also read: Planning to become an NRI? Read this financial checklist
  • If you have been out of India for many years & are coming to India for purpose of visit, you need to plan your stay & restrict to less than 182 days, so that you do not qualify as a Resident. Also read: Returning NRI Financial Checklist
  • If you have been in India in 365 days in the past 4 years & planning to visit India, you will lose your NR status if you are in India for more than 60 days. So, split your stay in 2 financial years so that you are in India for a maximum 120 days but not > 60 days in any particular financial year.
  • When returning to India permanently from an outside assignment/job/business, you can plan your job search in such a way that you come to India for an interview and go back (this will qualify as a “visit”) and then you can return permanently later in the year to ensure that your stay during the year (excluding the visit days) is < 182 days– this will ensure that you continue to qualify as a NR for that year.

Copyright © CA Abhinav Gulechha. All Rights Reserved. No part of this article can be reproduced without prior written permission of the CA Abhinav Gulechha. The content of the article is for general information purposes only & does not constitute professional advice. For any feedback, please write to  contact@abhinavgulechha.com


Posted

in

,

by

Tags:

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

×