Residential status under Income Tax Act, 1961

The incidence of tax on any assessee depends upon his residential status under the Act. The
residential status of an assessee must be ascertained with reference to each previous year. A
person who is resident in one year may become non-resident in another year or vice versa.

Residential status of an Individual

As per section 6(1) of Income Tax Act, 1961, Residential status is determined on the basis of
number of days of stay in India.

Based on the period of stay in India in a given financial year, an individual may be classified as:

1) Resident and Ordinarily Resident

2) Resident but not ordinarily resident
3) Non-resident (NR)

1) Resident and Ordinarily Resident [Sec. 6(1), 6 (6) (a)] - To find out whether an
individual is resident and ordinarily resident in India, first determine if he is resident or not.

An individual is said to be resident in India in any previous year, if he satisfies any one of the
following conditions:

Basic Condition (1) He has been in India during the previous year for a total period of 182 days
or more.

OR

Basic Condition (2) He has been in India during the 4 years immediately proceeding the previous
year for a total period of 365 days or more and has been in India for at least 60 days in the
relevant previous year.

If the individual satisfies any one of the conditions mentioned above, he is a resident.

Exceptions

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The 60-day period mentioned above will be substituted for 182 days in case of the
following persons:-

  A citizen of India who leaves the country as a crew member of an Indian ship or for
the purposes of employment outside India
 A Citizen of India or PIO who visits India in any previous year.

(It means he will have to satisfy basic condition 1 only in these cases)

Additional conditions for “resident and ordinarily resident” in India [Sec 6(6)]

 Additional condition (1) If he or she spends 730 days or more in India during seven years
immediately preceding the relevant previous year.
 Additional condition (2) If he/she has been resident in India in at least two out of ten
previous years immediately preceding the relevant previous year.

In short it can be said that an individual becomes resident and ordinarily resident in India if he
satisfies at least one of the basic conditions and two additional conditions.

3) Resident but Non ordinarily resident (NOR)/Deemed resident [Sec.

6(1), 6 (a)]

An individual becomes resident but not ordinarily resident in India in any of the following
circumstances.

Case 1-If he satisfies at least one of the basic conditions but none of the additional conditions.

Or

Case 2-If he satisfies at least one of the basic conditions and one of the two additional conditions.

4) Non-Resident

An individual is a non resident in India if he satisfies none of the basic conditions. In the case of
non resident additional conditions are not relevant.

Other related terms

Person of Indian Origin (PIO)

A person shall be deemed to be of Indian origin if he or either of his parents or grandparents

were born in an undivided India.

Residential Status of HUF – Sec 6(2)

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A HUF is said to be resident in India when during that year control and management is situated
wholly or partly in India. In other words, it will be non-resident in India if no part of the control
and management of affairs is situated in India.

Control and management lie at the place where a decision regarding the affairs of the HUF is
taken.

A resident HUF is said to be resident and ordinarily resident in India if the Karta of the HUF
satisfies both the following conditions:

i. He has been resident in India for at least 2 out of 10 previous years immediately proceeding the
relevant previous year

and

ii. He has been in India for 730 days or more during 7 previous years immediately proceeding the
relevant previous year.

If the Karta of HUF does not satisfy any or both of the above conditions, then HUF shall be
resident but not ordinarily resident in India.

Residential Status of Firms, AOP, BOI, etc – Sec 6(2), 6(4)

A Firm, AOP, BOI, etc are said to be resident in India when during that year control and
management is situated wholly or partly in India. In other words, it will be non-resident in India
if no part of the control and management of affairs is situated in India.

Control and management lie at the place where a decision regarding the affairs of the firms etc.
are taken.

Residential Status of Companies – Sec 6(3)

Indian Company is always resident in India

Foreign Company is resident in India if control and management of its affairs are situated wholly
in India during relevant previous year i.e. if all the board meetings of the foreign company are
held in India, then it shall be resident, otherwise non-resident.

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Practical questions
Problem 1: Mr. X, owner of ABC Ltd. comes to India for 100 days every year. What shall be his
residential status for A.Y. 2020-21 (F.Y. 2019-20)?
Solution- Mr. X’s residential status shall be determined in 2 steps:
Step 1: Total stay of Mr. X in last 4 years preceding 2019-20 is 400 days (i.e. 100 * 4) and his
stay in F.Y. 2019-20 is 100 days. Therefore, since he has satisfied 2nd condition of the basic
conditions, he is a resident in India.
Step 2: His total stay in India in last 7 years preceding F.Y. 2019-20 is 700 days (i.e. 100 * 7),
and his total stay in 10 prior fiscal years would be 1,000 days. (100*10), he satisfies the  2nd
condition of the additional conditions, hence he is Not-Ordinarily Resident (NOR) in India.

Thus, for AY 2020-21, Mr. X shall be resident but Not Ordinarily Resident (NOR).

Problem 2: Sachin, an Indian citizen, leaves India on 22nd September 2019 for the first time, to
work as an employee of a company in America. What shall be his residential status for A.Y.
2020-21 (F.Y. 2019-20)?
Solution:  During the F.Y. 2019-20, Sachin was in India for 175 days i.e. 30 (April) + 31 (May)
+ 30 (June) + 31 (July) + 31 (August) + 22 (September)  . Since he is leaving India for purpose
of employment, hence 2nd condition of basic condition shall not be applicable for him. He
doesn’t fulfil the 1st condition of basic conditions also. Hence he shall be Non-Resident in India
for F.Y. 2019-20.

Problem 3: X, a chief executive of a company had undertaken foreign tour on various occasions
for company’s work and was out of India for a total number of 255 days during the previous year
ending March 31, 2022. He submits his return of income for the assessment year 2022-23 in the
status of non-resident. Is he justified?  He visited a foreign country for the first time during May
2020.

Solution: By virtue of section 6(1)(c), an individual will be resident in India in any previous year
if he has been in India for a period of at least 60 days during the previous year and at least 365
days during 4 years preceding the previous year. However, as per Explanation (a) where an
Indian citizen leaves India for the purpose of employment outside India, the above period of 60
days has been extended to 182 days.

In the given problem, X had left India for purposes of employment outside India. In other
words, Explanation (a) will be applicable. Accordingly, X will be treated as non-resident for the
assessment year 2022-23. Hence, the submission of his return of income for the assessment year
2022-23 in the status of non-resident is justified.

Problem 4: R was born in Lahore in 1949. He has been staying in America since 1971. He came
to visit India on 2.10.2019 and returns on 31.3.2020. Determine his residential status for the
assessment year 2020-2021.

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Solution: Non-resident as he neither satisfy the first conditions of 182 days nor the 2nd
conditions as although he was in India during the previous year for 181 days (i.e. more than 60
days), but he was not in India for at least 365 days in the 4 preceding previous year

Problem 5-Shane Warne, an Australian cricket player, has been coming to India since 1995-96
every year to play cricket and has been staying here for about 4 months. What will be his
residential status for the assessment year 2020-2021

Solution -Resident in India, as he is in India for more than sixty days in the previous year and
was in India for more than 365 days in the 4 preceding previous years. Further, he satisfies both
the conditions of category B. He was resident in at least 2 out of 10 previous year prior to
relevant previous year and was in India for 730 days or more in the 7 preceding previous years.
Hence, he is “resident and ordinarily resident in India”.

The relation between residential status and the incidence of tax [Section 5]
Under the Act, the incidence of tax on a taxpayer depends on his residential status and also on
the place and time of accrual of receipt of income:

Indian Income and foreign income

Indian Income: Any of the following three is an Indian income:

i) If income is received (or deemed to be received) in India during the previous year and at the
same time it accrues (or arises or is deemed to accrue or arise) in India during the previous year;

ii) If income is received (or deemed to be received) in India during the previous year but it
accrues (or arises) outside India during the previous year;

iii) If income is received outside India during the previous year but it accrues (or arises or is
deemed to accrue or arise) in India during the previous year;

Foreign income: If the following conditions are satisfied, then such income is foreign income:

i)   Income is not received (or not deemed to be received) in India; and

ii) Income does not accrue or arise (or does not deemed to accrue or arise) in India.

The provisions of residential status are tabulated as below:

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Incidence of tax for different taxpayers is as follows:

Incidence of tax in India for Individuals and Hindu Undivided Family (HUF):

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Fully exempted Incomes
Exempted incomes are those incomes which are not added to the total income for the purpose of
taxation. The incomes on which tax is not levied are known as exempted incomes. There are
partially exempted incomes as well which are included in total income but are exempt to some
specified rate.

List of exempted incomes under Indian income tax Act.

Certain incomes are fully exempted, certain are partially exempted and certain institutions are

exempted from income tax. The following is a list of the exempted incomes:

Fully exempted incomes (Section 10):

The following are tax free incomes of individuals:

1. Agriculture Income [Section 10(1)]-See Notes in Part 1

2. Any sum received by a Co-parcener from Hindu Undivided Family (H.U.F.) [Section
10(2)]

As per section 10(2), amount received out of family income, or in case of impartible
estate, amount received out of income of family estate by any member of such HUF is
exempt from tax.

Example. HUF earned. Rs. 5,00,000 during the previous year and paid tax on its income.
Mr. A, a co-parcener is an employee and earns a salary of Rs. 20,000 p.m. During the
previous year Mr. A also received Rs. 1,00,000 from HUF. Mr. A will pay tax on his

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salary income but any sum of money received from his HUF is not chargeable to tax in
Mr. A’s hands.

3.  Share of Income from the Firm [Section 10(2A)]

As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the
hands of the partner. Further, share of profit received by a partner of LLP from the LLP will be
exempt from tax in the hands of such partner. This exemption is limited only to share of profit
and does not apply to interest on capital and remuneration received by the partner from the
firm/LLP.

4. Perquisites and Allowances paid by Government to its Employees serving outside India
[Section 10(7)]

Any allowances or perquisites paid or allowed, as such, outside India by the Government to a
citizen of India, for rendering services outside India, are exempt.

The following conditions have to be satisfied before such income is treated as deemed to accrue
or arise in India:

i. Income should be chargeable under the head 'Salaries';

ii. The payer should be Government of India;
iii. The recipient should be an Indian citizen — whether Resident or Non-Resident;
iv. The services should be rendered outside India.

While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all
allowances or perquisites paid outside India by the Government to the above Indian citizens for
their rendering services outside India are exempt under section 10(7).

5. Payment received under Bhopal Gas Leak Disaster (Processing of Claims) Act 1985
[Section 10 (10BB)]

Any amount received under the provision of such Act or any scheme framed there under shall be
fully exempted but in case payment is received against a loss or damage, for which deduction has
been claimed earlier, it shall be taxable.

6.. Scholarship [Section 10(16)]

The full amount of scholarship granted to meet the cost of education is exempted.

‘Cost of education’ includes not only the tuition fees but all other expenses which are incidental
to acquiring education. Scholarship may have been given by Govt., University, Board, Trust, etc.
The exemption is irrespective of actual expenditure incurred by the recipient to meet the cost of
education.

7. Allowance of M.P. /M.L.A. [Section 10(17)]

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Following allowances are exempt from tax in the hands of a Member of Parliament and a
Member of State Legislature—

•          Daily allowance received by a Member of Parliament or by a Member of

State Legislature or by member of any committee thereof.

 Any Constituency allowance received by a Member of State Legislature

An MLA or MP who is elected by the public has got a bounden duty to move from place to place
in his constituency, enquire the difficulties of the people in order to recommend the necessary
help or benefits to be done to the public in his constituency, to the Government. In this process,
he had to incur lot of expenditure on account of moving from one place to another and also
speaking with various important village heads, Government officers in his constituency. On such
account amount paid is known as Constituency Allowance. .

8. Payment received from provident funds [Section 10(11 and 12)]

Under the provisions of Sections 10(11), (12) and (13) any payment from a government or
recognised provident fund (Pf or approved superannuation fund, or PPF is exempt from income
tax.
9. Gallantry Awards, etc. - section 10(18)

The Finance Act, 1999 has, with effect from AY 2000-2001, provided for complete exemption
for the pension and family pension of Gallantry Award Winners like Paramvir Chakra, Mahavir
Chakra, and Vir Chakra and also other Gallantry Award winners notified by the Central
Government.

10. Capital gains from transfer of agricultural land — section 10(37)

As per the Finance (No.2) Act, 2004 capital gains received on transfer of agricultural land (used
in the past 2 years for agricultural purposes) by way of compulsory acquisition would be fully
exempt from tax.

11. Other Exempted Incomes

a) Leave Travel Concession or Assistance (LTC/LTA) to an Indian Citizen Employee [Section

10(5)]

b) Remuneration or Salary received by an individual who is not a citizen of India [Section 10(6)]

c) Tax paid by Government or Indian concern on Income of a Foreign Company [Section

10(6A), (6B), (6BB) and (6C)]
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d) Employees of Foreign Countries working in India under Cooperative Technical Assistance
Programme [Section 10(8)]

 e) Income of a Consultant [Section 10(8A)]

f) Income of Employees of Consultant [Section 10(8B)]

g) Income of any member of the family of individuals working in India under co-operative
technical assistance programmes [Section 10(9)]

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