Why Residential Status Matters in Taxation – Explained with Section 6 Rules

Residential status under Income Tax play very important role in taxation. Resident under Income Tax is different from citizenship. The residential status depends on number of days an individual had stayed in India. There are various rules and conditions one need to fulfill to qualify as resident or non resident. A resident individual is further categorized into

1. Resident and ordinary resident and

2. Resident but not ordinary resident.

Section 6 of the Income Tax Act deals with provisions of residential status. Lets understand this in detail.

Who Qualifies as a Resident and Ordinary Resident in India Under Income Tax Act?

An individual is considered a Resident and Ordinary Resident (ROR) in India for income tax purposes if any one of the following basic conditions is satisfied under Section 6 of the Income Tax Act:

a) The individual has stayed in India for 182 days or more during the relevant previous year; or
b) The individual has stayed in India for 60 days or more in the relevant previous year and 365 days or more in the four years immediately preceding that year.

Understanding your residential status is critical for accurate tax planning, especially for NRIs, expatriates, and frequent travelers. Ensure compliance and optimize your tax liabilities with expert guidance.

There is exception for the period of 60 days, an Indian Citizen who leaves India during previous year for the purpose of employment outside India or as a member of the crew of the Indian ship. The exception is also available for Indian citizen who come on a visit to India. In these two cases the period of 60 days in extended to 182 days.

Additional Conditions to Determine Residential Status under Income Tax

To qualify as a Resident and Ordinary Resident (ROR) in India, an individual must satisfy both of the following additional conditions, in addition to any one of the basic conditions:

1. The individual has been a resident in India in at least 2 out of the 10 previous years immediately preceding the relevant previous year; and

2. The individual has been in India for a total of 730 days or more during the 7 years immediately preceding the relevant previous year.

If both additional conditions are fulfilled along with any one basic condition, the individual will be treated as a Resident and Ordinary Resident.

If the individual satisfies only one of the basic conditions but not the additional conditions, he or she will be classified as a Resident but Not Ordinarily Resident (RNOR).

Non-Resident Individual (NRI) for Tax Purposes

An individual is treated as a Non-Resident (NRI) under the Income Tax Act if none of the basic conditions for residential status are satisfied.

This means that:

• An Indian citizen can be treated as a Non-Resident if the stay in India does not meet the required number of days.

• A foreign citizen can be treated as a Resident in India for tax purposes if the stay criteria are met.

Deemed Resident – Important Provision for Indian Citizens

The Income Tax Act also introduces the concept of Deemed Resident, applicable under special circumstances. An individual will be treated as a Deemed Resident but Not Ordinarily Resident if all of the following conditions are met:

1. The individual is an Indian citizen.

2. Their total income, excluding income from foreign sources, exceeds Rs. 15 lakhs during the relevant previous year.

3. They are not liable to tax in any other country or territory due to reasons such as domicile, residence, or similar conditions.

4. They do not satisfy either of the basic conditions for residency.

Why Residential Status Matters for Taxpayers

Understanding your residential status under Section 6 of the Income Tax Act is crucial for determining:

• Taxability of global income

• Eligibility for exemptions and deductions

• Filing requirements and compliance obligations

Whether you're an NRI, an expatriate, or a frequent traveler, determining your correct residential status helps in accurate tax planning and avoiding penalties.

Note: The concept of Place of Effective Management (POEM) plays a crucial role in determining the residency of foreign companies under Indian tax laws.

Residential Status of Firms, AOPs, and Companies under Income Tax Act

1. Residential Status of Partnership Firms and AOPs

A Partnership Firm or Association of Persons (AOP) is considered a Resident in India if control and management of its affairs is wholly or partly situated in India.

2. Residential Status of a Company under Income Tax Act

Understanding the residential status under Section 6 of the Income Tax Act is essential for determining the scope of total income that is taxable in India:

1. Resident and Ordinary Resident (ROR)

• Taxable on global income

• All income earned in India and abroad is liable to tax in India

2. Resident but Not Ordinarily Resident (RNOR)

Income is taxable in India only if:

• It is received or deemed to be received in India

• It is accrued or deemed to accrue in India

• It arises from a business controlled from India or a profession set up in India

In simple terms, foreign income that is accrued and received outside India is not taxable in India for an RNOR.

3. Non-Resident (NRI)

Taxable in India only on:

• Income that is received or deemed to be received in India

• Income that accrues or arises (or is deemed to accrue/arise) in India

Taxation of Income Based on Residential Status

Why Determining the Correct Residential Status is Crucial

Correctly determining your residential status under Income Tax is vital because it directly impacts your tax liability in India.

• A Resident pays tax on global income

• A Non-Resident pays tax only on Indian income

• Some exemptions, deductions, and benefits under Indian tax law are available only to Residents

Whether you're an Indian citizen living abroad, an NRI with income in India, a foreign company, or a resident individual, understanding your residential status helps in:

• Accurate tax planning

• Minimizing tax liability

• Staying compliant with Indian tax laws

Need expert advice on residential status and taxation in India?
Get in touch with our professional tax consultants today for personalized guidance and stress-free compliance.

Disclaimer :

The information comments and analysis expressed above is for informational purpose only and should not be considered or interpreted as any professional or legal advice. We have made efforts to ensure the information given above is reliable however we do not warrant for its accuracy or completeness. We shall not be liable for loss or damages (if any) for any decisions taken based on above content. We recommend obtaining proper professional advice before acting on basis of information contained herein.