Residence and Tax Liability

Residential Status

Individuals

Residential status for individuals is determined based on their physical presence in India during the financial year (April 1 to March 31).

• Resident: An individual is considered a resident if:
  • They stay in India for at least 182 days during the financial year (FY), or
  • They stay in India for at least 60 days during the FY and have been in India for 365 days or more in the 4 years immediately preceding the FY.
• Not Ordinarily Resident (NOR): An individual qualifies as NOR if:
  • They have been non-resident in India in 9 out of the 10 previous FYs preceding the relevant FY, or
  • Their total stay in India is 729 days or less in the 7 FYs immediately preceding the relevant FY.
• Non-Resident (NR): If an individual does not meet the criteria for being a resident or NOR, they are considered a non-resident.

Hindu Undivided Family (HUF)

Residential status for HUF is determined based on where the control and management of its affairs are situated:

• Resident HUF: Control and management of affairs are wholly or partly situated in India.
• Resident and Ordinarily Resident HUF: The Karta (manager) has been resident in India for at least 2 out of the 10 previous FYs and has been in India for 730 days or more in the 7 previous FYs.
• Non-Resident HUF: If the above conditions are not met, the HUF is considered non-resident.

Other Entities

• Firm, Association of Persons (AOP), Body of Individuals (BOI): These entities are considered residents if their control and management are situated wholly or partly in India.
• Companies:
  • Indian Company: Always considered resident in India.
  • Foreign Company: Resident if the control and management of its affairs are wholly situated in India during the relevant FY.

Tax Incidence Based on Residential Status

Individuals and HUFs

• Indian Income:
  • Taxable for all categories of residents (resident, NOR, NR).
• Foreign Income:
  • Taxable for residents and ordinarily residents in India if:
    • It is from a business controlled wholly or partly in India, or
    • It is income from a profession set up in India.
  • Non-residents are not taxed on foreign income unless it is earned or received in India.

Other Taxpayers (Companies, Firms, AOPs, etc.)

• Indian Income:
  • Taxable for both resident and non-resident entities.
• Foreign Income:
  • Taxable for resident entities.
  • Non-residents are taxed only on income sourced or received in India, except for specific cases like business income controlled from India or profession set up in India.

Double Taxation Avoidance Agreements (DTAAs)

India has bilateral tax treaties with many countries to prevent double taxation of income. These agreements typically provide relief through:

• Tax Credit Method: Where taxes paid in one country are credited against taxes payable in the taxpayer’s home country.
• Exemption Method: Where certain types of income are exempt from tax in one of the contracting states.

Conclusion

Understanding residential status is crucial for determining tax liabilities in India:

• Indian Income: Always taxable in India for all entities.
• Foreign Income: Taxability depends on the residential status of the taxpayer and the nature of the income, with residents generally taxed on worldwide income and non-residents on income sourced in India.

Compliance with residential status rules ensures proper tax planning and adherence to legal requirements under the Income Tax Act, 1961.