Know your residential status as per the income tax Act

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In India, a person’s status with reference to the question of how long the person has stayed in the country for the past five years is known as residential status. The tax liability of the taxpayer is based on the residential status in the financial year, and four years preceding the financial year. The applicable residential status needs to be filled while filling the tax returns.

The residential status of a person is an important criteria in determining the tax implications, according to the Income Tax Act, 1961. The income tax laws of India comprises the  term residential status and one must not confuse it with an individual’s citizenship in India.

There can be an  individual who is a citizen of India but may end up being a non-resident for a particular year. Similarly, for income tax purposes for a particular year there are some foreign individuals who may end up being a resident in India. It should also be noted that the residential status    of  individual or a firm or a company etc is determined differently. In below article know the importance, determining factor of residential status as per the Income tax act.

Why residential status for income tax is important?

Residential status of the individual is one of the factors based on which a person’s taxability is decided. So it is very important to know the residential status during the tax filing season.Know the rules  Income Tax Department use to determine the residential status of a tax paying individual or company.

How to determine residential status as per the income tax act?

For the purpose of income tax in India, The residential status of a person can be categorised into three parts:

  1. A resident
  2. A resident not ordinarily resident (RNOR)
  3. A non-resident (NR)

Steps in determining the residential status of an individual

  • Firstly, know or determine whether a taxpayer is resident or non resident
  • If one is a resident, then determine whether he is a resident and ordinarily resident, or resident and not ordinarily resident

Residential Status: Resident

An individual who satisfies any one of the following conditions will be referred as a resident taxpayer:

  • Stay in India for a minimum of 182 days in a year, or
  • One should stay in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year.

Residential Status: Resident Not Ordinarily Resident (RNOR)

If an individual satisfy the aforementioned conditions and qualifies as a resident, then one should to determine if he/she is a Resident ordinarily resident (ROR) or an RNOR.

Individual will be referred as a ROR only if he meets both of the following conditions:

  1. One should stay in India in at least 2 out of 10 years immediately previous years and
  2. Has been resident in India for at least 730 days in 7 immediately preceding years

Note: FaiIing to satisfy even one of the aforementioned conditions, one would be an RNOR.

If a citizen of India or a person of Indian origin who leaves India for employment outside India during the financial year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will applicable for individuals whose total income (other than foreign sources) exceeds Rs 15 lakh.

Residential Status:Non-resident

If a taxpayer satisfying neither of the conditions which are mentioned above would be non-resident (NR) in India in that particular financial year.

Know the taxability as per your residential status

  • Resident: A taxpayer whose residential status are termed as resident will be charged to tax in India on his global income i.e. the total earning in India as well as outside the India.
  • NR and RNOR: A taxpayer whose residential status NR or RNOR, their tax liability in India is restricted to the income they earn in India. They are not required to pay any tax in India on their foreign income.