Tax Planning Series 6: Residential status and tax incidence

Residential status and tax incidence 

The scope of taxable income of an assessee is determined by his residential status. This status will have to be determined in accordance with the provisions contained in section 6 of the Act, for each and every previous year separately.

An individual’s residential status can be of three kinds, namely, 

(a) resident and ordinarily resident; 
(b) resident but not ordinarily resident; and 
(c) non-resident.

Rule of residence in brief

Resident and ordinarily resident Resident but not ordinarily resident Non-resident
Must satisfy at least one of the basic conditions and the two additional conditions [i.e., one of (a) or (b) and both of (i) and (ii)] Must satisfy at least one of the basic conditions and one or none of the additional conditions [i.e., one of (a) or (b) and one or none of (i) or (ii)] Should not satisfy any of the basic conditions.

BASIC CONDITIONS AT A GLANCE

In the case of an Indian citizen who leaves India during the previous year for the purpose of employment or who leaves India as a member of the crew of an Indian ship In the case of an Indian citizen or a person of Indian origin (who is abroad) who comes to India on a visit during the previous year In the case of an individual [other than that mentioned in columns (1) and (2)]
(1) (2) (3)
a. Presence for at least 182 days in India during the previous year
a. Presence for at least 182 days in India during the previous year
a. Presence for at least 182 days in India during the previous year
b. Not functional
b. Not functional
b. Presence in India for at least 60 days during the previous year and 365 days during 4 years immediately preceding the previous year.
ADDITIONAL CONDITIONS AT A GLANCE
i. Resident in India in at least 2 out of 10 years immediately preceding the previous year [i.e., he must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding the previous years].
ii. Presence in India for at least 730 days during 7 years immediately preceding the previous year.

Note : It has been held that the term ‘for the purpose of employment’ includes self-employment like own business or profession taken up abroad – CIT v. O. Abdul Razak [2011] 198 Taxman 1/10 taxmann.com 4 (Ker.).

With effect from the assessment year 2015-16 in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed by the Central Board of Direct Taxes.

Rule 126(1) provides that for the purposes of clause (1) of section 6, in case of an individual, being a citizen of India and a member of the crew of a ship, the period or periods of stay in India shall, in respect of an eligible voyage, not include the period computed in accordance with sub-rule (2) of rule 126.

Sub-rule (2) of rule 126 provides that the period referred to in sub-rule (1) shall be the period beginning on the date entered into the Continuous Discharge Certificate in respect of joining the ship by the said individual for the eligible voyage and ending on the date entered into the Continuous Discharge Certificate in respect of signing off by that individual from the ship in respect of such voyage.

Explanation to rule 126 provides that “eligible voyage” shall mean a voyage undertaken by a ship engaged in the carriage of passengers or freight in international traffic where—
(i) for the voyage having originated from any port in India, has as its destination any port outside India; and
(ii) for the voyage having originated from any port outside India, has as its destination any port in India.


Tax incidence

WHETHER TAX INCIDENCE ARISES IN THE CASE OF
Resident and ordinarily resident Resident but not ordinarily resident Non-resident
(1) (2) (3) (4)
Income received in India, whether accrued in India or outside India Yes Yes Yes
Income deemed to be received in India, whether accrued in India or outside India Yes Yes Yes
Income accruing or arising in India, whether received in India or outside India Yes Yes Yes
Income deemed to accrue or arise in India, whether received in India or outside India Yes Yes Yes
Income received and accrued outside India from a business con-trolled in or a profession set up in India Yes Yes No
Income received and accrued outside India from a business con-trolled from outside India or a profession set up outside India Yes No No
Income earned and received outside India but later on remitted to India, whether tax incidence arises at the time of remittance. No No No


Tax Planning in respect of Residential Status by Individual


  1. Individuals who are visiting India on a business trip or in some other connection should not stay in India for more than 181 days in the year and no more than 364 days in preceding four years to enjoy non-resident status.
  2. If individual is in India for more than 364 days during the preceding four years then he should avoid staying in India for more than 59 days in a year. If he wants to stay more than 59 days then he may come in such manner that no more than 59 days come in a year.  He may come after 2nd feb and leave before 29 may. so that no more than 59 days period is covered in both years.
  3. Similarly Indian citizen or person of Indian origin should plan their trip such that no more than 181 days will fall in one year.
  4. A non resident should not receive any income directly in India even if the business is controlled directly from India. He should first receive income outside India and then remit it to India, by such way no tax is leviable on such income.
  5. Similarly a non ordinarily resident should receive his income outside India which is earned outside India and from a business controlled outside India.


Published by Business So Simple

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