Residence And Tax Liability

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INTRODUCTION

• Tax incidence on an assessee depends on his residential status.

• For instance, whether an income, accrued to an individual outside India, is taxable in India depends upon the residential status of the individual in India.

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• Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India, depends on the residential status of the individual, rather than on the citizenship. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability.

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Different residential status:

Resident

Ordinarily resident

Not-ordinarily resident

Non-resident

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Important points for deciding residential status:

•Assessment year [sec. 2(9)] – this means the year commencing on the first day of April every year and ending 31st march of the next year and assessee is liable to pay tax on the income of previous year.

•Previous year [sec. 3] – income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year.

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• Residential status for each previous year – residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year.

• Different residential status for different assessment year – an assessee may enjoy different residential status for different assessment year. For instance, an individual who has been regularly assessed as resident and ordinarily resident has to be treated as non-resident in a particular assessment year if he satisfies none of the conditions of section 6(1) of that year.

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• Resident in India and abroad – it is not necessary that a person who is “resident” in India, cannot become “resident” in any other country for the same assessment year. A person may be resident in two (or more) countries at the same time. It is, therefore, not necessary that a person who is resident in India will be non-resident in all other countries for the same assessment year.

• Onus of proof – whether an assessee is a resident or non-resident is a question of fact and it is the duty of the assessee to place all relevant facts before the income-tax authorities.

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How to determine residential status of an individual

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Step 1 First find out whether such individual is “Resident” in India

Step 2 If such individual is “Resident” in India, then find out whether he is “ordinarily resident” in India. However, if such individual is a “Non-resident” in India, then no further investigation is necessary

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BASIC CONDITIONS sec.(6)

•He is in India in the previous year for a period of 182 days or more

•He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years preceding the previous year

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Explanation of the above basic condition of 60 days in India

•An individual who is a citizen of India and leaves India on any previous year for the purpose of employment or as a member of the crew an Indian ship must have stayed in India for at least 182 days during the previous year instead of 60 days.

•If any citizen of India or of indian origin who is living outside India comes on a visit to India in the previous year, he must have stayed in India for at least 182 days during the previous year instead of 60 days.

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Additional conditions [sec. 6(6)(a)] to test as to when a resident individual is

ordinarily resident in India

1. He has been resident in India for at least two years preceding the relevant previous year. (This means that the assessee must have satisfied at least one of the basic condition for two years out of 10 years preceding the previous year.)

2. He has been in India for at least 730 days in all during the 7 previous year preceding the relevant previous year.

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CONDITIONS TO TEST AS TO WHEN A INDIVIDUAL IS A RESIDENT IN INDIA

• An individual is called a resident in India if he satisfies ant one of the basic condition and both the additional conditions.

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CONDITIONS TO TEST AS TO WHEN A INDIVIDUAL IS NOT ORDINARILY

RESIDENT

• If an individual satisfies any one of the basic conditions but does not satisfy both the additional conditions is a not ordinarily resident.

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CONDITIONS TO TEST AS TO WHEN A INDIVIDUAL IS NON-RESIDENT

• If an individual satisfies none of the basic conditions he is said to be non-resident.

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Particulars Ordinarily Resident

Not ordinarily resident

Non resident

a). Income due and received in India.

Y Y Y

b). Income due in India but received outside in India or income due outside India but received in India

Y Y Y

c). Income of a business outside India which was controlled from India.

Y Y N

d). Income due and received outside India.

Y N N

e). Past untaxed income brought to India.

N N N

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EXCEPTIONS

• Dividend from an indian company is exempted if from tax.

• Income from agriculture land is exempted from tax.

• If any income was received outside India then remitted to India will not be considered.

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Plan Ahead!Have A Non ‘Tax’ing Year!!

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