Residential Status for Income Tax – Individuals and Residents

The concept of residence status is an important part of the Indian Income Tax Act. It establishes the taxability of an individual's income in India. Residential status refers to an individual's status as a resident or non-resident based on his or her physical presence in India during a fiscal year.  It is critical to ascertain an individual's residence status for tax reasons since it impacts income tax liabilities and compliance obligations under the Income Tax Act. This blog article will go over the criteria used to determine residential status, the many kinds of residential status, and the tax ramifications.

What is Residential Status Under the Income Tax Act?

Residential status under the Indian Income Tax Act refers to an individual's status as a resident or a non-resident based on his or her physical presence in India throughout the fiscal year. An individual's residential status is significant since it affects the taxability of his or her income in India. The Income Tax Act divides residential status into three categories: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Nonresident (NR). Residential status is determined using certain criteria specified by the Income Tax Act, such as the number of days spent in India during the fiscal year and the number of days spent in India in the previous fiscal years. The tax implications of each category of residential status vary, and it is critical for individuals to understand their residential status in order to comply with tax laws and regulations.

How can I identify my residential status?

The Income Tax Act establishes certain criteria for determining an individual's residence status. The following criteria are used to determine residential status:

1. The number of days spent in India throughout the fiscal year (April 1–March 31). 

• A person is considered a resident if they are present in India for at least 182 days in a fiscal year, or 
• 60 days in a fiscal year and 365 days in the previous four years.

2. If an individual fits either of the qualifications listed above, he or she will be deemed a resident. If not, the person will be labeled as non-resident.

3. If an individual is leaving India for employment overseas or is a member of a crew on an Indian ship, the 60-day period specified above is increased to 182 days.

4. After determining an individual's residential status, he or she will be classified as a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR), based on their physical presence and stay in India during the fiscal year and previous years.

It is important to highlight that determining residential status is critical, and individuals should keep accurate records of their stays in India and overseas to avoid confusion or conflicts with tax officials.

Importance of residency status

Determining an individual's residence status is crucial for a variety of reasons. Here are some reasons why recognizing residence status is important:

• Individuals' tax burden in India is based on their residential status. Residents are taxed on their total income, whilst non-residents are taxed only on income earned in India. Therefore, it is critical to ascertain the exact residence status in order to calculate the correct tax liability.
• Individuals' compliance responsibilities vary depending on their residential status. For example, resident individuals must file their tax returns in India, although non-residents are not needed to do so if their income is less than a certain amount. As a result, determining residence status is critical for complying with tax laws and regulations.
•  Double Taxation: Individuals who reside in multiple countries may face double taxation, meaning they are taxed on the same income in both nations. Understanding residential status might help individuals claim tax breaks under the Double Taxation Avoidance Agreements (DTAA) that India has signed with other nations.

Resident (ROR)

The Indian Income Tax Act classifies residents as either resident or ordinarily resident (ROR). An individual is deemed a ROR if they have been in India for 182 days or more in the fiscal year, or 60 days or more in the fiscal year, and 365 days or more in the four years preceding the relevant fiscal year. 

Resident, but not ordinarily resident (RNOR)

Resident but Not Ordinarily Resident (RNOR) is a residential status categorization defined under the Indian Income Tax Act. An individual is deemed an RNOR if they have been a non-resident in India for nine of the ten years immediately preceding the relevant fiscal year, or if they have spent 729 days or less in India in the previous seven fiscal years. 

Non-resident (NR)

Non-resident (NR) is a residence status categorization under the Indian Income Tax Act. If an individual does not meet the criteria for Resident or RNOR classification, they are labeled an NR. NR people are only taxed on income earned or received in India.

How Do You Calculate an Individual's Residential Status?

An individual's residential status can be determined using the criteria listed below:

• The number of days the individual was present in India during the relevant fiscal year.
• The number of days the individual has spent in India during the four years before the relevant fiscal year.
• The individual's status as an Indian citizen or of Indian descent.
• The individual's status as an employee of the Indian government or a public sector organization.

Conclusion

According to the requirements listed above, an individual can be classed as a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR). It is vital to highlight that determining one's residence status is critical for tax purposes because it impacts the individual's tax liabilities. Therefore, it is recommended to obtain professional help to determine an individual's residence status.