What is Residential Status for Income Tax in India?

Mr. Singh has been commuting to and from India several times in the past year. Under such a circumstance, he must determine whether he can file taxes in the country as a resident or as an NRI. Individuals should understand that their residential status for income tax will affect their yearly liabilities to the government. The following write-up explains how the Income Tax Department decides whether one is a resident Indian or otherwise.

What Is the Definition of Residential Status?

Tax liability of every individual in India is based on several factors, and residential status is one of them. It can be referred to as the status of how long an individual has stayed in the country for the past 5 years.

Even though this particular term can be easily confused with the citizenship of an individual in India, it is completely different from that. Note that one can be an Indian citizen yet can be considered a non-resident for a specific financial year. On the other hand, despite being a foreign citizen, a person can be considered an Indian resident due to taxation purposes for a specific FY.

In order to be aware of one’s tax liabilities, file ITR, etc., a person needs to mention his/her relationship status in the relevant forms. Note that the determination of residential status in India for income tax is done differently in the case of firms, individuals, and companies. It is imperative to learn about the internal aspects to assess taxability correctly.

How Much Importance Does the Residential Status Hold?

As mentioned before, residential status plays a crucial role in determining a person’s tax liability for a particular financial year. This is why the Income Tax Act of India possesses certain rules that help in determining the residential status of every individual.

Note that learning about your residential status for income tax will allow you to get a clear understanding of these following aspects as well:

Available tax exemptions
Income tax return
Tax deductions
Income tax payable

What Is the Process of Determining Residential Status?

There are basically three types of residential statuses available as per Income Tax Act of India, 1961. Note that this particular aspect is dependent on certain factors such as an individual taxpayer’s annual income, incorporation, stay in the country, etc. The applicable categories are as follows:

Resident
Non-Resident (NR)
Resident Not Ordinarily Resident (RNOR)

Since the taxability of persons differs depending upon which residential status category they belong to, it is necessary to learn about each of these types in detail.

Defining Ordinary Resident

A person can be termed as an ordinary resident in case he/she meets the conditions mentioned below:

A person stays in India (during an entire financial year) for 182 days or beyond that time
A person stays in India (during the four preceding FYs) for 365 days or beyond that period

Note that as per a recent amendment, a person who is also an Indian citizen and is free from tax liability in any other country shall be deemed to be a resident of India. However, this particular residential status for income tax will be applicable if the individual’s total income crosses Rs. 15 lakh.

Defining Resident (Not Ordinarily Resident)

The Income Tax Act, with regard to, residential status possesses certain conditions that help in determining this category as well. Individuals fulfilling any of the below-mentioned conditions will be a resident but not ordinarily residents in an FY:

A person (both individuals and HUFs) not residing in India in 9 out of 10 preceding years of the relevant FY
Citizen of India or COIwhose domestic income from Indian sources exceeds Rs. 15 lakh in a financial year. These individuals must have resided in the country for a period of more than 128 days but less than 182 days.

Defining Non-Resident

The following are the conditions for residential status as per Income Tax Act to meet as a non-resident:

An individual stays in India for more than 119 days but less than 182 days and has a foreign income of less than Rs. 15 lakh
An individual resides in India for up to 119 days and earns more than Rs. 15 lakh in an FY
An individual resides in the country for up to 119 days and earns less than Rs. 15 lakh in a given FY

Also Read: How To Apply For Non Resident Indian(NRI) Home Loan

Taxability

For resident: An individual who is an Indian resident will bear taxes on his/her global income. This income consists of what the individual earns from India and abroad.

For non-resident and resident but not ordinarily resident: RNOR and NRI have to pay taxes only on the income they earn from India. In case of double taxation of income, they can take advantage of the Double Taxation Avoidance Agreement, which India has signed with another country.

Also Read: Form 26QB: Uses And Requirements

Final Word

Evidently, the residential status for income tax plays a major role in deciding one’s tax liabilities. Being aware of the intricacies related to such residential norms can help individuals compute their taxes.

FAQs on Residential Status for Income Tax in India

Q1. What is the first step that you must take when your RNOR tax status changes to resident?

Ans: Individuals who become a resident of RNOR will lose several of the tax privileges that NRIs receive. In such cases, taxpayers must inform their banks and convert any NRO/NRE account to a normal resident account.

Q2. As per the Income Tax department, which earnings are considered income?

Ans: A salaried individual receives earnings from his/her employer, while a self-employed person earns through net profits. To ease the understanding of what constitutes income, the IT Department has classified it into 5 different segments:
Salary earnings
Earnings from property
Earnings from business or profession
Earnings from capital gains
Earnings from miscellaneous sources

Q3. Who can file my income tax return when I am outside the country?

Individuals who reside abroad cannot file their ITR in India themselves. In such a case, the taxpayer would need to authorise another individual with a power of attorney to file his/her returns.

Q4. What are the penalties for NRIs who fail to clear their taxes?

There are two major penalties for late income tax return filing. First, a penalty interest of 1% is levied under Section 134A of ITA. Additionally, the taxpayer will need to bear a late penalty fee ranging from Rs. 1,000 to Rs. 10,000 as per Section 234F.

Q5. Which types of incomes are exempt from taxation for RNOR in India?

Generally, resident not ordinary resident individuals do not have to pay any taxes on income earned from foreign sources. Some of the types of incomes that are exempted are mentioned below:
Dividend or interest earned from deposits held abroad
Any withdrawals from retirement accounts
Interest earnings on FCNR deposits
Earnings from mortgaged or rented properties
Capital gains from foreign assets

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