Section 6 of The Income Tax Act: Overview, Importance And Exceptions
Individuals need to stay informed about their residential status for the previous year during income tax filing. The taxability of an individual depends on the residential status in that year.
Section 6 of the Income Tax Act
Section 6 of the Income Tax Act categorises the citizens into three different categories for ease of taxation based on their residential status. The categories are given below:
- Resident but Not Ordinarily Resident (RNOR)
- Resident but Ordinarily Resident (ROR)
- Non-Resident (NR)
The income tax to be levied on an individual depends on the above-mentioned categories. This is why it is important to know your residential status before filing income tax returns.
Importance of Residential Status for Income Tax
Determining one’s residential status is vital as the amount of tax that an individual has to pay depends on it. For example, if an individual is a resident of India, the person has to pay tax on the global income even though he/she can claim facilities of DTAA (Double Taxation Avoidance Agreement). However, an NR or RNOR has to pay tax on his/her income received only in India.
Here are the details of eligible and not eligible taxpayers in different scenarios:
| Income of the Resident | ROR | RNOR | NR |
| Income received or earned in India independent of the source | Yes | Yes | Yes |
| Income earned in India or is supposed to be earned during the mentioned financial year, independent of the source | Yes | Yes | Yes |
| Income earned and received outside India from other sources in the mentioned financial year | Yes | No | No |
| Income received outside India, but the business is being managed from India | Yes | Yes | No |
Exceptions Regarding an Individual’s Residential Status in India
Apart from the above-discussed criteria, there are some exceptions to the rules applied to an individual. The exceptions are as follows:
- If an individual is a resident of India and has to leave the country for job purposes, the second criterion from the above-mentioned criteria will be invalid; only the first will apply.
- If an individual is of Indian origin, lives in a foreign country, but visits the country during a particular financial year, then only the first criterion will apply.
Eligibility Criteria to Fulfil for Qualifying as a Resident of India
There are some criteria mentioned in Section 6 of the Income Tax Act that an individual has to fulfil to be identified as a Resident of India. They are as follows:
- The person has to live in India for at least 182 days in that financial year.
- The person must have lived in India for more than or equal to 60 days in that financial year and more than or equal to 365 days in four preceding years.
If an individual does not meet either of the above mentioned criteria, he/she is considered a Non-Resident Indian (NRI).
Now there are more criteria one should satisfy to be considered an Ordinarily Resident. The criteria are discussed below:
- An individual must have resided in India for 7 financial years in a row immediately before the FY under question.
- An individual must be living as an Indian citizen for two successive financial years out of the ten financial years immediately before the financial year in question.
Furthermore, when it comes to the conditions for being considered as a Not Ordinarily Resident, the following criteria have to be fulfilled:
- A person must have been an NRI for 9 out of 10 preceding years
- A person has been in India for less than or equal to 729 days in 7 preceding years.
- The person has to be a citizen of India and must have a total income of more than Rs. 15 lakh, excluding foreign income. Moreover, the person must be residing in India for more than 120 days but less than 182 days.
- A person has to be a Deemed Resident of India
Now, you might want to know what Deemed Resident in India means. To find out, read on!
Deemed Resident of India is an individual who —
- Is a citizen of India and has a total income of more than Rs. 15 lakh, excluding foreign sources.
- Is not liable to pay taxes in any other country other than India for residence, domicile, or other criteria.
Final Word
The taxability of an individual is largely dependent on his/her residential status. Hence, it is crucial to determine the residential status as per Section 6 of the Income Tax Act, India.
FAQs On Section 6 Of Income Tax Act
Ans: A citizen is a native of that country or belongs to the country. In contrast, residential status is a legal status given to an individual for living and working in the country. Citizens have the right to vote, work, live, study, and get healthcare facilities in that country, but a residency only gives them the right to work, study, and live in that country.
Ans: A DTAA or Double Taxation Avoidance Agreement is a pact signed between India and a foreign country. This agreement aims to save taxpayers from paying double taxes on their income earned from the source country as well as the residence country.
Ans: To avail of the benefits under DTAA, a Non-Resident Indian has to submit the following documents:
Tax Residency Certificate acquired through the native government
Self-attested copy of PAN card
Self-attested copy of VISA and Passport
OCI (Overseas Citizen of India) card (if applicable)
Indemnity-cum-declaration(if banks are involved)
Ans: ‘Place of Effective Management’ refers to the place where vital commercial and management decisions that are important for the business have taken place. POEM has been levying taxes on the shipping businesses.
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
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