Income Tax Provisions applicable to non-residents

1. Income Tax Provisions applicable to non-residents

2. The residential status of an individual is crucial for determining the taxability of income under Indian tax law. An individual’s residential status can be one of three types: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR). This status influences how various types of income are taxed. Indian citizens are deemed residents if their total income, excluding foreign sources, exceeds Rs. 15 lakhs and they are not taxed in another country. For Hindu Undivided Families (HUFs) and companies, residential status is determined based on the location of management and control. Companies, in particular, are considered resident if they are incorporated in India or their place of effective management is in India. The taxability of income also depends on its nature and source, with Indian incomes and those deemed to arise in India being taxed according to the residential status of the taxpayer. Changes to the residential status may occur annually based on specific conditions, impacting the tax obligations of individuals and entities.

3. Q1. Is the residential status of a person relevant for determining the taxability of the income in his hands? Ans: Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands. Taxability of any income in the hands of a person depends on the following two things : • Residential status of the person as per the Income-tax Law; and • Nature of income earned by him. Hence, residential status plays a vital role in determining the taxability of the income. Q2. What are the different classes of residential status prescribed under the Income-tax Law for an individual? Ans: For the purpose of Income-tax Law, an individual can have any one of the following residential status: (1) Resident and ordinarily resident in India (also known as resident) (2) Resident but not ordinarily resident in India (3) Non-resident Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

4. Q3. Will a person holding Indian citizenship be treated as a resident in India for the purpose of charging Income-tax? Ans: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India). However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature. Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country. “Liable to tax” in relation to a person and with reference to a country means that there is an income-tax liability on such person under the law of that country for the time being in force. It shall include a person who has subsequently been exempted from such liability under the law of that country.

5. Q4. What are the different classes of residential status prescribed under the Income-tax Law for a Hindu Undivided Family (HUF)? Ans: For the purpose of Income-tax Law, a HUF can have any one of the following residential status: • Resident and ordinarily resident in India • Resident but not ordinarily resident in India • Non-resident Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the HUF would be a resident and ordinarily resident and in the next year it may become non-resident or resident but not ordinarily resident and again in the next year its status may change or may remain same.

6. Q5. What are the different classes of residential status prescribed under the Income-tax Law for a person other than an individual or a HUF? Ans: For the purpose of Income-tax Law, a person other than an individual or a HUF, i.e., company, partnership firm, etc., can have any one of the following residential status: (1) Resident (2) Non-resident Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard (discussed later) and, hence, it may so happen that in one year the taxpayer would be a resident and in the next year may become non-resident and again in the next year the status may change or may remain same. Q6. How to determine the residential status of an Individual? Ans: To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident. Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.

7. Step 1: Determining whether resident or non-resident Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy any one or may satisfy both the conditions): • He is in India for a period of 182 days or more in that year; or • He is in India for a period of 60 days or more in the year and for a period of 365 days or more in 4 years immediately preceding the relevant year. However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India. The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).Read more at: https://taxguru.in/income-tax/income-tax-provisions-non-residents.htmlCopyright © Taxguru.in