Residential Status in India: Are You a Resident or NRI for Tax?

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What is Residential Status Meaning in India?

Any individual’s taxability in his/her country depends upon his/her residential status during a particular year. The term residential status has nothing to do with an individual’s citizenship in India and has been coined under the Income Tax Act of India. It is only applicable for tax purposes. Even if an individual is a citizen of India, he/she might be a non-resident. Similarly, a foreign citizen might end up as a resident in India during a particular FY.

Residential status in India is important for determining how you are taxed. The Income Tax Act defines three residential status:

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Resident Status Classifications

Here is how the different residential statuses can be classified -

Resident and Ordinarily Resident (ROR):

This is the most common category. You are considered a resident of India for tax purposes if you meet either of the following conditions:

• You are physically present in India for at least 182 days in a financial year. (This is known as the 182-day rule.)
• You have been present for at least 60 days in the current financial year, and you were also present in India for a total of 365 days or more in the four preceding financial years. (This is known as the 60-day rule.)

Resident but Not Ordinarily Resident (RNOR):

An ordinarily resident individual is someone who has close connections with India. This can be based on factors like your nationality, place of birth, or permanent residence. However, under the Income Tax Act, an individual is considered ordinarily resident if they meet either of the following conditions:

• They have spent 730 days or more in India in the seven years preceding the current year.
• They have resided in India for at least two of the ten preceding financial years before the current year.

Non-Resident (NRI):

If you don't meet the criteria for resident or ordinarily resident, i.e., failing to satisfy these conditions of stay in India:-
182 days or more in the previous year or

• 60 days or more in the previous year and 365 days in the 4 years preceding previous years

will be considered as a Non-Resident for that financial year.

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Example to Explain Residential Status in India:-

Here are a few residential status examples -

i) Mr. Bill Gates stayed in India from 1 April 2017 to 31 July 2017 and again from 1 September 2017 to 30 November 2017. Is he an Indian resident for the financial year 2017-2018?

Solution: Total no of days = 30 (april) + 31 (may) + 30 (june) + 31 (july) + 30 (sept) + 31 (Oct) + 30 (Nov) = More than 182 .Since Mr. Bill Gates stayed in India for more than 182 days, he would be a Resident Indian for the financial year 2017-18.

ii) Mr. Bill Gates stayed in India from 01 April 2017 to 31 July 2017 and from

• 01 September 2013 to 30 November 2013
• 01 September 2014 to 30 November 2014
• 01 September 2016 to 31 March 2017

Is he an Indian resident for the financial year 2017-2018?
Solution: Mr Bill Gates stayed in India :
In F.Y. 2017-18 Period of Stay= 122 days(30+31+30+31) and
Prior Financial Years =

Condition (i) = 122 Days (You have stayed for 60 days or more during the financial year)
and
Condition (ii) = 394 Days( A total of 365 days or more during 4 years immediately prior to that financial year)

Thus, he is said to be Resident Indian for the financial year 2017-18
But, in some cases, the 2nd condition mentioned above (60 days & 365 days) doesn't apply.

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Exceptions to the Second Condition in the Case of Resident Indian

The 2nd condition mentioned above (60 days & 365 days) doesn't apply in case of

1. An Indian citizen who has left India for the purpose of employment in a foreign or a crew member of an Indian ship, OR
2. An Indian Citizen or person of Indian origin who comes to visit India

Thus, in these cases, only if you stay in India for a period of 182 days or more in the Financial year, you are said to be a Resident Indian.

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Importance of Residential Status

• Residential status plays an important role especially when person’s tax liability is calculated for a particular year. Residents are taxed on their total income, whilst non-residents are taxed only on income earned in India.
• For individuals filing tax returns in India, it is important to determine their residential status as 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.
• Understanding residential status is important to avail of the Double Taxation Avoidance Agreements (DTAA) for people who reside in multiple countries facing double taxation.

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What Happens If Your Residential Status Changes?

If your residential status changes, it can significantly affect your tax obligations in both your country of residence and any foreign countries where you earn income. Here's what happens if your residential status changes:

1. Impact on Tax Residency

• Resident: If you qualify as a resident in a country (based on the number of days spent in the country, or other criteria), you are typically taxed on your global income. This means all income earned worldwide is subject to tax in your country of residence.
• Non-Resident: If you no longer meet the criteria for residency in a country, you become a non-resident and may only be taxed on income earned within that country. Income from foreign sources may not be taxed, or only taxed at a reduced rate.

2. Effects on Income Tax Filing

• Global Income: A change to non-resident status means that you may no longer have to report your global income to the tax authorities of your previous country of residence. However, you might still need to file tax returns for any income earned domestically.
• Tax Credits or Exemptions: A change in status might affect eligibility for tax credits, deductions, or exemptions available for residents, such as relief under Double Taxation Avoidance Agreements (DTAA). If you become a non-resident, you may lose out on these benefits.

3. Applicability of DTAA (Double Taxation Avoidance Agreement)

• If you were a resident and are now a non-resident, your eligibility for tax relief under DTAA between your country of residence and the foreign country may change. For instance, you may not be eligible to claim exemptions, deductions, or credits on foreign income.

4. Change in Tax Rates

• As a resident, you may be taxed at progressive rates on your global income, which might include a lower tax bracket for certain incomes. However, as a non-resident, the tax rates on your income from foreign sources may be different, and generally, non-residents are subject to a higher tax rate on income earned in the country.

If your residential status changes:

• It can alter your tax liabilities (from global income tax to local income tax).
• May affect your eligibility for tax relief under treaties like DTAA.
• Changes your filing and reporting requirements for taxes.
• May expose you to exit taxes or loss of social benefits.

It’s essential to be aware of these changes and consult with a tax professional to ensure compliance and optimize your tax situation based on your new status.

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Tax Rules Based on Your Residential Status

Important Points

1. Income received outside India but subsequently sent to India subsequently, does not amount to receiving income in India. 1st receipt is important for consideration;
2. A person of Indian origin is defined as someone who was born in Undivided India, either himself, one of his parents, or one of his grandparents.

The residential status of an individual or entity plays a key role in determining how income tax returns are filed and what tax obligations they have. The tax liabilities and filing requirements are directly influenced by whether an individual or entity is considered a resident or non-resident in India.

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Residential Status of Hindu Undivided Families (HUFs)

• Resident HUF: An HUF is considered resident in India if its control and management are wholly or predominantly situated in India. This includes where the members of the HUF manage it from within India. Otherwise, it is a non-resident HUF.
• Resident and Ordinarily Resident: An HUF is classified as a resident and ordinarily resident if its Karta (manager) satisfies the following criteria:
  • The Karta has been resident in India for at least 2 out of the last 10 previous years, and
  • The Karta has stayed in India for 730 days or more in the last 7 previous years.
• Resident but Not Ordinarily Resident: If the HUF's Karta does not meet the above criteria, the HUF is classified as resident but not ordinarily resident.

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Residential Status of a Company

• Resident Company: A company is considered resident in India under the following conditions:
  • It is an Indian company, or
  • Its place of effective management (POEM) in the previous year is located in India.
• Place of Effective Management (POEM): POEM refers to the location where key management and commercial decisions for the business are made, such as strategic planning and policy decisions.

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Residential Status for Businesses & Other Entities

• Resident: These entities are considered resident if their control and management are exercised primarily from India.
• Non-Resident: If the control and management are exercised primarily from outside India, the entity is considered non-resident.

If you need any assistance determining your residential status or about NRI taxation, you can contact our tax experts.

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