Introduction
Understanding how tax liability is determined under the Indian Income Tax Act is crucial for every taxpayer, especially those with global income sources or travel history. One of the most important criteria that governs a person’s tax liability in India is residential status. The Income Tax Act, 1961 does not merely tax individuals based on citizenship or location; it considers residency status to determine whether income earned in India or abroad will be taxed.
This article breaks down how the residential status of an assessee affects their tax liability, what criteria are used to determine residential status, the different types of residency classifications, and how income is taxed under each.
Understanding “Assessee” and “Tax Liability”
An assessee, as defined in Section 2(7) of the Income Tax Act, is a person by whom any tax or any other sum of money is payable under the Act. This includes individuals, companies, firms, Hindu Undivided Families (HUFs), and others.
Tax liability refers to the total amount of tax an assessee is required to pay on income earned during a financial year. But the liability does not arise uniformly for all — it depends significantly on residential status, particularly for individuals and HUFs.
Residential Status Under the Income Tax Act
The taxability of income depends on whether the assessee is:
- A Resident and Ordinarily Resident (ROR)
- A Resident but Not Ordinarily Resident (RNOR)
- A Non-Resident (NR)
These categories are relevant mainly for individuals and HUFs under Section 6 of the Income Tax Act.
Determining Residential Status of Individuals (Section 6)
An individual is considered resident in India if they satisfy either of the following basic conditions:
Basic Conditions:
- Stay in India for 182 days or more during the previous year, or
- Stay in India for 60 days or more during the previous year and 365 days or more in the four preceding years.
Note: For Indian citizens leaving India for employment or foreign-bound Indian citizens visiting India, the 60 days is replaced by 182 days.
Additional Conditions (for ROR):
To be classified as Resident and Ordinarily Resident (ROR), the person must:
- Have been a resident in India for at least 2 out of 10 preceding years, and
- Have stayed in India for 730 days or more in the last 7 years.
If these are not satisfied but the basic condition is, the individual is Resident but Not Ordinarily Resident (RNOR).
Residential Status for HUFs, Firms, and Companies
- A Hindu Undivided Family (HUF) is resident if the control and management of its affairs is wholly or partly in India.
- It becomes Ordinarily Resident if the Karta satisfies the same additional conditions as for individuals.
- A company is resident in India if:
- It is incorporated in India, or
- Its Place of Effective Management (POEM) is in India during the relevant financial year.
Scope of Tax Liability Based on Residency
The residential status determines which portion of income is taxable in India.
| Type of Income | ROR | RNOR | NR |
|---|---|---|---|
| Income received or deemed to be received in India | Taxable | Taxable | Taxable |
| Income accrued or arising in India | Taxable | Taxable | Taxable |
| Income accrued or arising outside India and received outside India | Taxable | Not Taxable | Not Taxable |
| Income from a business controlled in India or profession set up in India | Taxable | Taxable | Not Taxable |
Illustration: Practical Example
Let’s say Mr. A is an Indian citizen who works in Dubai and returns to India for only 100 days during a financial year. He sends money to his family from Dubai.
- He is Non-Resident (did not stay for 182 days).
- His Dubai income will not be taxable in India.
- Any interest earned in Indian savings accounts or rent received in India will be taxable.
If Mr. B, on the other hand, has been working in India and satisfies both basic and additional conditions, he becomes Resident and Ordinarily Resident. In this case, even income earned abroad is taxable in India.
Double Taxation Relief (Section 90/91)
When a Resident earns income outside India and is taxed in that country, Double Taxation Avoidance Agreements (DTAAs) help reduce tax burden.
India has signed DTAAs with more than 90 countries. Relief can be claimed under:
- Section 90 – For countries with whom India has a DTAA
- Section 91 – For other countries
This prevents the same income from being taxed twice.
Key Case Laws and Judicial Interpretations
- A.S. Glaxo SmithKline vs CIT – Clarified the difference in taxability based on residential status.
- Gaurav Goel v. ITO – Held that citizenship alone does not define residency.
These rulings reinforce that the physical presence in India and not citizenship is the determining factor.
Planning and Compliance Tips
- Track your stay in India through passport stamps or travel records.
- If you’re a frequent traveler or NRIs, consult a tax advisor annually.
- Use Form 10FA and 10FB to apply and obtain residency certificates when needed.
Mnemonic :
Mnemonic to Remember: “Stay, Stay, Source, Status”
Here’s a handy sentence to remember the residential status rules:
“Stay counts, Stay period, Source of income, Status decides the tax fate.”
- Stay counts – Number of days in India (182 or 60 + 365 rule)
- Stay period – Additional 730 days and 2-year test
- Source of income – Indian or foreign
- Status – ROR, RNOR, or NR
