Introduction

To determine a person’s liability to pay income tax in any country, we must first determine the residency of such person, based on which tax liability will be determined, and if a particular person fits into the criteria decided by the laws of that country, he will be deemed to be a resident of that country for such laws.

When determining an individual’s or a company’s residence status in India for any given year, the provisions of the Income-tax Act, 1961 are used. A person may be deemed to be a resident of one or more countries due to the tax rules of those countries, and in such a circumstance, that person may be required to comply with the tax laws of those nations.

What Is The Residential Status?

The term “residential status” is stated in the Income Tax Act, however, it has nothing to do with a person’s nationality or residence. An Indian citizen can be a non-resident for income tax purposes, but an American citizen can be a resident of India for income tax purposes.

How To Determine Your Residential Status For Income Tax Purposes?

Residential status criteria differ for different people, i.e., individuals’ residential status will be based mainly on their criteria, while a company’s residential status will be decided on their criteria, and residential status will be determined every year, which means a person may be a resident for the current year but become a non-resident the following year.

How Is Residential Status Of A Individual Or A Company Determined In Income Tax Act?

How To Determine An Individual’s Residence Status?

1st CONDITION: 

To determine whether the taxpayer is a resident or non-resident in India, he must meet one of the two conditions listed below. If this is not the case, the individual will be considered a non-resident of India.

  • He is in India for 182 days or more in that year, or He is in India for 60 days or more in that year and for a time total of 365 days or more in the four years preceding it.

2nd CONDITION: 

Resident and ordinarily resident (or) resident but not typically resident (This step is performed only if an individual turns out to be a resident in India). If a resident individual meets both of the following qualifications, he will be classified as a resident and ordinarily resident in India:

  • He has lived in India for at least two years in the ten years preceding the relevant year.
  • His stay in India is for 730 days or more in the seven years before the relevant year.

A resident who does not meet any of the above-mentioned qualifications, or who meets only one of the conditions in CONDITION 2, is deemed a resident but not ordinarily resident under income-tax law.

How Can The Hindu Undivided Family (HUF) Residential Status Be Determined?

A Hindu undivided family (HUF) is stated to be resident in India unless the control and management of affairs are located entirely outside of India.

CONDITION 1: HUF, Resident Or Non-Resident

If the HUF’s control and administration are located (partially or entirely) in India, the HUF will be recognized as a resident in India.

CONDITION 2: Whether The Person Is A Resident And An Ordinarily Resident, Or A Resident But Not A Ordinary Resident

To be deemed a resident and ordinarily resident in India, the individual of a HUF must meet both of the qualifications listed below.

  • He has lived in India for at least two years in the ten years preceding the relevant year.
  • His stay in India was for 730 days or more in the seven years before the relevant year.

If the HUF’s control and administration are entirely outside of India, the HUF will be considered a non-resident.

How Do You Determine A Company’s Residential Status?

  • A firm that is incorporated in India is always deemed to be a resident of India.
  • A company that is not an Indian company (i.e., a foreign company) and has a place of effective management (POEM) of business in India for that year is said to be a resident in India. The POEM idea is in force from 2017 to 2018.
  • The term “place of effective management” refers to a location where essential management and business decisions are made to run an entity’s business. POEM is an internationally recognized test for determining a company’s residence.

How Do You Determine Your Business’s Place Of Effective Management (POEM) In India?

  • Identification of a person or people who make all critical managerial and commercial decisions to do business in India.
  • The next step is to choose a location where all of these decisions will be made.

How Can The Residential Status Of A Person Other Than An Individual, HUF, Or Company Be Determined?

Other than an individual, HUF, or company, everyone is a resident of India if the control and management of business operations are entirely or substantially located in India throughout the financial year.

Taxation Based On Residential Status:

Types of IncomeResident and Ordinarily ResidentResident But Not Ordinarily ResidentNon-Resident
Income generated in IndiaTaxedTaxedTaxed
Income deemed to accrue or arise in IndiaTaxedTaxedTaxed
Income derived from a firm controlled in India but earned outside of India.TaxedTaxedNot taxed
Other than the above sources of income (I.e., income which has nothing to do with India)TaxedNot taxedNot taxed

What Is The Significance Of Residence Status In Terms Of Income Tax?

  • If a person is a resident of India, his global income, i.e., income generated anywhere in the world, is subject to income tax in India, whereas, for non-residents, only income gained in India is liable to income tax.
  • As a result, to ascertain whether a person’s total worldwide income or income received in India is subject to tax, they must first determine their residency status.
  • However, if a person is a resident of India and gets income from other nations, he may be subject to taxes in both countries, depending on the rules of each.
  • But, to prevent double taxes, the Indian government has reached an agreement with several countries known as the Double Taxation Avoidance Agreement (DTAA).
  • The DTAA is extremely favourable to anyone who gets income from two or more countries.

Conclusion

As a result, a taxpayer must carefully examine their residential status to avoid any legal complications and income tax payments. Payment of income tax is simple and free of legal ramifications for a person who permanently resides in the state of domicile. Special considerations are made for those who are moving in and out of the country. To prevent double taxation on their income, one must check all of the conditions and whether they qualify for it or not before paying the taxes.