This article is written by Kalyani Gupta, a Master’s in Law student from Amity University, Noida. This article discusses meaning and rules for determining the residential status of an assessee.
An ‘Assessee’ implies to an individual on whom tax, or any additional sum of cash is imposed under the Income tax and he is legally responsible to reimburse the same. According to section 2(7) of the Income tax Act, 1961, “assessee” implies an individual by whom any tax or any additional sum of money is outstanding under this Act, includes –
- “Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person”
- “Every person who is deemed to be an assessee under any provision of this Act”
- “Every person who is deemed to be an assessee in default under any provision of this Act”
Hence, any individual who is responsible to pay tax through his personal income or income of any other individual is said to be called an assessee.
Need to Determine the Residential Status
The aggregate income is separate in case of an individual resident in India and a person who is a non-resident in India. Additionally, in case of a single person and HUF being “not ordinarily resident in India”, the implication of the total income shall be slightly distinct. Subsequently the total income of an assessee differs in accordance with his residential status in India, the occurrence of tax will also fluctuate keeping in mind such residential status in India.
Tax is imposed on the total income of assessee. According to the provision of Income-tax Act, 1961 the entire income of each individual is created upon his residential status. Section 6 of the Act separates the assessable individuals into three groups:
- Ordinary Resident
- Resident but Not Ordinarily Resident
Residential status is a name devised under Income Tax Act and does not have nothing to do with nationality of an individual or his domicile. A person who is an Indian and a citizen of India can be non-resident for purposes of Income-tax, but an American who is a citizen of America can be an Indian resident for purposes of Income-tax. The residential status of an individual varies upon the territorial links of the individual with this country, which means that, the number of days he has actually and physically stayed in India.
The residential status of various kinds of persons is decided in a different way. Likewise, the residential status of the assessee is decided each and every year while referring to the “previous year”. This may change from year to year. What is important here is that the status throughout the previous year and not in the current assessment year.
An individual may be a resident in the preceding year and a non-resident in India in another preceding year, for example: Mr. X is a resident in India in the preceding year which is 2018-19 and in the next year he becomes a “non-resident in India”.
Duty of Assessee: It is duty of the assessee’ to put relevant statistics, evidence and information before the Authorities of Income Tax backing the determination of “Residential status”.
Dual residential status: A dual residential status is permissible. An individual may be resident of more than one country in a relevant preceding year for example, Mr. A may be an Indian resident during the preceding year 2018-19 and may also be a “resident/non-resident” in US in the same preceding year. The advent of such a condition varies upon the following:
- the presence of the Residential status in countries under such considerations
- the distinct set of rules getting put down for purpose of determining residential status.
Determination of Residential Status of Different Person’s
The Income tax is indicted on every person. The term ‘Person’ has been well-defined under section 2(31), which includes:
- An individual
- Hindu Undivided Family (HUF)
- Local authority
- Every other artificial juridical person not included in the above categories
Therefore, it is necessary to ascertain the residential status of the above-mentioned different categories of persons.
Types of Residential Status
The following fundamental rules must be adhered to while ascertaining the residential status of an Assessee:
- Residential status is ascertained for each type of persons individually and separately for example, there are distinct set of rules for deciding the residential status of a person and different rules for companies, etc.
- Residential status is constantly ascertained for the preceding year because we must determine the aggregate income of only the preceding year.
- Residential status of an individual is to be ascertained for every preceding year because it may vary every year. For example, X, who is an Indian resident in the year 2017- 18 which is considered the preceding year, could become a “non-resident” in the previous year 2018-19.
- If an individual is an Indian resident in a preceding year related to an assessment year in regard of any basis of income, he shall be considered to be a resident in India in that preceding year which is pertinent to the current assessment year in reverence of each of his sources of income.
- An individual can be a resident of one or more countries for any preceding year. For example, If A is an Indian resident for the previous year i.e., 2017-18, it will not imply that he cannot be a resident of any other country for that same preceding year.
- It is the responsibility of the assessee to put all relevant facts before the assessing officer to allow him to ascertain his appropriate and accurate residential status.
An assessee can be classified into the subsequent residential status during the preceding year:
- Resident in India
- Non-Resident in India
A resident person and HUF are further sub-categorized into the following:
- Resident and Ordinarily Resident
- Resident but Not-ordinarily Resident
The “residential status” of a person for the objective of taxation is decided on the foundation of his bodily presence in India for the duration of the preceding year (April 1 to March 31) and the preceding previous years. A person is deemed to be an Indian resident if he is:
- “Physically present in India for a period of 182 days or more in the previous year”
- “Physically present in India for a period of 60 days or more during the relevant previous year and 365 days or more in aggregate in four preceding previous years”
If an individual does not fulfil any of the two conditions mentioned above will be considered a non-resident in India for the objective of taxation in India. A resident person is additionally categorized into ‘Resident but not Ordinarily Resident’ if:
- “His stay in India is of 729 days or less in previous 7 years”
- “He was considered as ‘non-resident’ in 9 out of previous 10 years”
2. Hindu Undivided Family (HUF):
A Hindu Undivided Family is believed to be resident in India if the control and administration of HUF is in India. A resident Hindu Undivided Family is further categorized into ‘Resident but not Ordinarily Resident’ if:
- “Stay of Karta in India is 729 days or less in previous 7 years”
- “Karta was considered as ‘non-resident’ in 9 out of the previous 10 years. If the control and management of HUF are situated wholly outside India, then HUF shall be treated as non-resident”
An Indian Company is always considered as a resident in India. But, in the case of a Foreign Company, it will be regarded as a resident in India only if the “Place of Effective Management” (POEM) of that foreign company is situated in India. If Place of Effective Management of Foreign Company is beyond India, then it will be considered as a non-resident in India.
4. Every other Person:
In the situation of every other person, which is, Firm/BOI/AOP, they will be considered as a resident in India if the control and supervision of person is in India. If it is located outside of India, then the status will be considered as non-resident. It must be stated that if an individual is a resident in India in a preceding year in regard of any of his source of income, he is considered to be an Indian resident in regard of all his other sources of income. An assessee is not permitted to obtain separate residential status for his various sources of income. So, before determining the income during the year, it is very crucial to assess the residential status of the assessee for the duration of the preceding year.
“Origin, Nationality, place of birth, domicile” does not play a crucial role in the computation of Income Tax. If an individual who is a citizen of Indian can be non- resident and the individual who is not an Indian citizen and if he is residing in India and satisfying the conditions of being a resident then as an eye of Income Tax he can be a resident of India and will be taxable in nature.
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