Residential Status Under Section 6 Of Income Tax Act ?

Introduction

Residential Status Under Section 6 of Income Tax, To understand residential status, we must first look at the term Residence. Baylay J. states that residence refers to the place where a person eats, drinks, and sleeps, or where their family or staff do the same. Blackburn, J. agrees, saying a man’s residence is where he sleeps. However, this definition doesn’t apply to companies, as they cannot eat or sleep but can conduct business. Thus, the term has a broader meaning in the Income Tax Act and other laws, relating to where a person lives or operates a business, which determines their residential status.

Types of a person Depending upon Residential status

A person can be classified based on their residential status as either a Resident in India or a Non-Resident (NR) in India. Additionally, some residents, specifically individuals and Hindu Undivided Families (HUF), can be further categorized into two groups: Resident and Ordinarily Resident (ROR) and Resident and Not Ordinarily Resident (RNOR).
There are specific rules to determine if someone is a Resident or Non-Resident in India. Different rules apply for various types of individuals: two tests for individuals, two for companies, and one for other entities like HUFs, partnerships, AOPs, BOIs, local authorities, and artificial juridical persons. Additionally, there are set criteria to classify a resident as either (1) Resident and ordinarily resident (ROR) or (2) Resident and not ordinarily resident (RNOR).

Residential status of an individual [section 6(1)]

An individual is considered a resident in India for the previous year if they meet one of these two criteria:
(1) He is in India for 182 days or more during the relevant Previous Year, or
(2) He is in India for 60 days or more during the relevant Previous Year AND has been in India for 365 days or more during four Previous Years immediately preceding the relevant Previous Year
An Individual who does not satisfy any of the two above conditions is Non-Resident in India during the Previous Year.
Exception
There are two types of exceptions:
one is for individuals with total income over INR 15 Lacs, where the 60 days condition is replaced by 120 days. The other is for certain individuals, like Indian citizens leaving for employment or crew members of ships, where the 60 days condition is replaced by 182 days. Additionally, Indian citizens living abroad with income under 15 Lacs can visit India without exceeding the limit.
If an Indian citizen or person of Indian origin lives outside India and earns more than fifteen lakh rupees from sources other than foreign income, they can visit India for 120 days instead of 60. They must also meet the requirement of being in India for 365 days over the last four years. According to Section 6(14), if this individual is not taxed in any other country due to their residence status, they will be considered a resident of India for tax purposes. Income from foreign sources refers to earnings from outside India, except for income from a business or profession based in India. This rule applies only if the individual is not paying taxes on their income abroad, such as those working in places like Dubai or Cayman Islands, even if they do not visit India at all in the relevant year.

Resident and ordinarily resident (ROR) And Resident and Not ordinarily resident
(RNOR) individual [Section 6(6)(a)] Further, an Individual who is Resident in India is of two types (1) Resident and ordinarily resident (ROR) (ii) Resident and Not ordinarily resident (RNOR)

An Individual is said to be Resident and Not ordinarily resident (RNOR) in India in any Previous Year if he satisfies one of the following two conditions:
(1) He is a non-resident in India in 9 out of the 10 Previous Years immediately preceding that year, or
(2) he is in India for a total period of 729 days or less during the 7 Previous Years immediately preceding relevant Previous Year
It is important to note that for fulfilling first condition, we have to apply Section 6(1) again for ten Previous Years immediately preceding the relevant Previous Year and decide whether in each year he was Resident of Non Resident.
It means an Individual is said to be Resident and ordinarily resident in India in any Previous Year if he does not satisfy both of the above two conditions or satisfies following two conditions:

1.He is resident in India for at least two out of ten Previous Years immediately preceding the relevant Previous Year, and.
2.he is in India for a total period of seven hundred and thirty days or more during the seven Previous Years immediately preceding relevant Previous Year.
The Apex Court of India in the case of Pradip J. Mehta v CIT, has held that an assessee will be “not ordinarily resident” in India within the meaning of Section 6(6)(a) if he was not resident for 9 out of 10 years. A person would become an ordinary resident only (a) if he is resident in India for 2 out of 10 preceding years, and (b) he had been in India for at least 730 days or more in the previous seven years.

In Example , we determined that Mr. A, a law graduate from Panjab University, traveled abroad for the first time for study or business on August 13, 2020, and was a resident of India during the previous year 2020-21. We will now assess if he was a Resident and Ordinarily Resident (ROR) or a Resident and Not Ordinarily Resident (RNOR) for that year.
Since he went for the first time, it means he spent 365 days in India each year, making him a resident for the ten years before the relevant year (this meets the first requirement for being a Resident and ordinarily resident).He meets the second requirement to be considered a Resident and ordinarily resident (ROR) because he spent over 730 days in India during the seven years before the Previous Year, making him a Resident and ordinarily resident (ROR) for the Previous Year 2020-21.

Residential status of A Hindu Undivided Family (HUF), a partnership firm or association of persons (AOPs) [Section 6(2)]

According to Section 6(2) of Income-tax Act, 1961 these entities are resident in India in any Previous Year if the control and management of their affairs is wholly or partly in India during that year. Therefore, these entities are said to be Non-resident (NR) in India during the Previous Year if the control and management of their affairs is wholly outside India during that year.

The control and management of its affairs	Residential status of A Hindu Undivided Family (HUF), a partnership firm or association of persons (AOPs)
wholly in India	Resident (R)
Partly in India partly outside India	Resident (R)
Wholly outside India	Non-Resident (NR)

Resident and ordinarily resident (ROR) And Resident and Not ordinarily resident (RNOR) HUF (Section 6(6)(b)]

Further, HUF which is resident in India during Previous Year is further of two types (1) Resident and ordinarily resident (ROR) (ii) Resident and Not ordinarily resident (RNOR). The resident HUF is said to be Resident and Not ordinarily resident (RNOR) in India in any Previous Year if he satisfies one of the following two conditions :

1.If Karta is non-resident in India in nine out of the ten Previous Years preceding relevant Previous Year, or
2.If Karta is in India for a total period of seven hundred and twenty-nine days or less during the seven Previous Years immediately preceding relevant Previous Year
Hence, the HUF is said to be Resident and ordinarily resident in India in any Previous Year if Karta does not satisfy any or both of the above two conditions or satisfies following two conditionsYear
1.If Karta is resident in India for at least two out of ten Previous Years immediately preceding the relevant Previous Year, and
2. If Karta is in India for a total period of seven hundred and thirty days or more during the seven Previous Years immediately preceding relevant Previous Year

Residential status of A company Section 6(3)

According to section 6(3) of Income-tax Act, 1961 a company is said to be resident in India in any Previous Year, if
1.it is an Indian company, or
2.its place of effective management, in that year, is in India.
place of effective management”: means a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made.’
For deciding Residential status, a company is of two types: (i) Indian company and (ii) Foreign company. Indian company is always resident in India even if control and management of its business affairs is from outside India or even if shareholders of Indian company having more than 51% voting rights are non-resident. Whereas Foreign company whose turnover or gross receipt in the previous year is more than 750 crore is resident in India if its place of effective management in that year is in India. Whereas Foreign Company whose turnover or gross receipt in the previous year is 750 crore or less is always non-resident in India even if its place of effective management in that year is in india

A resident company can never be Resident and ordinarily resident (ROR) or Resident and Not ordinarily resident (RNOR):

It is important to note that like firm/association of persons (AOPs), a company Resident in India is further not divided into (1) Resident and ordinarily resident (ROR) and (ii) Resident and Not ordinarily resident (RNOR) in India during relevant Previous Year

Residential status of Every other person [Section 6(4)]
According to section 6(4) of Income-tax Act, 1961 every other person (means Body of individual (BOIs), A Local Authority and Every artificial and juridical person) to be resident in India in any Previous Year, if control and management of its affairs is situated wholly or partly in India during the relevant Previous Year.

Conclusion

In summary, knowing your residential status is important for figuring out your tax obligations in India. The Income Tax Act divides people into residents and non-residents, with further distinctions between ordinary and not-ordinary residents. Each group has different tax rules, so it’s vital to correctly identify your residential status to follow tax laws. By understanding these details, taxpayers can manage their income tax more effectively and ensure they comply with regulations.

FAQ ?

What is the residential status of income tax?