Residence of Individuals under Indian Income-tax Act
[Submitted by : Bhavik Mehta & Kartik Badiani
B. com, CA Articled Students,
Mumbai, Maharashtra]
March 18, 2009
Introduction
Residence is a vast topic in itself. Due to restriction of space, we have restricted the scope of this article to residence of individuals only.
Why discuss ‘Residence’?
There should be a base for the government for taxing any income of a person. Indian government has taken 3 bases for levy of income-tax in India:
- Residence.
- Source of Income.
- Receipt of Income.
For the levy of income-tax, Indian Government can tax the global income of Indian tax residents; or the Indian sourced income & income received in India of tax non-residents of India.
Foreign sourced income of the Indian residents becomes taxable in India. Conversely, foreign sourced income of the non- residents is not taxable in India. Thus, a person will always try to become a non- resident in India for the purpose of taxation. A person can become a non-resident by proper planning in advance. Viscount Sumner [Levene V. IRC 13 TC 486, 501 (HL)] has remarked: “It is trite law that His Majesty’s subjects are free, if they can, to make their own arrangements so that their cases fall outside the scope of the taxing Act.”
Therefore, it is very important to understand when does a person become resident in India. Let us discuss the Indian regulations for determining an individual’s residence.
Sec. 6 of the Indian Income-tax Act defines residence; sec. 5 gives the scope of income taxable in India for residents as well as non-residents; and Sec. 4 levies a charge of tax on the scope of total income as determined under sec. 5.
Part I
Residence in India (Sec. 6):
Sec. 6 (1) defines a resident individual. Sec. 2 (30) negatively defines a non-resident as
a person who is not a resident as per sec. 6 (1). If a person is resident under Sec. 6(1), then he can be either an ordinarily resident or not-ordinarily resident. Sec. 6 (6) defines a person who is not-ordinarily resident.
Foreign sourced income of a not-ordinarily resident which is not derived from a business controlled or profession set up in India is not taxable in India.
Sec. 6(1) – Conditions for becoming a resident:
There should be some criteria for judging whether a person is resident in India or not. Indian Income-tax Act has adopted the criteria of period of stay in India. The period of stay is counted as no. of days stay in India (date of arrival & date of departure both inclusive) in each Financial Year beginning from 1st April to 31st March (known as previous year under Indian Income-tax Act).
Sec. 6 (1) is reproduced below:
“6. For the purposes of this Act,
(1) An individual is said to be resident in India in any previous year, if he
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or
(b) [* * *]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
A person becomes resident in India if he is physically present in India for a substantial period of time during the relevant financial year. Sec. 6 (1) (a) defines substantial period as more than 181 days irrespective of his past stay in India.
This means the residential status has to be determined in each financial year i.e. each Financial Year is separate. A person can become a resident in one financial year & become a non-resident in subsequent financial year depending on his physical presence in India.
Alternatively, substantial stay is also determined by sec. 6 (1) (c). Sec. 6 (1) (c) defines substantial stay considering a person’s past stay. As per sec. 6 (1) (c), if a person is present in India for more than 364 days in 4 years preceding the previous year, then the substantial period during the financial year is reduced from more than 181 days to more than 59 days.
We hope that upto now, you have understood the basic conditions for becoming a resident. One must clear his basic concepts first, then proceed further towards complex issues.
Initially no benefit was available to NRIs. Subsequently in Finance Act, 1978, an explanation was inserted that 60 days period in sub-clause (c) of section 6 (1) shall be increased to 90 days in case of an individual, being a citizen of India, who is rendering service outside India & who is or who has been in India on leave or vacation in the previous year.
The amendment did not give relief to persons leaving India in previous year but not visiting India during the same financial year.
Thus, in Finance Act, 1982, the benefit was extended to persons leaving India during the previous year. But the then benefit given to persons leaving India was more than that available to person visiting India during the previous year. Therefore, with effect from 1st April, 1995 the benefit was equated for both the categories of persons and current explanation to section 6 (1) is as follows:
“Explanation: In the case of an individual,
(a) being a citizen of India, who leaves India in any previous year [as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words sixty days, occurring therein, the words one hundred and eighty-two days had been substituted;(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words sixty days, occurring therein, the words one hundred and eighty-two days had been substituted.”
Explanation (a) and (b) to section 6 (1) provide relief to a special category of individuals.
Explanations (a) can be bifurcated into following 2 persons:
1. A citizen of India, who leaves India in any previous year [as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958)
&
2. A citizen of India , who leaves India in any previous year for the purposes of employment outside India
Expln (a) applies only to Indian citizens. Also, for getting relief under Expln (a) individual must leave India during the relevant financial year. The relief is only available for the year in which he goes outside India.
According to the current explanation, the relief is: if he goes outside for employment then the second condition of more than 364 days in 4 years does not apply. Thus, only the first condition of more than 181 days will be applicable.
This means that in order to claim the benefit, person leaving India other than as a member of the crew of an Indian ship must leave India for the purposes of employment.
From second year, he will become ‘a person visiting India’ and therefore, expln (b) will be applicable. Thus, again second condition of more than 364 days in 4 years would not apply. Only the first condition of more than 181 days will be applicable.
However, it should be noted here that the above mentioned benefit is applicable for Indian Citizens. For persons who are not Indian Citizens, Sec. 6(1)(c) will be applicable i.e. he will get 59 days to meet/visit his relatives, parents who are staying in India if his stay in India in past 4 years is more than 365 days.
Part II
Not ordinarily resident (NOR) (Sec. 6 (6):
A person who is a resident as per sec. 6(1) can either be an ordinarily resident or a not ordinarily resident. Sec. 6 (6) lays down conditions for becoming a not ordinarily resident. Foreign sourced income of a NOR is not taxable in India (unless it is derived from a business controlled or a profession set up in India).
Presently the section reads as follows:
“(6) A person is said to be not ordinarily resident in India in any previous year if such person is
(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less”
The above section can be bifurcated in two parts:
1. an individual who has been a non-resident in India in nine out of the ten previous years preceding that year,
Or
2. an individual who has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.
Both the above conditions are based on past stay of the individual.
Condition 1:
This condition speaks about residence of an individual in past ten years. To implement this condition, one has to first go back to section 6(1) to determine whether the assessee was a resident of India in how many years out of past 10 years.
To be a Not Ordinarily resident, he has to be non resident in nine out of past 10 years by applicability of section 6(1) as explained above.
This would mean that if, for current year he is ruled resident by applicability of section 6(1) and he was a resident in two or more than two years out of past 10 years then he would be regarded as a resident and ordinarily resident.
Condition 2:
This condition speaks about an assessee’s number of days stay in preceding 7 years. To satisfy this condition an individual has to be present in India for 729 days or less; irrespective of his residential status in those seven years.
Of course, if he is a resident in 4 or more than 4 preceding years out of past seven years then his stay will exceed 728 days.
The section represented and explained above is as amended by Finance Act, 2003 w.e.f. 01.04.2004.
Prior to amendment, the section read as follows :
(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is—
(a) an individual who has not been resident in India in nine out of the ten previous years preceding that year, or has not during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and thirty days or more ;
The above section can also be bifurcated in two parts:
1. an individual who has not been resident in India in nine out of the ten previous years preceding that year,
Or
2. an individual who has during the seven previous years preceding that year not been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or more.
The above words primarily seem to be same as the amended section.
However, they were interpreted as :
Condition 1:
Here, the words used are ‘not been resident in India in 9 out of 10 years’. Therefore, to be a Not Ordinarily resident, he has to be resident either 1-8 or all 10 years out of past 10 years by applicability of section 6(1) as explained above.
Condition 2:
To satisfy this condition an individual has to be present in India for 729 days or less; irrespective of his residential status in those seven years.
The above interpretation was against the intention of the law. The intention of the law was therefore made clear by amending the section. After the amendment, only one interpretation is possible which is what is intended by law.
The above explanation summarises the residence of an individual under the Indian Income Tax Act, 1961.
