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Unit 2: Residential Status and Taxation

2.7 Summary Notes

Tax incidence on an assessee depends on his residential status. Whether an income earned
by a foreign national in India or outside India taxable in India depends on the residential
status of the individual, rather than on his citizenship. Therefore, the determination of the

residential status of a person is very significant in order to find out his tax liability.
There are three residential statuses that we will study in detail this unit namely the Residents
also referred to as Resident & Ordinarily Residents, the Resident but not Ordinarily
Residents and the non-residents.
Residential status of an assessee is to be determined in respect of each previous year as it
may vary from previous year to previous year.
An assessee may enjoy different residential status for different assessment years. For
instance, an individual who has been regularly assessed as resident and ordinarily resident
has to be treated as non-resident in a particular assessment year if he satisfies none of the

conditions of section 6(1).
Under section 6(1), an individual is said to be resident in India in any previous year, if he
satisfies any one of the conditions like he has been in India during the previous year for a

total period of 182 days or more, or he has been in India during the 4 years immediately
preceding the previous year for a total period of 365 days or more and has been in India
for at least 60 days in the previous year. If the individual satisfies any one of the conditions

mentioned above, he is a resident. If both the above conditions are not satisfi ed, the
individual is a non-resident also referred to as NRI.

Only individuals and HUF can be resident but not ordinarily resident in India. All other
classes of assesses can be either a resident or non-resident.

An individual is said to be a resident and ordinarily resident if he satisfies both the
following conditions:
(i) He is a resident in any 2 out of the last 10 years preceding the relevant previous year,
and
(ii) His total stay in India in the last 7 years preceding the relevant previous year is
730 days or more.
If the individual satisfies both the conditions mentioned above, he is a resident and

ordinarily resident but if only one or none of the conditions are satisfied, the individual is

a resident but not ordinarily resident.
Every Indian company is resident in India irrespective of the fact whether the control and
management of its affairs is exercised from India or outside. But a company, other than an
Indian company, would become resident in India only if the entire control and management
of its affairs is in India. The control and management of the affairs of company are said to
be exercised from the place where the director’s meetings (not shareholders’ meetings) are
held, decisions taken and directions issued.
As per section 5, incidence of tax on a taxpayer depends on his residential status and also on
the place and time of accrual or receipt of income. In order to understand the relationship
between residential status and tax liability, one must understand the meaning of “Indian
income” and “foreign income”.

The scope of total income of an assessee depends upon the following three important
considerations like the residential status of the assessee, the place of accrual or receipt of
income, whether actual or deemed and the point of time at which the income had accrued
to or was received by or on behalf of the assessee.

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