Wednesday, 1 January 2020

Unit 2: Residential Status and Taxation

0 comments

Unit 2: Residential Status and Taxation


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 signifi cant in order to fi nd 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 satisfi es 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 satisfied, 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.


AOP: It is an entity or a unit of assessment which is includes two or more persons who join for a common purpose with a view to earn an income.

Company: It is an association or collection of individual real persons and/or other business entities, each of which provide some form of capital.

Hindu Undivided Family (HUF): It is a legal term related to the Hindu Marriage Act.

Incidence of tax: Tax incidence means the fi nal burden of tax.

In other words, incidence of tax is on person who actually bears or pays the fi nal tax liability.

Income: It is the consumption and savings opportunity gained by an entity within a specifi ed timeframe that is generally expressed in monetary terms.

Partnership firm: It is a relation between two or more persons who have agreed to share the profi ts of a business carried on by all of them or any of them acting for all.

Receipt: The receipt of income refers to the first occasion when the recipient gets the money under his control.

Remittance: Remittance is transmission of income after its first receipt.

Royalty: It is a consideration which also includes any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head ‘Capital gains’.

No comments:

Post a Comment