The determination of an assessee’s residential status is a cornerstone of income tax law, fundamentally shaping the scope of income that becomes taxable in a particular jurisdiction. Unlike concepts such as citizenship or domicile, which are typically permanent or difficult to change, residential status for income tax purposes is dynamic, assessed for each financial year (or “previous year” in Indian tax parlance) and based primarily on the duration of an individual’s stay or the control and management of an entity’s affairs. This annual assessment is critical because it directly dictates whether an assessee’s global income, or only income sourced within the country, is brought into the tax net.

The nuances involved in classifying an assessee as a Resident, a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident (NR) are intricate and vary significantly depending on the type of assessee – whether an individual, a Hindu Undivided Family (HUF), a company, or other entities. For individuals, the criteria primarily revolve around physical presence in India, while for entities, it centers on where key decisions are made or where their affairs are controlled. The implications of this classification are profound, influencing not only the amount of tax payable but also the applicability of various tax treaty benefits, exemptions, and deductions. Understanding these rules is therefore paramount for effective tax planning and compliance for anyone with income streams connected to India, irrespective of their nationality or origin.

Determination of Residential Status

The Income Tax Act, 1961, categorizes assessees into three primary groups for each previous year: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR). The criteria for determining these statuses vary based on the nature of the assessee.

A. Residential Status of an Individual

For an individual, the determination process is bifurcated: first, establishing whether they are a ‘Resident’ or a ‘Non-Resident,’ and then, if they are a ‘Resident,’ further classifying them as ‘Ordinarily Resident’ or ‘Not Ordinarily Resident.’

1. Resident vs. Non-Resident (Basic Conditions)

An individual is considered a ‘Resident’ in India for a previous year if they satisfy at least one of the following two basic conditions:

  • Condition A: They have been in India for a period or periods amounting in all to 182 days or more during the previous year.
  • Condition B: They have been in India for a period or periods amounting in all to 60 days or more during the previous year AND have been in India for 365 days or more during the four previous years immediately preceding the relevant previous year.

If an individual fails to satisfy both of these basic conditions, they are classified as a ‘Non-Resident’ for that previous year.

Exceptions to Condition B (60-day rule): The 60-day period in Condition B is extended to 182 days in certain specific cases. This means that for individuals falling under these exceptions, only Condition A (182 days) is relevant for determining residency; they cannot become a resident merely by satisfying Condition B. These exceptions are:

  • Indian Citizen leaving India for Employment or as a Crew Member: An Indian citizen who leaves India during the previous year as a member of the crew of an Indian ship or for the purpose of employment outside India.
  • Indian Citizen or Person of Indian Origin (PIO) visiting India: An Indian citizen or a Person of Indian Origin who, being outside India, comes on a visit to India during the previous year. A Person of Indian Origin is defined as an individual or either of whose parents or any of whose grandparents were born in undivided India.

Important Amendments by Finance Act, 2020 & 2021 for Indian Citizens/PIOs Visiting India:

The Finance Act, 2020, introduced significant changes, further refined by the Finance Act, 2021, particularly impacting Indian citizens and Persons of Indian Origin (PIOs) with substantial income from India.

  • Amendment for Indian Citizens/PIOs with Indian Income exceeding INR 15 Lakhs (Effective from FY 2020-21): For an Indian citizen or a Person of Indian Origin visiting India, if their total income (excluding income from foreign sources) during the previous year exceeds INR 15 Lakhs, then the 60-day period in Basic Condition B is replaced by 120 days. This means they become a resident if they are in India for 120 days or more during the previous year AND 365 days or more during the four preceding previous years. If their Indian income is INR 15 Lakhs or less, the original 182-day exception continues to apply.

  • Deemed Resident Provision (Section 6(1A)) – Introduced by Finance Act, 2020 (Effective from FY 2020-21): A new provision was inserted, stating that an Indian citizen shall be deemed to be a resident in India in any previous year if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criterion of a similar nature. This provision targets individuals who, due to their transient nature or specific legal circumstances, might otherwise escape tax residency in any country, effectively becoming “stateless for tax purposes.” This rule applies irrespective of their physical presence in India.

2. Ordinarily Resident vs. Not Ordinarily Resident (Additional Conditions)

Once an individual is determined to be a ‘Resident’ based on the basic conditions, they must then satisfy two additional conditions to be classified as ‘Resident and Ordinarily Resident (ROR)’. If a resident fails to meet even one of these additional conditions, they are classified as ‘Resident but Not Ordinarily Resident’ (RNOR).

The two additional conditions are:

  • Additional Condition 1: They have been a resident in India for at least 2 out of the 10 previous years immediately preceding the relevant previous year.
  • Additional Condition 2: They have been in India for a period or periods amounting in all to 730 days or more during the 7 previous years immediately preceding the relevant previous year.

An individual is an ROR only if they satisfy both Additional Condition 1 and Additional Condition 2. An individual is an RNOR if they are a resident but fail to satisfy either Additional Condition 1 or Additional Condition 2 or both.

Deemed RNOR Provisions (Introduced by Finance Act, 2020 & 2021):

The Finance Act, 2020, significantly expanded the categories of individuals who will automatically be treated as RNOR, regardless of the two additional conditions:

  • RNOR by virtue of 120-day rule: An Indian citizen or a Person of Indian Origin who becomes a resident in India based on the relaxed 120-day rule (i.e., stay in India for 120 days or more but less than 182 days during the previous year, and 365 days or more in the preceding four years), and whose total income (other than foreign sources) exceeds INR 15 Lakhs, will always be treated as RNOR. This ensures that while they become tax residents, their foreign income not connected to Indian business/profession is not taxed.
  • RNOR by virtue of Deemed Resident Status (Section 6(1A)): An Indian citizen who is deemed to be a resident in India under Section 6(1A) (i.e., not liable to tax in any other country due to domicile, residence, or similar criteria) will always be treated as RNOR. This ensures that even though they are brought into the Indian tax net, their global income is not fully taxed if it has no connection to India.

This complex interplay of days of stay, income thresholds, and specific categories of individuals (Indian citizens/PIOs) means that the determination of an individual’s residential status requires meticulous calculation and understanding of recent amendments.

B. Residential Status of a Hindu Undivided Family (HUF)

An HUF is considered a ‘Resident’ in India if the control and management of its affairs are wholly or partly situated in India during the previous year. If the control and management of its affairs are wholly situated outside India, the HUF is treated as a ‘Non-Resident.’

Once an HUF is determined to be a ‘Resident,’ its status as ‘Ordinarily Resident’ or ‘Not Ordinarily Resident’ depends on the residential status of its Karta (the manager of the HUF).

  • Ordinarily Resident (ROR) HUF: An HUF is an ROR if the Karta of the HUF satisfies both the additional conditions (as applicable to an individual, i.e., resident in India for at least 2 out of 10 preceding years AND stay in India for 730 days or more during 7 preceding years).
  • Not Ordinarily Resident (RNOR) HUF: An HUF is an RNOR if the Karta of the HUF fails to satisfy even one of the additional conditions.

C. Residential Status of a Company

The residential status of a company is determined differently:

  • Resident Company: A company is considered a ‘Resident’ in India in any previous year if:
    • It is an Indian company, OR
    • Its Place of Effective Management (POEM) in that year is in India.
      • Place of Effective Management (POEM): POEM means a place where key management and commercial decisions that are necessary for the conduct of the entity’s business as a whole are, in substance, made. For a company engaged in an “active business outside India,” the POEM is presumed to be outside India if the majority of board meetings are held outside India. Otherwise, a more detailed examination of where key decisions are actually made is undertaken.
  • Non-Resident Company: A company is a ‘Non-Resident’ if it is not an Indian company and its POEM is outside India.

D. Residential Status of Other Assessees (Firm, AOP, BOI, Local Authority, Artificial Juridical Person)

For a Firm, Association of Persons (AOP), Body of Individuals (BOI), Local Authority, or Artificial Juridical Person, the rule is straightforward:

  • Resident: Such an entity is considered a ‘Resident’ in India if the control and management of its affairs are wholly or partly situated in India during the previous year.
  • Non-Resident: Such an entity is a ‘Non-Resident’ if the control and management of its affairs are wholly situated outside India.

These entities are not further classified as ‘Ordinarily Resident’ or ‘Not Ordinarily Resident.’

Incidence of Residence on Tax Liability (Scope of Total Income)

The residential status of an assessee is the primary determinant of the scope of income that is chargeable to tax in India. Section 5 of the Income Tax Act, 1961, outlines this crucial link. The principle is that income can be taxed in India if it is received in India, accrues or arises in India, or accrues or arises outside India but is taxable based on the assessee’s residential status.

A. Resident and Ordinarily Resident (ROR)

An individual or HUF classified as Resident and Ordinarily Resident (ROR) is liable to tax on their global income. This means:

  • Income received or deemed to be received in India during the previous year.
  • Income which accrues or arises or is deemed to accrue or arise in India during the previous year.
  • Income which accrues or arises to them outside India during the previous year.

For an ROR, the source of income (whether within India or outside India) and the place of its receipt (whether within India or outside India) are irrelevant. All income, regardless of its geographical origin, is taxable in India. This is the broadest scope of taxation.

B. Resident but Not Ordinarily Resident (RNOR)

An individual or HUF classified as Resident but Not Ordinarily Resident (RNOR) has a restricted scope of taxation compared to an ROR. They are liable to tax in India on:

  • Income received or deemed to be received in India during the previous year.
  • Income which accrues or arises or is deemed to accrue or arise in India during the previous year.
  • Income which accrues or arises to them outside India IF it is derived from a business controlled in India or a profession set up in India.

Any other income that accrues or arises outside India and is not derived from a business controlled in India or a profession set up in India is not taxable for an RNOR. For example, rental income from a property in the USA not connected to an Indian business would not be taxable for an RNOR. This category is often beneficial for NRIs returning to India for a few years or foreign nationals working temporarily in India, as it shields their foreign non-business income from Indian taxation.

C. Non-Resident (NR)

A Non-Resident (NR) has the narrowest scope of taxation in India. They are liable to tax in India only on:

  • Income received or deemed to be received in India during the previous year.
  • Income which accrues or arises or is deemed to accrue or arise in India during the previous year.

Any income that accrues or arises to an NR outside India, and is also received outside India, is not taxable in India. For a non-resident, the tax liability is solely linked to the income’s source or first receipt within India.

D. Deemed Accrual or Receipt in India

To broaden the tax net, the Income Tax Act includes specific provisions that deem certain incomes to accrue or arise in India (Section 9) or be received in India (Section 7), even if they originate or are initially received elsewhere. These provisions significantly impact the tax liability of NRs and RNORs, as such income automatically falls within the taxable scope for them. Examples include:

  • Income from Business Connection in India: Any income accruing or arising, whether directly or indirectly, through or from any business connection in India.
  • Income from Property/Assets in India: Income from any property situated in India, or from any asset or source of income in India, or from the transfer of a capital asset situated in India.
  • Salaries: Salaries earned in India (for services rendered in India), or salaries paid by the Government of India to an Indian citizen for services rendered outside India.
  • Dividends: Dividends paid by an Indian company.
  • Interest, Royalties, Fees for Technical Services (FTS): Interest, royalties, or FTS payable by a resident, or by a non-resident if payable for the purpose of a business or profession carried on by the non-resident in India.

These ‘deeming’ provisions ensure that economic activities having a substantial nexus with India are brought within the tax jurisdiction, irrespective of the residential status of the recipient or the exact location of the transaction.

The determination of residential status is an intricate annual exercise that forms the bedrock of income tax assessment in India. It is a critical distinction from nationality or domicile, focusing instead on the actual presence or the locus of control and management. For individuals, this involves a careful count of days spent in India, coupled with consideration of specific exceptions and recent amendments that introduce income thresholds and the concept of “deemed residency” for Indian citizens. The classification as a Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), or Non-Resident (NR) dictates the extent to which an assessee’s global income is subject to Indian taxation.

The incidence of residence on tax liability is profound. An ROR is taxed on their worldwide income, emphasizing India’s jurisdiction over their entire economic activity. An RNOR enjoys a more limited tax liability, primarily on Indian-sourced income and foreign income connected to an Indian business or profession, a status often beneficial for individuals with international ties returning to India. Non-residents face the most restricted tax exposure, being taxed only on income that accrues, arises, or is received, or deemed to accrue, arise, or be received, in India. This tiered approach is fundamental to India’s tax system, aiming to balance revenue generation with attracting foreign investment and managing the tax burden on its diaspora.

The continuous evolution of residential status rules, particularly the recent amendments introduced by the Finance Act, 2020 and 2021, reflects the government’s efforts to address issues of tax avoidance and expand the tax base in an increasingly globalized world. These changes, such as the 120-day rule for high-income Indian citizens/PIOs and the “deemed resident” provision for stateless individuals, underscore the complexity and the need for individuals and entities with cross-border income to meticulously assess their residential status each year. Given the significant implications for tax liability and compliance, seeking professional advice is often indispensable to navigate these intricate provisions effectively.