UNIT 2

SCOPE OF TOTAL INCOME AND RESIDENTIAL STATUS

2.1 SCOPE OF TOTAL INCOME (SEC.5)

Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes. Income can be Income from any source which (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises to him outside India during such year .

Table explaining Scope of total Income under section 5 of Income Tax Act, 1961

Note-

Explanation 1 & 2:-

Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

Key Takeaways:

1)  Section -5 of Income Tax Act, 1961 provides Scope of total Income in case of of person who is a resident, in the case of a person not ordinarily resident in India and person who is a non-resident which includes.

2)  Income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

2.2 RESIDENTIAL STATUS (SEC.6) FOR INDIVIDUAL ASSESSEE

The Income Tax Act, 1961, (Act) to consolidate and amend the law relating to income tax. However, not everyone is liable to pay taxes on income under the Act. The Act makes certain exceptions and exempts certain kind and extent of income from taxation. As per Section 2(31) of the Act, defines the term “Person” for whom we will assess the income. Further, those who are liable to pay tax and whose incomes are assessed under the Act are known as “Assessees” and the same has been defined under section 2(7) of the Act. Also for determining the tax liability of the Assessees, the same has been further categorise on the basis of Residential Status.

Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person. An Indian, who is a citizen of India can be non-resident for Income-tax purposes, whereas an American who is a citizen of America can be resident of India for Income-tax purposes, as per the Income Tax Act, 1961. Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

Further it is to be note that the residential status of different types of persons viz an individual, a firm, a company etc is determined differently. Here, we have discussed about how the residential status of an individual taxpayer can be determined for the Previous Year i.e 2019-2020 or Assessment Year 2020-2021.

Determining the Residential Status of an Individual

Under the Act, Residential Status of an individual is either Resident of India or Non-Resident of India. The first thing that needs to be kept in mind is that the residential status is determined with respect to the previous financial year – hence, an individual may be a resident in one year and a non-resident in the next year.

As per Section 6(a) of the Act which mandates that an individual is said to be resident of India in any previous year, if he satisfy any of the following primary conditions, otherwise the person become Non-Resident of India, if an individual-

i. Is in India in previous year for 182 days or more; or

ii. Is in India in previous year for 60 days or more and 365 days or more in the immediate 4 preceding Financial Year.

Further Act provides certain exemption to following persons to comply only clause (i) to become resident in India:

a. Citizen of India who leaves India for taking up employment outside India;

b. Indian Citizen who leaves India as a member of the crew of Indian Ship;

c. Citizen of India or to a person of Indian origin who visit India ;

Further, Clause (a) of Section 6 of the Act, a Resident of India can be termed as Resident-Ordinary Resident of India, if an individual satisfy all the following two conditions, otherwise he can be termed as Resident-Not Ordinary Resident of India, if

i. An individual is a resident in India for 2 years out of 10 previous years preceding current financial year; and

ii. An individual is in India for 730 days or more in 7 previous years preceding current financial year.

Amendment have also been made vide Finance Act, 2020, From F.Y. 2020-21, a citizen of India or a person of Indian origin who leaves India for employment outside India during the year will be a resident and ordinarily resident if he stays in India for an aggregate period of 182 days or more. However, this condition will apply only if his total income (other than foreign sources) exceeds Rs 15 lakhs.

The Finance Act, 2020, has also introduced the concept of “Deemed Resident” whereby all such citizen of India who are not taxable in any other country by reason of residence or domicile or any other criteria of similar nature and such individuals have income exceeding Rs. 15 lakhs from sources in India and from business controlled from India or Profession set up in India. With effect From F.Y. 2020-202 1 deemed resident will be a resident and ordinarily resident in India.

Example: Mr. D, who is business head for Asia Pacific regions for a private firm. Mr. D was born and brought up in India. He has to travel to various locations of the continent for business purposes. He has spent 200 days travelling in the current financial year. Also, he has been travelling abroad from the past two years and has stayed out of India for about 400 days in this period.

Let us evaluate whether Mr. D was resident in India for the current financial year.

Solution:

Condition I (Resides in India for a minimum of 182 days in a year) – Not satisfied

To figure out the resident status of Mr. D, you will understand that he has only spent 165 days in India during the current financial year as he spent 200 days travelling. Hence, he does not satisfy the first condition.

Condition II (Resides in India for a minimum of 365 days in the immediately preceding four years and for a minimum of 60 days in the current financial year) – Satisfied

However, It is given that Mr. D has been travelling only from the past two years. Also, it is said that he has travelled for 400 days in the past two years. That means, in the past four years, Mr. D has stayed in India for more than 365 days (1061 days).

Hence, Mr. D has resided for atleast 60 days in the current financial year and for more than 365 days in the immediately preceding four financial years. Therefore, Mr. D satisfies the second condition.

Hence, if any one of the above two condition is satisfied he is a resident taxpayer.

Resident and Ordinarily Resident (ROR) and

Resident but Not Ordinarily Resident (RNOR)

There is a further classification under the resident status – Resident and Ordinarily Resident (ROR) and Resident but Not Ordinarily Resident (RNOR).

In addition to the basic conditions, if both the below conditions are met, he will be a ROR:

In above example Mr. D has satisfed as resident of India. Let us further classify whether Mr. D is ROR or RNOR

If both the additional conditions are satisfied then Mr. D is ROR

Considering the example, Mr. D was travelling out of India since past 2 years only. Hence, the first condition is satisfied as he resided in India for atleast 2 years out of the immediate previous 10 years. Also, he has fulfilled the criteria of residing for at least 730 days in seven immediately preceding years. Therefore, he can be considered as Resident Ordinarily Resident.

Tax Incidence in India

A Resident Ordinary Resident is subject to tax on his global income in India. Resident Not Ordinary Resident and Non-Residents are generally subject to tax in India only in respect of India source income that is, income received, accruing or arising in India or deemed to be received, accrued or arisen in India.

Salary received in India or for services provided in India, rental income from a house property in India, capital gains on sale of assets in India — be it shares or house property, income from fixed deposits or savings bank account in India are instances of income which would be taxed in the hands of not just tax residents of India, but also Resident Not Ordinary Resident and Non-Residents.

Conclusion

In order to enjoy tax benefits through Non-Resident Status, individuals visiting India on a business trip should not stay for more than 181 days during one previous business year and their total stay in the previous four years should not exceed more than 364 days.

If individuals, having been in India for more than 365 days during four years preceding the relevant previous year, and stay for more than 60 days in the previous year, they should plan their visit to India in such a manner that their total stay in India falls under two previous years. Such persons can come to India any time in the first week of February and stay till May 29.

Key Takeaways:

1)  Residential status is a term coined under Income Tax Act, 1961, and has nothing to do with nationality or domicile of a person.

2)  Residential status of a person depends upon the territorial connections of the person with this country, i.e., for how many days he has physically stayed in India in any particular Financial Year.

References:

1)  Income Tax Act with Gist of Supreme Court Rulings Book (Bharat Law House.)

2)  Income Tax Law & Accounts For B.Com Vth Semester of Calicut University  (English, Paperback, Dr. H.C. Mehrotra, Dr. S.P. Goyal)