THE LINBUZ INSIGHTS
KNOW YOUR RESIDENTIAL STATUS - YOUR TAX DEPENDS ON IT
Residential status is a term coined under the Income Tax Act and it is not connected with nationality and the domicile of a person. An Indian who is a citizen of India may be a Non Resident for Income Tax purposes and a person who is a citizen of a foreign country can be a resident of India for Income Tax purpose.
Determination of a residential status of a person is very critical to compute the tax liability of the person in the respective jurisdiction.
The chargeability of income tax, scope of coverage of the tax, the tax computation and the tax credit to be sought are based on the residential status of the person. The Indian Income Tax law recognizes different types of residential status and has set out criteria for determining the residential status. The conditions specified for different category of residential status has to be followed and adhered to find out the residential status of the person.
Determining the residential Status of an Individual:
The Income Tax Act states the conditions that determine the residential status of an individual. An individual is a resident of India in any previous year, if he stays in India for 182 days or more in the current Previous year or if he has stayed in India for 60 days or more in the current Previous year and 365 days or more in the four preceding Previous years.
If none of the above conditions are satisfied, the Individual shall be treated as Non-resident for the Previous Year.
The major exclusion to the above rules are – An Indian Citizen leaving India for employment outside India need not comply with the second leg of the condition, i.e., if he has stayed in India for 60 days or more in the current Previous year and 365 days or more in the four preceding Previous years
Again, in case of Indian Citizen or Person of Indian Origin the second condition shall not apply if the Indian income earned is upto INR 15 Lakhs. In circumstances exceeding INR 15 Lakhs the number of days to be calculated shall be 120 days.
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 ten
previous years preceding that year, or
b) 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.
There are more specific conditions and criteria for more specific cases like crew member of Indian ship and for Indian Citizens not liable to tax in any other Country. A detailed study of the purpose, the number of days, the objective, the intention and related factors are to be made to arrive at the residential status in each case.
Dual Residential Status:
Where a dual residence (i.e., the same person can be a resident of India as well as UAE for the same tax period) causes double taxation, most of the countries have laws to negate dual taxation of such individuals, or they might have double taxation avoidance agreement with the foreign country.
Most of the treaties contain a series of tie breaker tests to determine which country’s residence takes precedence. The DTAA guidelines regarding tiebreakers rules are:
1. The country where the individual has a permanent home available to them. A permanent home refers to any place of residence that is available as a means to stay, even if it is rented or on lease.
However, places of residence taken out for short-term accommodation does not count as a permanent residence such as hotel rooms or guest house rooms taken for shorter periods.
2. If an individual has a permanent home in both countries, then the residency depends on the individual’s personal and economic relations with the nation. In whichever country the individual shares a closer personal and financial connection will be considered as his
country of residence.
3. If it is not possible to determine a person’s place of interest or the person does not have a permanent home in either country, then the place of residence depends on the country where the individual has a habitual abode. Habitual abode refers to the place where an individual resides
typically.
4. If the individual has a habitual abode in both countries, then the nationality of the individual is taken into account. Therefore, the residency of the individual is decided based on their nationality.
5. If the residential status of an individual cannot be determined based
on the previous step, then it depends on a mutual agreement which has to be undertaken by both the countries to decide on which nation will get the tax residency claim.
All the above-mentioned steps have to be followed sequentially that is no step can be skipped in between.
