Understanding Residential Status for Tax in India
Knowing your residential status for tax purposes is crucial in India. The cornerstone of this understanding is Section 6 of the Income Tax Act, 1961. This section helps determine if you are a resident in India and how it impacts your taxes. Let’s break down the essentials of Section 6 in simple terms.
Why is Residential Status Important?
Your residential status decides how your income will be taxed in India. Residents pay tax on their global income, while non-residents only pay tax on the income earned in India.
Key Provisions of Section 6
1. Residential Status for Individuals (Section 6(1))
To be considered a resident of India, you must meet one of these conditions:
- 182 Days Rule: You are in India for at least 182 days during the previous financial year.
- 60 Days + 365 Days Rule: You are in India for at least 60 days in the current financial year and for a total of 365 days or more in the four years preceding the current financial year.
Special Cases:
- Indian Citizens or Persons of Indian Origin: If you earn more than ₹15 lakh (excluding foreign income) and are not taxed elsewhere, the 60-day requirement extends to 120 days.
- Seafarers and Those Employed Abroad: If you leave India as a crew member of an Indian ship or for employment abroad, the 60-day rule is relaxed to 182 days.
2. Residential Status for Entities (Section 6(2))
For entities like Hindu Undivided Families (HUF), firms, or associations, residency is based on where their control and management are located. If these are entirely in India during the financial year, the entity is considered a resident.
3. Ordinarily Resident vs. Not Ordinarily Resident (Section 6(6))
An individual can be classified as either:
- Resident and Ordinarily Resident (ROR): You qualify if you’ve been a resident for at least two out of the last ten years or spent at least 730 days in India in the last seven years.
- Resident but Not Ordinarily Resident (RNOR): If you don’t meet the ROR criteria but still fulfill the basic residency conditions, you fall into this category.
Implications of Your Residency Status
- Tax Residents (ROR and RNOR): You are taxed on your global income.
- Non-Residents (NR): You are taxed only on income earned in India.
Additional Considerations
Section 6 is detailed and has many exceptions. It’s wise to consult a tax professional for specific situations. Remember, tax laws can change, so staying updated is important.
Conclusion
Section 6 of the Income Tax Act is key to determining your residency in India. By understanding the rules, individuals and entities can better manage their tax responsibilities. Always seek professional advice for specific tax matters and keep informed about changes in tax laws.
