Residential status is a critical factor in determining an individual’s income tax liability in India. The Income Tax Act 1961, defines the rules and guidelines for determining the residential status of an individual in India. A person’s residential status determines the scope of income that is taxable in India and the tax rates applicable to that income. In this blog, we will discuss the three different residential status categories, their criteria, and how they impact income tax liability.
Residential Status Categories:
The three residential status categories in India are:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
- Resident and Ordinarily Resident (ROR):
An individual is considered a Resident and Ordinarily Resident (ROR) in India if he/she satisfies any of the following conditions:
- The individual has been in India for 182 days or more during the financial year (April to March), or
- The individual has been in India for 60 days or more during the financial year and 365 days or more during the preceding four financial years.
If an individual qualifies as an ROR, then he/she will be taxed on his/her global income, i.e., income earned in India and outside India. This includes salary, business income, capital gains, and any other sources of income. The tax rates applicable to an ROR are the same as those for a resident, which range from 0% to 30%, depending on the individual’s income.
Resident but Not Ordinarily Resident (RNOR):
An individual is considered a Resident but Not Ordinarily Resident (RNOR) if he/she satisfies any of the following conditions:
- The individual has been an NRI (Non-Resident Indian) in 9 out of the 10 preceding financial years, or
- The individual has been in India for 729 days or less during the preceding seven financial years.
If an individual qualifies as an RNOR, then he/she will be taxed only on the income earned in India. This includes salary, business income, capital gains, and any other sources of income. The tax rates applicable to an RNOR are the same as those for a resident, which range from 0% to 30%, depending on the individual’s income.
Non-Resident (NR):
An individual is considered a Non-Resident (NR) if he/she satisfies both of the following conditions:
- The individual has been in India for less than 182 days during the financial year (April to March), or
- The individual has been in India for less than 60 days during the financial year and 365 days or less during the preceding four financial years.
If an individual qualifies as an NR, then he/she will be taxed only on the income earned in India. This includes salary, business income, capital gains, and any other sources of income. The tax rates applicable to an NR are different from those for a resident or RNOR. The tax rates for NRs range from 0% to 30%, depending on the type of income.
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Conclusion:
Determining the residential status of an individual is crucial in the income tax calculation process. The residential status determines the scope of income that is taxable in India and the tax rates applicable to that income. The rules for determining residential status are complex and require a thorough understanding of the Income Tax Act. It is essential to seek professional help to determine the residential status and calculate the income tax liability correctly.
Frequently asked questions (FAQs) on residential status in income tax:
Q1: What is residential status in income tax?
Residential status in income tax refers to the criteria used to determine whether an individual is considered a resident or non-resident in India for income tax purposes.
Q2: What are the three different categories of residential status?
The three categories of residential status in India are Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR).
Q3: How is the residential status determined?
The residential status is determined based on the number of days an individual has spent in India during a financial year and the preceding four financial years. It also depends on the individual’s NRI status.
Q4: Why is the residential status important for income tax purposes?
The residential status determines the scope of income that is taxable in India and the tax rates applicable to that income. Residents and RNORs are taxed on their global income, while NRs are taxed only on their income earned in India.
Q5: Are the tax rates different for different residential status categories?
Yes, the tax rates for different residential status categories are different. The tax rates for residents and RNORs range from 0% to 30%, while the tax rates for NRs range from 0% to 30% depending on the type of income.
Q6: Can an individual’s residential status change during the financial year?
No, an individual’s residential status is determined for the entire financial year based on the criteria specified in the Income Tax Act.
Q7: Is it necessary to file an income tax return if an individual’s income is below the taxable limit?
No, if an individual’s income is below the taxable limit, then there is no need to file an income tax return. However, it is advisable to file a return if the individual wants to claim a refund or carry forward losses.
Q8: What is the penalty for not filing an income tax return?
If an individual does not file an income tax return, he/she may be subject to a penalty of up to Rs. 10,000 or more, depending on the time delay and the individual’s total income.
