The Income Tax Act, 1961 is an important piece of legislation that governs the taxation of income in India. It is a complex law with various provisions, sections, and sub-sections. One such section is Section 6, which deals with the determination of the residential status of an individual. In this blog, we will discuss Section 6 of the Income Tax Act, 1961, its importance, and its provisions.
Residential Status:
Section 6 of the Income Tax Act, 1961, defines the residential status of an individual. It is important to determine the residential status of an individual as it determines the tax liability of that individual in India. The residential status of an individual is divided into three categories: Resident, Non-Resident, and Resident but not ordinarily resident.
Determination of Residential Status:
The residential status of an individual is determined based on the number of days the individual has stayed in India during the previous year. The previous year is the financial year preceding the assessment year. The following are the criteria for determining the residential status of an individual:
Resident:
An individual is considered a resident if he/she satisfies any one of the following conditions:
He/she has been in India for 182 days or more during the previous year.
He/she has been in India for 60 days or more during the previous year and has been in India for 365 days or more during the four years immediately preceding the previous year.
Non-Resident:
An individual is considered a non-resident if he/she does not satisfy any of the above conditions.
Resident but not ordinarily resident:
An individual is considered a resident but not ordinarily resident if he/she satisfies any one of the following conditions:
- He/she has been a non-resident in India for nine out of the ten previous years preceding the previous year.
- He/she has been in India for 729 days or less during the seven years immediately preceding the previous year.
Tax Liability:
The tax liability of an individual in India is determined based on his/her residential status. A resident individual is liable to pay tax on his/her global income in India. A non-resident individual is liable to pay tax only on the income earned or received in India. A resident but not ordinarily resident individual is liable to pay tax only on the income earned or received in India and on the income earned outside India if it is derived from a business controlled or set up in India.
Importance of Residential Status:
The determination of an individual’s residential status is crucial for the application of tax laws in India. The residential status determines the scope and extent of taxation of an individual’s income in India. For instance, a non-resident individual is taxed only on the income earned or received in India, while a resident individual is taxed on the global income in India. Therefore, it is important to accurately determine the residential status of an individual to avoid tax-related complications and legal issues.
Impact of Residential Status on Taxation:
The residential status of an individual is not only important for determining the tax liability but also impacts the tax rate applicable to the individual’s income. For instance, a resident individual is subject to higher tax rates compared to a non-resident individual. Similarly, the tax rate applicable to a resident but not ordinarily resident individual is different from that of a resident individual. Therefore, the residential status not only determines the scope of taxation but also the tax rate applicable to an individual’s income in India.
Tax Planning and Residential Status:
The determination of an individual’s residential status is also essential for tax planning. An individual can plan his/her investments and income sources to optimize tax liability based on the residential status. For instance, if an individual is a non-resident, he/she can plan his/her investments to generate income outside India to avoid or minimize tax liability in India. Similarly, if an individual is a resident but not ordinarily resident, he/she can plan his/her investments to generate income outside India that is not derived from a business controlled or set up in India to minimize the tax liability.
Conclusion:
In conclusion, Section 6 of the Income Tax Act, 1961, is an important provision that determines the residential status of an individual for the purpose of taxation. The residential status determines the scope and extent of taxation of an individual’s income in India and impacts the tax rate applicable to the individual’s income. Therefore, it is crucial to accurately determine the residential status of an individual to avoid tax-related complications and legal issues. Additionally, the residential status is also essential for tax planning to optimize tax liability based on the residential status.
Read more useful content:
- section 234e of income tax act
- section 286 of income tax act
- section 90a of income tax act
- section 40a(7) of income tax act
- section 226(3) of income tax act
- section 24 of income tax act
Frequently Asked Questions (FAQs)
What is Section 6 of the Income Tax Act, 1961?
Section 6 of the Income Tax Act, 1961, defines the residential status of an individual for the purpose of taxation in India.
What are the three categories of residential status?
The three categories of residential status are Resident, Non-Resident, and Resident but not ordinarily resident.
How is the residential status of an individual determined?
The residential status of an individual is determined based on the number of days spent in India during the previous year.
What is the previous year in the context of determining residential status?
The previous year is the financial year immediately preceding the assessment year.
What is the tax liability of a resident individual?
A resident individual is liable to pay tax on his/her global income in India.
What is the tax liability of a non-resident individual?
A non-resident individual is liable to pay tax only on the income earned or received in India.
What is the tax liability of a resident but not ordinarily resident individual?
A resident but not ordinarily resident individual is liable to pay tax only on the income earned or received in India and on the income earned outside India if it is derived from a business controlled or set up in India.
Can an individual be a resident of more than one country?
Yes, an individual can be a resident of more than one country. In such cases, the individual’s residential status in India will be determined based on the tie-breaker rule in the relevant Double Taxation Avoidance Agreement.
How does residential status impact tax planning?
The residential status of an individual is essential for tax planning as it determines the scope and extent of taxation of an individual’s income in India and impacts the tax rate applicable to the individual’s income.
Is it possible to change residential status during the year?
No, the residential status of an individual is determined based on the number of days spent in India during the previous year and cannot be changed during the year.
