Section 12 of the Income Tax Act, 1961, deals with the determination of the residential status of an individual. The residential status of an individual determines the scope of their taxable income in India. In this blog, we will discuss Section 12 of the Income Tax Act in detail, covering the various provisions and rules that determine the residential status of an individual.
Introduction to Section 12
Section 12 of the Income Tax Act lays down the rules for determining the residential status of an individual for the purpose of taxation. The section applies to all individuals, including both Indian citizens and foreign nationals. The residential status of an individual is determined based on the duration of their stay in India and their ties to the country.
Determination of Residential Status
The residential status of an individual is determined based on the following criteria:
a) Resident
An individual is considered a resident of India if they meet any of the following criteria:
- They have been in India for 182 days or more during the relevant financial year
- They have been in India for 60 days or more during the relevant financial year and 365 days or more during the preceding four financial years.
b) Non-Resident
An individual is considered a non-resident of India if they do not meet any of the above criteria.
c) Resident but Not Ordinarily Resident (RNOR)
An individual who meets any of the following criteria is considered a resident but not ordinarily resident (RNOR):
- They have been a non-resident in India in nine out of the ten previous financial years preceding the relevant financial year.
- They have been in India for 729 days or less during the preceding seven financial years preceding the relevant financial year.
Tax Implications of Residential Status
The residential status of an individual has a significant impact on their taxable income in India. The following are the tax implications based on the residential status:
a) Resident
A resident individual is taxed on their global income in India. They are required to file their income tax returns in India and pay tax on their income earned both in India and abroad.
b) Non-Resident
A non-resident individual is taxed only on the income earned in India. They are required to file their income tax returns in India if their income in India exceeds the basic exemption limit.
c) RNOR
An RNOR individual is taxed on their income earned in India and on the income received or earned outside India, which is derived from a business controlled or set up in India.
Factors Considered in Determining Residential Status
The determination of residential status under Section 12 is based on a few key factors, including the number of days an individual has been present in India, as well as their connections to the country. Some of the factors considered when determining residential status include:
a) Physical Presence
The number of days an individual has been present in India during the relevant financial year is a significant factor in determining their residential status. If an individual has been in India for more than 182 days during the financial year, they are considered a resident of India.
b) Connection to India
An individual’s connection to India is another key factor in determining their residential status. If an individual has roots in India, such as having a permanent home, or business interests in the country, it may indicate that they are a resident of India, even if they have not been physically present in the country for a significant amount of time.
c) Citizenship and Nationality
Citizenship and nationality are also taken into account when determining an individual’s residential status. If an individual is a citizen of India, they are generally considered a resident of the country, even if they are living abroad. Conversely, if an individual is not a citizen of India, they may be considered a non-resident even if they spend a significant amount of time in the country.
Importance of Determining Residential Status
It is essential for individuals to correctly determine their residential status, as it has significant implications for their tax liability in India. If an individual is considered a resident of India, they are required to pay taxes on their global income, while non-residents are only taxed on their Indian income. Additionally, the tax rates for residents and non-residents may differ, and non-residents may be eligible for certain tax exemptions and deductions.
Tax Planning based on Residential Status
The residential status of an individual has a significant impact on their tax liability in India. Therefore, tax planning based on residential status is an essential aspect for individuals to minimize their tax liability. Some of the tax planning strategies that can be employed based on residential status are:
a) For Residents
Residents are taxed on their global income in India. Therefore, it is essential for residents to report all their income, including income earned outside India. However, residents can claim foreign tax credits for taxes paid in other countries to avoid double taxation. Residents can also take advantage of various tax deductions and exemptions available under the Indian tax laws to minimize their tax liability.
b) For Non-Residents
Non-residents are taxed only on the income earned in India. Therefore, they can avoid tax on their income earned outside India. Non-residents can also take advantage of various tax treaties between India and their home country to minimize their tax liability. Additionally, non-residents can claim various deductions and exemptions available under the Indian tax laws to reduce their tax liability on income earned in India.
c) For RNORs
RNORs are taxed on their income earned in India and the income received or earned outside India, which is derived from a business controlled or set up in India. RNORs can claim various deductions and exemptions available under the Indian tax laws to reduce their tax liability on income earned in India. Additionally, RNORs can take advantage of various tax treaties between India and their home country to minimize their tax liability.
Conclusion
In conclusion, Section 12 of the Income Tax Act lays down the rules for determining the residential status of an individual for the purpose of taxation. The residential status of an individual determines the scope of their taxable income in India. It is important for individuals to understand the provisions and rules of Section 12 to determine their residential status correctly and comply with the tax laws of India.
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Frequently Asked Questions (FAQ’s)
- What is residential status for the purpose of income tax in India?
Residential status is the determination of an individual’s connection to India based on their physical presence, connection to India, and citizenship. It is important for tax purposes, as residents are taxed on their global income in India, while non-residents are taxed only on the income earned in India.
2. How is residential status determined under the Income Tax Act?
Residential status is determined based on the number of days an individual has been present in India during the financial year, as well as their connection to India and citizenship. If an individual has been in India for more than 182 days during the financial year, they are considered a resident of India.
3. What is the difference between resident and non-resident for tax purposes?
Residents are taxed on their global income in India, while non-residents are taxed only on the income earned in India. Additionally, the tax rates for residents and non-residents may differ, and non-residents may be eligible for certain tax exemptions and deductions.
4. Can a non-resident claim deductions and exemptions under the Indian tax laws?
Yes, non-residents can claim various deductions and exemptions available under the Indian tax laws to reduce their tax liability on income earned in India.
5. What is an RNOR?
An RNOR or a Resident but Not Ordinarily Resident is an individual who has spent less than 182 days in India during the financial year and satisfies other conditions of Section 6 of the Income Tax Act. RNORs are taxed on their income earned in India and the income received or earned outside India, which is derived from a business controlled or set up in India.
6. Can an RNOR claim foreign tax credits?
Yes, RNORs can claim foreign tax credits for taxes paid in other countries to avoid double taxation.
7. How does residential status impact tax planning?
Residential status has a significant impact on an individual’s tax liability in India. Therefore, tax planning based on residential status is crucial for individuals to minimize their tax liability. Residents can claim foreign tax credits and various tax deductions and exemptions available under the Indian tax laws, while non-residents can take advantage of various tax treaties between India and their home country to minimize their tax liability.
8. How is residential status determined for an NRI or a person of Indian origin?
Residential status is determined for NRIs or persons of Indian origin based on the same factors as other individuals, such as the number of days present in India and their connection to the country.
9. Can an NRI claim deductions and exemptions under the Indian tax laws?
Yes, NRIs can claim various deductions and exemptions available under the Indian tax laws to reduce their tax liability on income earned in India.
10. Can a non-resident file a tax return in India?
Yes, non-residents are required to file a tax return in India if they have earned income in the country.
