ALL YOU NEED TO KNOW ABOUT RIGHTS AND LIABILITIES OF A PERSON RESIDENT IN INDIA
By Neha Agarwal March 19, 2018
Determination of residential status of a person is essential for purposes like levy of income tax, or for investment purposes –like opening a PPF or to purchase an agricultural land under FEMA, or owning NRE/NRO/FCNR(B) accounts.
A person resident in India is clearly defined under the Foreign Exchange Management Act, 1999 (FEMA), the Income Tax Act, 1961, and the Companies Act, 2013.
Under FEMA, a person resident in India is determined by two factors – a) period of stay b) the purpose or intention of his stay.
As per Sec 2(v) of the Act: a person who resides in India for more than 182 days during the course of the preceding financial year is a person resident of India. For example, to determine residential status of a person on 1st August 2017, one has to look at his period of stay in the previous financial year i.e. form 1st April’16 to 31st March ’17. If a person resided in India for more than 182 days then he will be considered as a resident in India. (The residential status of a person is determined for a particular point in time and not for the whole of year).
However, in the following two instances a person becomes a non-resident (depending upon the purpose or intention of stay) even though he has resided in India for more than 182 days in the previous financial year.
A) If he leaves India for an uncertain period of time – i.e. for taking up employment outside India or for carrying on a business or vocation outside India or any other purpose then he becomes a non-resident form the day he leaves India.
For example, if a person has stayed for more than 182 days in the FY 2016-2017 and he leaves India on 1st August ’17 to take up employment outside India. He will be considered as a non-resident from 1st August ’17. He was a resident till 31st July ’17.
If that person leaves for employment on 1st January ’18 having stayed for more than 182 days in the same financial year i.e. in 2017-2018 then he stops being a resident from that date i.e. from 1st Jan ’18. His residential status for the year 2018-19 will be non-resident as he left India for an employment even though he stayed for more than 182 days in the previous financial year.
B) If he comes to India for non-commercial purpose - i.e. for any other reason except taking up employment in India or for carrying on a business or vocation in India.
For example, if a tourist comes to visit India for a definite period of two years then he becomes a non-resident as he has not come for any commercial purpose. Or if a person comes to India for some family arrangements or charity work and ends up staying in India for an uncertain period without any intention of doing business or employment in India then he can be considered as a non-resident after supporting the facts.
In cases where a person has not stayed in India in the previous financial year for more than 182 days but has come to India in the current financial year for an uncertain period of time i.e. to take up employment, carry on a business or a vocation then he will be a person resident of India from the day he comes to India for such purpose. For example, if a person resident outside of India comes to India on 1st August ‘17 to start his business then he becomes a resident from 1st August ’17.
A person resident in India also includes –
- A person other than individual if it is registered or incorporated in India. S.2(v)(ii).
- An office, branch or agency in India, which is owned or controlled by a person resident outside India. (S.2 (v)(iii)).
- An office, branch or agency outside India owned or controlled by a person resident in India. (S.2 (v)(iv))
Residential status of a taxpayer is important under the Income tax act as their tax liabilities are different. If a person is resident in India then his global income i.e. Income derived from India as well as outside India is taxable in India. If he is a non-resident then he is taxable in India only if his income is received or deemed to be received in India or accrues or arises or is deemed to accrue or arise to him in India.
Section 6 of the Income-tax Act, 1961 states the criteria for determining the residential status of an individual. A person is resident in India for a financial year if any of the two conditions are satisfied -
(1) if he is in India in that year for a period of 182 days or more; or
(2) if he is in India for 60 days or more during that financial year and has been in India for 365 days or more during four previous years immediately preceding the relevant financial year.
For instance, to qualify as a resident for the financial year (FY) 2016-17, one should have either lived in India for 182 days between 1 April 2016 and 31 March 2017; or lived in India for 60 days between 1 April 2016 and 31 March 2017, and 365 days between 1 April 2012 and 31 March 2016.
If an individual does not satisfy any of these two conditions then he shall be a non-resident during that FY.
However, if a) an individual who is a citizen of India leaves India to take up employment outside India or b) if an individual who is a citizen of India or a person of Indian origin comes to India in any FY then he becomes a resident of India only when he stays in India for at least 182 days or more in that FY.
Under the Act, residents are further classified into ordinary residents and non-ordinary residents as they both have different tax liabilities. An individual who is not ordinarily resident in India, income accruing or arising to him outside India will not be taxable in India unless it is derived from a business controlled from or a profession set up in India.
As per section 6(6) of the Act –
An individual will be considered an 'ordinary resident' if he qualifies as a resident Indian (as per the above mentioned criteria) for at least 2 out of the 10 years that immediately precede the relevant financial year or;
If he has spent 730 days or more in India during the 7 financial years immediately preceding the relevant one, the status will be that of an 'ordinary resident'.
Within the category of resident individuals, a person who does not qualify as an 'ordinary resident' will be treated as a 'resident but not ordinarily resident'.
For instance, to qualify as an ordinary resident for FY17, one should either have been a resident for any 2 years between FY07 and FY16, or should have lived in India for 730 days or more between FY10 and FY16.
A company is said to be resident in India if:
1. It is an Indian company (as defined in the Companies Act, 1956); or
2. Its place of effective management, in that year, is in India (place of effective management means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance are made).
3. A firm, an association of persons and any other person (not included above) is considered to be resident in India in any relevant tax year, if the control and management of its affairs is situated wholly or partly in India.
A person who is a non-resident under the income Tax Act, 1961 will also be a non-resident under the FEMA, but a person who is considered to be non-resident under FEMA may not necessarily be a non-resident under the Income Tax Act.
For example, a resident Indian goes abroad to conduct a business on 1st Jan ’17 .Under the Income Tax Act, he will be regarded as resident during financial year 2016-17 as period of stay in India is more than 182 days. However, under FEMA, he will be regarded as non-resident form the day he left India for business purposes.
Under Schedule V, Part 1 (Explanation 1) of the Companies Act, 2013 –a resident in India is a person who has been staying in India for a continuous period of not less than twelve months immediately preceding the date of his appointment as a managerial person and who has come to stay in India, either for taking up employment in India; or for carrying on a business or vacation in India.