You must be proficient with the issue of residence status for income tax purposes. Your tax liability will be significantly simpler to authenticate as a result.
The calculation of taxes must take into account your residential status, which has a significant impact on the amount you pay or receive as refunds. During the current tax filing process, this is especially important. In fact, it is one of the criteria used to assess a person's tax deductibility for a specific fiscal year.
Why Residential Status is important?
The taxability of a person is determined by his place of residence in the nation during any given financial year. Even if they are an Indian citizen, certain people are granted non-resident identity for a certain fiscal year. The same is true for foreign nationals who wish to get residential status in the country for the duration of a specific fiscal year. Different sorts of entities have their residential status determined independently.
How to Determine an Indian Resident?
An individual who has never left India is perpetually and normally a resident of India. If a person meets at least one of the following criteria, they are considered to be a resident of India.
- He/she spends at least 182 days in India in a particular year.
- He/she spends at least 365 days in India over the course of the four years that directly preceded the last year, as well as at least 60 days within the year.
If an Indian citizen leaves the country during the year in order to work outside of India or if an Indian citizen needs to leave India during the year in order to serve on the deck of an Indian ship, the aforementioned 60-day term is increased to 182 days. For this aim, departing India for professional purposes is necessary.
If an Indian citizen or someone of Indian descent pays a visit to India, the previously mentioned 60-day term is also prolonged to 182 days. If an individual, either themselves or any of their parents or grandparents were born in India He/she is considered to be an Indian resident.
A person is not a resident if they do not meet any of the aforementioned two requirements.
Also Read: What is Alternative Minimum Tax?
Determining Whether Somebody is Ordinarily Resident or Not Ordinarily Resident
If a person meets the prerequisites for resident status as listed above as well as the two following requirements, they are considered a resident and ordinarily resident of India.
- He/she has resided in India for at least two out of the ten years that have passed before the relevant fiscal year.
- He/she has spent at least 730 days in India throughout the seven years immediately before the applicable year.
The individual who does not meet both of the aforementioned requirements is a resident however not ordinarily resident.
Tax Planning as per the Residential Status:
Depending on the assessee's residency status, an income stream may or may not be subject to income tax. People who spend a significant amount of time outside of India during the current year and the previous year should keep a few things in mind so that, assuming they are able to change their schedules, they could save a significant amount of tax.
- For non-resident designation, visitors to India for work or in any other capacity should not remain for longer than 181 days in a financial year and no longer than 364 days in the 4 years prior.
- A person should avoid residing in India for a further over 59 days in a fiscal year if they spent more than 364 days there in the 4 years prior. If he/she wishes to stay longer than 59 days, they may do so by arriving after February 2 and departing before May 29, which will ensure that no more than 59 days are covered throughout the course of both years.
- An individual of Indian descent or a citizen of India must schedule their travel so that no more than 181 days overlap in a single year.
- Even if the firm is run entirely from India, a non-resident shouldn't be paid directly in India. To avoid paying taxes on such revenue, one should first collect it outside of India before remitting it back to India.
- Similar to this, the non-ordinary resident should collect their earnings from a firm that is operated outside of India that is received outside of India.
Residential Status Of HUF
A Hindu Undivided Family (HUF) is considered to be a resident of India if all or a portion of its control and administration are located there.
A resident HUF is considered to be a resident and regular citizen in India if the Karta meets both of the following criteria:
- He/she has lived in India for at least two of the ten years before the eligible year.
- He/she has spent at least 730 days in India throughout the seven years immediately before the pertinent year.
Karta is considered a resident but is not ordinarily resident if none of the aforementioned requirements is met.
If HUF's administration and control are located entirely outside of India, it is regarded as a non-resident.
Residential Status of a Firm or Association of People
A partnership business or group of people is deemed to be a resident of India if, throughout the pertinent prior year, the management and control of its operations were entirely or partially located inside India. Nonetheless, if the entirety of its management and control is located outside of India, it is classified as non-resident in India.
Residential Status of Company
An Indian company is always a resident in India.
Residential Status of Foreign Company from the Financial Year 2016-17.
If an international firm's place of effective management (POEM) for the pertinent prior year was in India, that organization will be considered a resident of India. The term "site of effective management" refers to a location where crucial managerial and business choices that are essential to the operation of an organization, in general, are made.
Is your current residence in India sufficient to prove that you are a citizen of the country permanently? No, not always. You will be referred to as a non-ordinarily resident or even a non-resident if you don't comply with the conditions for identifying residents. Your home status significantly determines the amount of tax you must pay. It is, therefore, crucial to fully comprehend the rules as well as the residence status.
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