Taxation of individuals in India is primarily based on their residential status in the relevant tax year. The residential status of individuals is determined independently for each tax year and is ascertained on the basis of their physical presence in India during the relevant tax year and past tax years.
Following types of residential status are envisaged for an individual.
- Resident in India – which is further divided into following two categories:
- Resident but not ordinarily resident (RNOR)
- Resident and ordinarily resident (ROR)
- Non-resident in India (NR)
An individual is said to be a resident in the tax year if he/ she is:
- Physically present in India for a period of 182 days or more in the tax year (182 day rule), or
- Physically present in India for a period of 60 days or more during the relevant tax year and 365 days or more in aggregate in four preceding tax years (60 day rule).
If none of the above two conditions are met, the individual is said to be a NR in India in that tax year.
- If Mr. A comes to India on or before 30 September, he will be treated as resident for that tax year.
- If Mr. B comes to India on or before 31 January and have stayed in India for 365 days or more during the four tax years preceding the relevant tax year, he will be treated as resident for that tax year.
A resident individual is treated as RNOR in India if he/ she satisfies any one of the following conditions:
- He/ she has been NR of India in nine out of 10 tax years preceding the tax year for which residential status is being determined.
- His/ her physical presence in India is less than or equal to 729 days during seven tax years preceding the tax year for which residential status is being determined.
A resident individual not satisfying both of the above conditions [(i) and (ii)] is treated as ROR.
If an expatriate stays in India for say 300 days for each of the three tax years, then he or she will not qualify as RNOR in the fourth year because of the following reasons:
- He or she is not a NR in nine out of 10 tax years; and
- His or her physical presence in India exceeds 729 days in the preceding seven tax years.
In determining the physical presence of individuals in India, it is not essential that their stay in the country needs to be continuous or at the same place.
Furthermore, their date of arrival in India and date of departure from it may be considered as their period of stay in the country. The purpose of their residence in India is irrelevant, and even if it is for a visit to their families or tourism, it is counted as a stay in India for residency purposes.
In effect, a newcomer to India normally remains NR/ RNOR for the first 2-3 tax years of stay in India. The rules are slightly more liberal for a person who is of Indian origin or an Indian citizen residing abroad and visiting India, or who is an Indian citizen and leaves India for employment abroad. In such cases only the “182 days rule” is applicable to determine their residency in India.
Scope of taxation
Under Indian tax laws, the scope of taxation differs as per the residential status of an individual:
- RORs are subject to tax in India on their worldwide income, wherever received.
- RNORs are subject to tax in India only in respect to income which accrues/ arises or deemed to accrue/ arise in India or is received or deemed to be received in India or is from a business controlled in or a profession set up in India.
- NRs are subject to tax in India only in respect to income, which accrues/ arises or deemed to accrue/ arise or is received or deemed to be received in India.
RNOR and NR individuals are not subject to tax in respect to their income earned and received outside of India.