Taxation as per Residential Status in India

Residential Status is very important for determining taxability in India. Provision related to residential status is in Section [wiki slug=’6-residence-in-india’ /] of Income Tax Act, 1962. If you don’t know how to determine residential status, read our article on a status of residence in India as per Income Tax Act, 1962.

Resident and Ordinary Resident

In India, Residence determines the taxability of Income. For Resident and Ordinary Resident, all incomes are taxable in India. Income earned in foreign countries are also taxable for Resident and Ordinary Resident. Even his income from agriculture in foreign is taxable in India. This is because Income Tax Act exempts only agricultural income from India. In short, every income irrespective of place of its source is taxable in India for Resident and Ordinary Resident. He can claim deductions and exemptions for tax paid in foreign countries under DTAs (Double Tax Avoidance Agreements between India and Foreign Countries). This is because DTAs supersede the provisions of Income Tax Act. But, he will have to report his all income under Income Tax Act.

Resident But not ordinary

The taxability of income is similar to that of Resident and Ordinary Resident with an exception that his/her income earned and received in foreign are not taxable in India. But, his income even if earned and received in foreign is taxable in India if it is from a source –

• Business or Profession
• Controlled from India.

Non-Resident

Only Income that relates to India is taxable in India. Income earned from a source in foreign and received in foreign are not taxable in India. To be taxable in India, income must accrue in India.

Explanation with Examples

Illustration 1 – Suppose Mr. X has following incomes. Compute his taxable income as if he is (i) Resident and Ordinary Resident, (ii) Resident But not Ordinary Resident and (iii) Not Resident in India.

• Income from Agricultural Land in Bhutan of ₹ 20,000.
• Income received from a British Business in a Bank Account in London of ₹ 1,00,000/
• Income received from a Business in South Africa of ₹ 1,50,000. This Business is controlled by Mr. X from New Delhi.
• Past Foreign untaxed Income of ₹ 2,00,000 transferred in Indian Bank Account.
• Interest from Saving Bank Account in London of ₹ 20,000.
• Technical Fees rendered in India but received in London of ₹ 10,000.
• Income from Sale of Property in Germany of ₹ 3,00,000 but later remitted to Indian Bank Account to Manage his Personal Expenses in India.

Computation of Taxable Income of Mr. X (All Amount are in ₹)

Here for Past Untaxed Income brought in India, it is assumed that when it was earned, he was a non-resident. But, if he was resident in that year, it will be his income for that relevant Previous Year. It will not be his income in present Previous Year.

Few Important Notes

• Income from Sale or Purchase of Companies with Significant Assets in India is taxable in India. But, dividend received by non-resident from such foreign companies having significant assets in India, is not taxable in India.
• Mere transfer of income earned in foreign to India isn’t taxable event. To be taxable there should be a business connection in India.
• Capital Gains from Shares of Indian Companies is taxable in the hands of the non-resident subject to other conditions under Income Tax Act & Rules thereunder.
• Salaries paid to Indian Employees of Central Government is taxable in India. It is deemed to be accrued in India. However, the value of perquisites is exempted by Central Government for tax purposes.
• Income under the head of Salaries, received by Personnel employed under United Nations and such recognized international missions are exempt.
• Royalties and License fees received by non-resident from a citizen of India is taxable only if such royalties and licenses are for business in India. In case royalties are paid by a citizen of India for his overseas business purposes, it will not be taxable in India.

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