As an individual, it is important for you to assess your residential status. And the same goes for the income tax department as well. The rationale being, understanding the residential status is the first step towards a hassle-free tax filing season ahead.
As a matter of fact, most of the other steps of assessing taxes and filing returns are heavily dependent on the residential status of an individual. Without the proper residential status, you might end up paying more taxes or even get into some unchartered territory that you don’t necessarily want to be a part of.
How can I find my residential status is a question that would definitely crop up. The income tax department has outlined a few categories of residential status based on the amount of time that an individual spends in the country.
If you want an answer to the question of how to check residential status, the following detailed steps will help you to determine your residential status. Once you determine what your residential status is, understanding the tax code and your tax liability becomes that much easier. Of course, depending on your residential status, the tax liability will also change.
If an individual qualifies as a resident of India, he/she will be taxed on their total global income in the country. This includes their income in the country as well as different sources of income abroad. However, if you have paid taxes in the respective countries, you might want to look for DTAA between India and the country in question.
However, if you qualify as a non-resident you would only need to pay taxes on your Indian income. Any source of income that you have outside the country does not affect your tax liability. Here is how you can find out your residential status.
To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.
Step 1 given below will ascertain whether the individual is resident or non-resident and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.
Step 1: Determining whether resident or non-resident
Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e.may satisfy any one or may satisfy both the conditions):
(1) He is in India for a period of 182 days or more during the previous year ; or
(2) He is in India for a period of 60 days or more during the previous year and for a period of 365 days or more in 4 years immediately preceding the relevant previous year.
If an individual does not satisfy any of the above conditions he will be treated as non-resident in India.
Note : Condition given in (2) above will not apply to an Indian citizen leaving India for the purpose of employment or to an Indian citizen leaving India as a member of crew of Indian ship or to an Indian citizen/person of Indian origin coming on a visit to India. A person is said to be of Indian origin, if he or any of his parents or grandparents (maternal or paternal) were born in undivided India.
Note: With effect from Assessment Year 2015-16, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.
Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident
A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies following conditions:
(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.
(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.
A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as resident but not ordinarily resident.
In short, following test will determine the residential status of an individual:
If the individual satisfy any one or both the conditions specified at step 1 and satisfies both the conditions specified at step 2, then he will become resident and ordinarily resident in India.
If the individual satisfy any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.
If the individual satisfy no conditions satisfied at step one, then he will become non-resident.
The above steps should help you identify how to determine residential status. And determining the residential status is the first step. You are then liable to pay taxes as per the income tax slab. If income in India of an NRI is less than 2,50,000 he is not required to file return in India. For an Indian resident it is compulsory to file return of income if his global income has exceeded 2,50,000.
You can avail various exceptions and deductions to reduce your tax liability. These include short term and long term investments, tax credits, health insurance etc. Your tax liability is then calculated on the net taxable income and you must pay the same for the fiscal year in question. You can pay taxes either as TDS (Tax Deducted at Source, Advance Tax or Self Assessment Tax).
At the end of a fiscal year, you are required to file a tax return for the fiscal year, which essentially documents all the details such as the source of income, deductions, taxes paid etc.
- How residential status of firm and company are to be determined?
A firm or company qualifies as a resident of India if either of the two conditions is met.
> The company or firm is Indian.
> Most of the effective management of the company, for the fiscal year in question, takes place in India. (Key commercial and management decisions)
A firm or company not adhering to the above two conditions would naturally attain the status of non-resident.
- What is residential status in ITR?
The ITR or income tax return is a document that summarizes the annual income of an individual, the deductions and exceptions that they have availed, the taxes that they have paid and so on. The tax calculation is based on the residential status of an individual. Residents have to pay taxes on their global income, whereas non-residents only have to pay taxes on their Indian income.