Residential status determination is among the pillars of proper tax planning and compliance for India. Whether India’s Income Tax Act makes you resident, non-resident, or resident but not ordinarily resident has an impact on all dimensions of your tax liability, including what is to be considered as income, what disclosure requirements you have to comply with, and what benefits or restrictions there are.
Regardless of whether you are an overseas national working for an outfit in India, an NRI, a PIO, or an Indian citizen staying either overseas or in India, precise determination of your residential status for each year of your accounting for earnings is imperative. Legal N Tax provide International Tax Consultancy in India to the clients on these nitty-gritty rules, derives maximum benefits for them, and avoids costly blunders. Below is an extensive guide to residential status determination in India.
Why Does Residential Status Matter?
Residential status is an essential part of your Indian tax calculation. Unlike citizenship, it is based on the number of days you spend in India during a financial year.
Your residential status determines:
- The range of income liable to taxation (Indian and/or global)
- The applicable tax slabs and eligible exemptions
- Mandatory disclosures of overseas assets, bank accounts, and investments
- Liability for advance tax and tax deducted at source (TDS)
Failure to accurately determine your status may lead to tax overpayment, shortfalls penalized by the authorities, or in severe cases, prosecution.
Classification of Residential Status (Individuals)
Indian income tax law classifies individuals into three key categories each financial year:
|
Category |
Criteria & Definition |
Taxability |
|
Resident and Ordinarily Resident (ROR) |
Meets residency tests and has long-term recent Indian presence |
Indian + global income |
|
Resident but Not Ordinarily Resident (RNOR) |
Satisfies minimum stay but not full “ordinarily resident” conditions |
Indian income + certain Indian-controlled foreign income |
|
Non-Resident (NR) |
Fails both main residency tests |
Only Indian income |
Basic Residency Tests for Individuals
Under Section 6 of the Income Tax Act, 1961, you are considered a resident if you satisfy any one of the following two tests during a financial year:
- Stay of 182 days or more in India during the relevant tax year (April 1 to March 31)
- Stay of 60 days or more in the current tax year, and 365 days or more in the preceding 4 financial years
If neither test is met, you are a non-resident for that year.
Special Provisions and Exceptions
- Indian citizens leaving for overseas employment or as crew: The 60 days threshold is replaced by 182 days, giving more flexibility.
- Indian citizens/PIOs visiting India: If total Indian income is below ₹15 lakh, the 60-day test does not apply; the 182-day rule is used instead.
- For others, the 60-day test applies for residency assessment.
Deemed Residency and RNOR Status (Latest Rules)
From FY 2020-21 onwards, the PIOs/Citizens of India who are not liable to tax elsewhere (i.e. “Indian citizens not subject to tax in any foreign jurisdiction.”) would remain as “deemed residents” only if their combined Indian income exceeds ₹15 lakh. These individuals would have a similar taxability as of Resident but Not Ordinarily Resident (RNOR).
RNOR is an intermediate status between ROR and NRI, which is for returning NRIs or expatriates:
You’ll be “RNOR” if you:
- have been a non-resident in 9 out of the 10 preceding tax years or
- your stay in India totals 729 days or less in the preceding 7 tax years
Why is RNOR status important?
- RNORs enjoy tax benefits: global income is not taxed; only Indian-sourced or Indian-controlled income is.
Examples to Illustrate Residency Determination
Scenario 1: Aniket, an Indian citizen, works in the US and visits India for 100 days during FY 2024-25. He moved abroad for employment.
- Since he’s abroad for employment, he qualifies for the 182-day exception, and is NRI for tax purposes (unless his stay exceeds 182 days in India).
Scenario 2: Ritu, a PIO living in the UK, visits India for 130 days in FY 2024-25. Her Indian income is ₹18 lakh.
- Because her Indian income is above ₹15 lakh and she is in India for more than 120 days, she is considered resident (specifically RNOR or “deemed resident”) under new rules.
Scenario 3: Mark, a foreign national, has stayed in India for 70 days in the current year and 400 days over preceding four years.
- Mark meets the (60+365) day rule and will be counted as a resident.
Impact of Residential Status on Taxability
|
Status |
Taxed on Indian Income |
Taxed on Foreign Income |
Scope of Tax Return |
|
NRI |
Yes |
No |
India only income/assets |
|
RNOR |
Yes |
Only if derived from India/set up in India |
Some foreign disclosures |
|
ROR |
Yes |
Yes |
Worldwide income/assets |
Key Points:
- NRIs' foreign earnings are not taxed in India. Taxation is only for the income, which is earned/received within India.
- RORs must disclose and pay tax on all overseas earnings, including salary, business, investment, even overseas-held assets/income.
- RNORs are taxed only on Indian earnings and earnings from foreign occupation or business held under Indian control.
Determining Residential Status for Other Taxpayers
- Companies: Status determined by “place of effective management.” Companies managed from India are residents; otherwise, non-residents.
- Firms, HUFs, AOPs: Controlled and managed “wholly or partly” in India means resident; otherwise, non-resident.
Compliance Tip: Why Professional Guidance is Essential
Errors in determination of residence routinely engender:
- Underreporting or overreporting of world-wide income
- Penalties for failure to disclose foreign earnings and assets
- Forfeiture of benefits under treaty or double taxation
- Excess tax outgo or deferal of refunds
Legal N Tax Offers Personalized Determination and Documentation To:
- Ascertain your residency status correctly, especially for frequent travel or cross-border working.
- Provide supporting documentation (visa, entry into your passport, ticket itinerary, employment contracts) for raising of any challenges by the Income Tax Department or courts of law.
- Advise on exemption of tax and treaty relief permitted for residents and non-residents of countries of residence.
- Ensure effective and enhanced disclosure of earnings and assets for return-filing
Checklist for Individuals
- Work out your residential status each year of accounting (financial year)—shifting events can quickly alter your tax residence.
Preserve your travel documents, visas, and documentation of overseas jobs, if you plan to raise NRI or RNOR status.
Deliberate RNOR categorization planning, if you're returning NRI or emigrating, for its advantages and drawbacks.
Consider the ripple effects for only for tax, but also for your investment, inheritance, and will planning.
In Conclusion
Residential status navigation is not simple and requires attention annually. Getting absolutely spot-on ensures peace of mind, efficient maximization of your taxes, as also statutory compliance under laws of India. To have an extensive personal analysis of your status or address special cross-border challenges of each type, approach Legal N Tax—the expert guide for NRI Taxation in India. Contact us today for an extensive briefing and ensure your residence for tax is correctly assessed—attracting attention results when working out your Indian/worldwide!
