Residential status of Individual under the Income Tax Act as amended by Finance Act 2020

Introduction

The Finance Act 2020 has amended the section 6 in which the new provision of Deemed resident has been inserted and certain provisions have been amended to widen the tax base for the Individual / HUF. Section 6 is the main factor in determining whether the assessee is resident or not and thus determining the taxability of the same.

Types of Residents

In the section 6, for the purpose of Individuals, there are following types of Residents.

1. Resident
   1. Resident and Ordinary Resident
   2. Resident but Not Ordinary Resident
2. Non Resident
3. Deemed Resident

Determination of Residential Status

1. Resident Individual

To determine whether the Individual is a Resident in India or not, we have to analyse the provisions of section 6(1). For this, there are 2 basic conditions out of which 1 needs to be satisfied:-

1. The individual is in India for a period of 182 days or more during the previous year; or
2. The Individual is in India for a period of 60 days or more during the previous year and 365 days or more during the 4 immediately preceeding previous year from the existing previous year.

Now after determining the residential status, the next test arises whether the Individual is a Resident and Ordinarily resident, the following 2 additional conditions need to be satisfied cumulatively:-

1. The individual is resident in India in 1 out of 10 previous years preceding that year; and
2. The individual has been the resident for a period of 730 days or more during the 7 immediately previous year preceding that year.

If the Individual satisfies one of the basic conditions and both the additional conditions, then the Individual is said to be “Resident and Ordinarily Resident”.

However, if the Individual satisfied one of the basic conditions but fails to satisfy one or both the additional conditions, then the Individual is said to be “Resident but Not Ordinarily Resident”.

Now, the case arises, being the citizen of India, or a person of Indian origin, whether what will be the conditions for them to be the Resident as per the Income tax act.

In the Finance Act 2020, the provision has been amended for them. It says the Individual being the Citizen of India or a person of Indian origin shall stay in India for a period of 120 days or more (which was 182 days or more earlier) as amended in the clause (b) of Explanation 1 of Section 6. The second condition is that the Indian citizen or a person of Indian origin shall have the Total Income, other than income from foreign sources, exceeds Rs. 15 Lakhs during the previous year.

2. Non-Resident

For the Individual to be Non-resident, the Individual shall not satisfy any of the basic conditions.

3. Deemed Resident

In the Finance Act 2020, the concept of Deemed Resident has been introduced. The provision has been added vide Explanation 1A of Section 6(1) which says that a citizen of India having total income exceeding Rs. 15 Lakhs other than income from foreign sources, during the previous year shall be deemed to be resident of India.

The provision will cover the citizen who have been living abroad for the sake of their employment but are not covered earlier in the definition of the Resident. To cover the said persons, the Deemed resident has been introduced. It says the person who is a citizen of India shall be deemed to be a resident in India if the total income excluding the income from foreign sources exceeds Rs. 15 Lakhs. In this context it would be noted that if the income of the individual is taxed in the foreign country then it shall be considered as “Non Resident”. However, if the income of that deemed resident is taxable in India, then it is to be taxed as Deemed Resident. It is worthwhile to note that CBDT released the press release in which the income earned outside India by deemed resident will not be taxable unless it is derived from business or profession in India.