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A person’s classification as either a resident or non-resident in India is primarily determined by their duration of stay within the country. This period is measured in days for each financial year, which runs from April 1 to March 31, referred to as the “previous year” under the Income Tax Act.
The classification of an individual as a resident or non-resident is primarily based on specific criteria outlined in Section 6 of the Income Tax Act. This classification not only influences the individual’s tax liabilities but also determines their eligibility for various deductions and exemptions.
To be classified as a non-resident, an individual must fulfill both of the following conditions:
Condition 1: The individual must not have been present in India for 182 days or more during the relevant previous year. If this condition is satisfied, it prompts a review of Condition 2.
Condition 2: The individual must not have spent 60 days or more in India during the previous year and must also not have accumulated 365 days or more in India over the four years preceding the previous year.
If both conditions are met, the individual is unequivocally classified as a non-resident.
While the above criteria are standard, there are specific exceptions where the stay requirements outlined in Condition 2 do not apply. These exceptions include:
Indian Citizens Leaving for Employment: If an individual is an Indian citizen leaving India for employment outside the country, or if they serve as a member of the crew on an Indian ship, they may be exempt from the typical stay requirements.
Persons of Indian Origin: Individuals who are either Indian citizens or of Indian origin and are visiting India may also qualify for non-resident status if they meet only Condition 1.
These exceptions are critical in understanding how certain individuals can navigate their residential status despite their physical presence in the country.
Understanding the implications of non-resident status is crucial for effective tax planning. Non-residents are only taxed on income that is earned or accrued in India, which can significantly reduce their overall tax liability compared to residents, who are taxed on their global income.
Moreover, non-residents may not have access to specific deductions and exemptions that residents can claim, making it essential to accurately assess one’s residential status.
If an individual does not satisfy any of the conditions to be classified as a non-resident, they are automatically considered a resident under Indian tax laws.
In certain situations, an individual may be classified as Resident but Not Ordinarily Resident (RNOR). This status is conferred to individuals who are considered residents for the previous year but also meet at least one of the following conditions:
Condition 1: The individual has not been classified as a resident under the provisions stated above for at least 9 out of the 10 previous years preceding the current previous year. If this is true, they qualify as RNOR.
Condition 2: The individual’s cumulative stay in India during the 7 years prior to the current previous year must not exceed 730 days. If this condition is satisfied, they are classified as RNOR.
Note: Typically, an individual returning to India after being classified as a non-resident for 9 years or more may maintain their RNOR status for a period of two years following their return. This provision is particularly beneficial for expatriates and those with long-term stays outside India.
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