Determination of Residential Status of a person

Generally, In Income tax there are two types of taxpayers.

• 1) Resident
• 2) Non-Resident

Now we going to find the residential status of a person i.e., whether is he a resident or non-resident then it would help us to get know whether global income is taxable in his hands or not.

Residential Status of an Individuals

In India the residential status of an individual depends on his physical presence or number of days he /she stayed in India and not on his nationality or domicile.

Basic conditions for determining residential status.

• I. (B1)- One should stay in India at least for 182 days during the relevant Previous year ; (or)
• II. (B2)- One should stay in India at least for 60 days during relevant previous year and at least for 365 days during 4 Preceding previous years.

An Individual who satisfies any one of the above basic conditions then the Individual will be treated as “Resident” or else treated as “Non-Resident”.

Exception to Fulfilment of both the above two conditions (i.e., where only first condition need to be checked)

• a. Indian Citizen leaves India during PY for employment outside India.
• b. Indian Citizen leaving India as a member of crew of Indian Ship.
• c. Indian Citizen or Person of Indian Origin visit India during PY

However, such person having total income, other than the income from foreign sources.
Exceeding 15 lakhs during the previous year will be treated as resident in India if Sec 3- Previous year is also known as financial year, is basically the year in which you earned the income.

Sec 3- Previous year is also known as financial year, is basically the year in which you earned the income.

Note: Basic condition 2 need to be checked only when his income exceeds 15 lakhs, if satisfy either of B1 or B2 Condition then he will be treated Resident not an ordinary resident.

Additional Conditions for determining ROR or RNOR

• i. One should stay in India at least for 730 days during 7 preceding Previous years AND
• ii. One should be resident at least for 2 years out of 10 Preceding years.

Decision Criteria:

• 1. Residential status to be determined every year
• 2. India Includes territorial waters of India. Therefore, stay in territorial waters to be counted.

Sec 5: The Scope Total Income:

Two types of Income

• a) Indian income: Income accrued* or received** in India.
• b) Foreign income: Income accrued* and received** outside India.

Notes:
*Accrued includes deemed to be accrued ** Received includes deemed to be received.

Focus Points:

• 1. ROR: entire global income is taxable.
• 2. RNOR: Indian income and foreign income earned outside India from a business controlled from India is taxable.
• 3. NR: Only the income earned in India is taxable.

ROR- Resident Ordinary resident, RNOR- Resident but not Ordinary Resident.

Once we came to know that the taxability of income, tax will be calculated at prescribed rates mentioned in the finance act of each year.

How Foreign Tax Credit (FTC) claimed on Global Income?

The concept of FTC introduced to avoid the double taxation in both countries. Where a taxpayer is resident in one country but has a source of income situated in another country. it gives rise to possible double taxation.

• I. Residence rule: that the power to tax should rest with the country in which the taxpayer resides.
• II. Source Rule: holds that income is to be taxed in the country in which it originates irrespective of whether the income accrues to a resident or a non-resident.

P=To Avoid double taxation government entered into an agreement with other countries i.e., Double Taxation Avoidance Agreement.

(Double taxation means taxing the same income twice in the hand of an assesses) A particular income may be taxed in India in the hands of a person based on his/its residence. However, the same income may be taxed in his/its hands in the source country also, as per the domestic laws of the country. This gives rise to double taxation. In order to take care of situation, the Income tax act introduced double taxation relief.

1. Bilateral Relief:

Under Sec 90 & 90A, the Governments of two countries can enter into an agreement to provide relief against double taxation by mutually working out. Relief may be granted by either of the following ways.

Most of the countries and India follows credit method in majority of its DTAA. Under rule 128, India allows FTC to resident Indians for taxes paid in the other country.

2. Unilateral Relief:

Under Sec 91, This method provides for double taxation relief unilaterally by a country to its resident for the taxes paid in the other country, even where no DTAA has been entered into with that country.

Computation of Taxation Relief under Sec 91

The foreign tax credit (FTC) computed separately for each source of Income.It shall computed lower of:

• i. Tax payable on such income under the Income tax Act and
• ii. Foreign tax paid.

Computation of Taxation Relief under Sec 90/ 90A:

The amount relief will be lower of Tax paid in India & Tax paid on foreign income or FTC claimed up on tax paid on foreign income up to an extent of prescribed percentage in the law.

Documents required to be provided for claiming foreign tax credit on the foreign income:

• From 67 to be filed in online for respective period before due date of filing income tax. [Notification No. 100/2022/F. No. 370142/35/2022-TPL]- IT Rule 128(9) Amended to relax timeline for filing Form 67 (FTC Claims) including for Belated/ Updated ITR. This amendment is effective from 1st day of April 2022. It allows to claim FTC on Belated returns/ revised returns]
• Statement where taxes as deducted and Proof of tax deducted and
• If Taxes has been paid on the source income, then tax challan or acknowledgement where taxes has been paid.
• Proof of foreign income statement