Residential status and taxation - Incidence of taxation varies with changes in the status of residence of the tax-payer. It is important, therefore, to correctly ascertain the residential status of the assessee before his tax liability is determined. Persons fall into the following three categories according to residential status:

(i) Resident in India;

(ii) Not Ordinarily Resident in India; and

(iii) Not Resident in India (i.e., Non-residents).

The residential status must be determined with regard to the previous year in respect of a source of income and not with regard to the assessment year. As the tax is levied on the income of a particular previous year, the enquiry and determination of residential status should be confined to the facts obtained in that previous year. Residential status of an individual has to be determined with reference to his stay in India in each year and the finding that he is "Resident" in one year would not mean that he is resident in the following year also.

Resident in India - Tax liability - In the case of residents, all income of the previous year derived from any source forms part of his total income, which :

(a) is received or is deemed to be received in India by or on behalf of the assessee,

(b) accrues or arises or is deemed to accrue or arise to him during such year, or

(c) accrues or arises to him outside India during such year.

In other words his entire income - whether Indian or foreign - of that previous year is taxable in India.

‘Not ordinarily resident’ - Tax liability - In the case of a person ‘not ordinarily resident’ in India, the total income of the previous year includes all income from whatever sources derived, which:

(a) is received in India in such year by or on behalf of such person,

(b) accrues or arises or is deemed to accrue or arise to him in India during such year, or

(c) accrues or arises outside India during such year from a business controlled in or a profession set up in India.

In brief, his foreign income of the previous year, not falling under (c) above, is not taxable in India.

Note :- All income accruing or arising through or from :-

(i) any business connection in India, or

(ii) any property in India; or

(iii) any asset or source of income in India, or

(iv) the transfer of capital asset situated in India shall be deemed to accrue or arise in India.

Non-Resident-Tax liability - In the case of a non-resident, the total income of such person of any previous year shall include all income from whatever source derived, which:

(a) is received or deemed to be received in India in such year by or on behalf of such person, or

(b) accrues or arises or is deemed to accrue or arise to him in India during the year.

Thus, in the hands of person who is ‘Resident’ all income received by him or accruing to him anywhere in the world, will be taxed. In the case of a ‘Not Ordinarily Resident’ person, only the Indian income will be taxable. The foreign income will not be taxable unless it is relatable to a business controlled in India or a profession which was set up in India. In the case of a ‘Non-resident’ his Indian income alone will be taxable. The foreign income of a ‘Non-resident’ is not taxable in India.
 

Money Talk

Investment in India