What Does The Term “Residential Status” In Income Tax Mean?
When it comes to income tax, residency status is essential to figuring your tax responsibilities. It influences how income and investments are treated by the tax system and is dependent on how long a person stays in a nation. This article defines resident status for income tax purposes, highlights the distinction between residents and non-residents in India, and describes how it is classified for efficient tax planning in India.
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It is important to know your residential status when submitting your income tax return. Your tax obligations can be greatly impacted by your residence status, regardless of whether you are a resident, non-resident, or resident but not normally resident. Now let’s explore the nuances of residence status and how your income tax is affected by it.
Meaning of residential status in India
In India, a person’s tax status is determined by their residential status, which is determined by how long they have lived there throughout the course of a fiscal year. It affects an individual’s tax liabilities by classifying them as either resident, non-resident, or resident but not normally resident.
What is residential status in Income Tax?
The Indian income tax laws distinguish between citizenship and residential status. Even citizens of India are permitted to be non-residents for a period of one year. In the same way, a foreign national may be considered a resident for the purposes of taxes. For people, businesses, and partnerships, determining residential status varies, particularly with relation to tax liabilities for a given fiscal year.
In terms of income tax, residential status shows a person’s tax responsibility for a specific financial year. Based on their attendance throughout the current fiscal year and the four years prior, it is calculated. Declaring the applicable residence status on tax returns is required.
Resident Status classification
In India, a person’s residency status divides them into three groups:
- Resident: People who stay in India for more than 182 days are liable to pay worldwide income taxes.
- Non-Resident: People who visit India for fewer than 182 days & solely pay taxes on their income there.
- Resident but Not Ordinarily Resident (RNOR): Individuals who have lived in a place for more than 182 days, 60 days in the previous year, or 365 days in the four years prior are classified as Resident but Not Ordinarily Resident (RNOR). RNORs are only subject to taxes on income earned in India, or worldwide if they were previously considered residents.
The range of income subject to taxation in India is determined by this classification, which also aids in assessing tax responsibilities.
Difference in India between a Resident and a Resident but Not a Regular Resident
The primary distinctions that exist between an Indian resident and a resident who does not typically reside there are as follows:
| Aspect | Resident | Resident but not ordinarily resident |
| Global income | Yes | Only income earned or received in India |
| Tax rates | Regular tax rates apply | Slab rates apply, subject to specific conditions |
| Residential status | Must meet one of the criteria | Must meet both the criteria |
| Stay in India | More than 182 days | 1. More than 182 days or |
| 2. More than 365 days (four years prior) and more than 60 days (previous year) | ||
| Tax benefits | Available | Limited tax benefits for foreign income |
In income tax, it is essential to comprehend residence status. It controls tax obligations and the range of revenue; it’s not only about physical presence. Your tax journey is therefore shaped by this classification, regardless of whether you are a resident, non-resident, or resident but Not Ordinarily Resident (RNOR). This affects your financial obligations while guaranteeing precise and fair taxation.
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