Section 6 of the Income Tax Act, 1961 – Residence in India

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Section 6 of the Income Tax Act helps in determination of residential status of any class of persons for the purpose of income tax. Section 6 can be bifurcated in the following manner for better understanding:

• Individual

The first stage in determining a person's residential status is to identify whether or not he is a resident. If he is a resident, the next stage is to determine whether he is a resident who is also ordinarily resident or not ordinarily resident.

Resident or Non-Resident

To be a resident, an individual needs to fulfill one or both of the following criteria:

1. Stay in India for a period or periods totaling to 182 days or more in that year.

2. Stay in India for a period or periods totaling to 60 days or more in that year and for a period or periods totaling to 360 days or more in the 4 years prior to that year.

However, in the following cases ‘60 days’ in the second criterion will be substituted by ‘182 days’:

1. In case an Indian citizen leaves India as a member of a crew in any previous year.

2. In case of employment outside India.

3. In the case of an Indian citizen or a person of Indian origin visiting India in that year with an exception (as per The Finance Act, 2020) wherein, ‘60 days’ are substituted with ‘120 days’, when an Indian citizen or a person of Indian origin visiting India in that year has a total income (except income from foreign sources, i.e., income accruing outside India as long as it is not from a business or a profession set up in India) exceeding Rs. 15 lakhs in the previous year.

Also, according to Section 6 (1A) introduced by the Finance Act, 2020 if an Indian citizen's total income, excluding income from foreign sources, exceeded Rs. 15 lakhs the previous year, that person be considered to be a resident of India only if he is not subject to taxation in any country or jurisdiction because of his residency, domicile, or any other comparable factors.

Resident is ordinarily resident or not ordinarily resident

For a resident to be a resident and ordinarily resident the following criteria are established:

1. Must be resident for at least 2 out of 10 years prior to that year.

2. Must stay in India for a period or periods totaling 730 days or more in the course of 7 years prior to that year.

The following two scenarios also help in determining whether resident is resident but not ordinarily resident (added by the Finance Act, 2020):

1. An Indian citizen or a person of Indian origin having total income in the previous year of more than Rs. 15 lakhs who stayed in India for at least 120 days but no longer than 182 days.

2. An Indian citizen who, under the new section 6 (1A), is considered to be a resident of India.

Any resident not fulfilling both or one of the above mentioned criteria is deemed to be resident but not ordinarily resident.

• Company

For a company to be a resident in a previous year, it should either:

1. Be an Indian company; or

2. Have India as the place of the company’s effective management at any time during the relevant year

For better understanding the “place of effective management” has been explained as the actual place of making key management and commercial decisions that are crucial to the business of an entity as a whole.

One of the ways to establish the place of effective management is through the test of Active Business Outside India (ABOI). A company is considered to be conducting "active business outside India" if its passive income does not exceed 50% of its total income. There are also certain additional requirements related to the location of total assets, payroll expenses and employees that must be met.

If the majority of meetings of the board of directors for a company conducting active business outside of India are conducted outside of India, that place is assumed to be where effective management for that firm resides.

The following two steps determine the place of effective management for companies not involved in active business outside India:

1. Identify or determine the individual or individuals who actually make the key management and commercial decisions for the overall operation of the business.

2. Find the place where these decisions are actually being made.

An important point to add here would be that place of effective management (POEM) guidelines does not apply to a company with turnover or gross receipts of INR 50 crores or less in a financial year.

• Hindu Undivided Family (HUF)

The first stage in determining an HUF's residential status is to identify whether or not it is a resident. If it is a resident, the next stage is to determine whether it is a resident who is also ordinarily resident or not ordinarily resident.

Resident or Non-Resident

A HUF shall be considered a resident of India if its control and management of its affairs are located wholly or partially in India.

Resident is ordinarily resident or not ordinarily resident

If a resident HUF's manager or karta meets all of the enumerated requirements, it will be considered to be a resident and ordinarily resident in India for the duration of the year.

1. He has been resident for at least two of the ten years prior to the applicable year.

2. He spent at least 730 days in India over the seven years prior to that year.

A resident HUF whose manager or karta does not meet any of the above mentioned requirements or meets only one of them will be considered as a resident but not ordinarily resident.

• Person other than individual, company or HUF

If the control and management of their affairs for the relevant year are located wholly or partially in India, then every person other than an individual, company or HUF is considered to be resident during that year.

Why is residential status important to ascertain taxability of income?

Residential status is important to ascertain taxability of income because to determine whether income is taxable or not the following factors are considered:

1. Residential status as per the Income Tax Act

2. Nature of income earned

For the purpose of this Act, the residential status of a taxpayer is ascertained each year. Hence, residential status can change from year to another or can remain the same. For example, an individual may be resident in one year and then become a non-resident the next year.

Rule 126 of the income tax rules provides further insight into Section 6.