Residential Status under the Income Tax Act, 1961

The determination of a person's residential status is fundamental under the Income Tax Act, 1961. It plays a critical role in defining the scope of a taxpayer's income that is chargeable to tax in India. Whether an individual is a resident or a non-resident impacts how their global and domestic income is assessed for taxation.

With the increasing mobility of professionals, cross-border business transactions, and frequent changes in residence due to employment or other reasons, understanding the residency rules has become more relevant than ever.

This article presents a detailed analysis of India’s income tax residency rules, the criteria under the law, relevant judicial interpretations, amendments by the Finance Act, 2020, and implications for various classes of taxpayers.

Legal Foundation: Section 6 of the Income Tax Act, 1961

Section 6 of the Income Tax Act provides the statutory basis for determining an individual’s residential status. It lays down criteria for the following categories of taxpayers:

• Individuals
• Hindu Undivided Families (HUFs)
• Companies
• Firms and other associations of persons (AOPs)

Importance of Residential Status

The residential status of a person determines:

• The scope of their total income liable to be taxed in India.
• Eligibility to claim certain exemptions or deductions.
• Tax rates and compliance obligations under various provisions of the Income Tax Act.

Classification of Residential Status

Broadly, taxpayers are classified into two categories:

1. Resident
2. Non-Resident

Residents are further classified into:

• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)

Let’s examine how residential status is determined for individuals.

Residential Status of Individuals

Basic Conditions under Section 6(1)

An individual is said to be a resident in India for a given previous year if they satisfy either of the following:

• Stay in India for 182 days or more during the relevant previous year; or
• Stay in India for at least 60 days during the relevant previous year and 365 days or more during the 4 immediately preceding previous years.

Exceptions to the 60-Day Rule

The 60-day period is extended to 182 days in the following cases:

• Indian citizens leaving India for employment abroad, or
• Indian citizens or Persons of Indian Origin (PIOs) coming to India on a visit.

This ensures that Non-Resident Indians (NRIs) and Indian employees working abroad do not unintentionally become residents for tax purposes due to short visits.

Additional Conditions for 'Ordinarily Resident' – Section 6(6)

Once an individual qualifies as a resident, they are classified as either Ordinarily Resident or Not Ordinarily Resident, based on two additional tests:

An individual is Ordinarily Resident if they:

• Have been a resident in India in at least 2 out of 10 preceding previous years, and
• Have stayed in India for at least 730 days during the 7 years preceding that year.

Failing either of these conditions makes the individual a Resident but Not Ordinarily Resident (RNOR).

Non-Resident (NR)

If an individual does not satisfy any of the two basic conditions under Section 6(1), they are treated as a Non-Resident for that financial year.

Scope of Total Income Based on Residential Status

The residential status determines whether global income or only Indian income will be taxable in India.

Note: RNORs are taxed on foreign income only if it is derived from a business controlled from India or a profession set up in India.

Residential Status of Hindu Undivided Families (HUF)

An HUF is considered a Resident in India if:

• The control and management of its affairs is wholly or partly in India.
• It is Non-Resident only if control and management are entirely outside India.

Classification into ROR and RNOR

Based on the status of the Karta, who must satisfy the same two additional conditions under Section 6(6).

Residential Status of Companies

As per Section 6(3), a company is considered a Resident in India if:

• It is an Indian company, or
• Its Place of Effective Management is in India.

Explanation:

Place of effective management refers to the location where key management decisions are made.

Introduced to check tax evasion through shell companies operating from tax havens.

Residential Status of Firms and Other Entities

As per Section 6(4), a firm or association of persons (AOP) is treated as a resident if:

• Control and management are wholly or partly in India.
• They are non-resident only when control is completely outside India.

Importance of Accurate Classification

• Incorrect determination of residential status can lead to:
• Penalty proceedings
• Wrongful tax demands or refunds

Double Taxation Relief under Income Tax Act, 1961

Section 90 – Agreements with Foreign Countries

The Central Government may enter into agreements with foreign governments or specified territories to:

• Grant relief from double taxation on the same income taxed both in India and the foreign jurisdiction.
• Avoid double taxation by allocating taxing rights between the two countries.
• Exchange tax information to prevent evasion or avoidance.
• Facilitate the recovery of taxes under respective laws.

Key Provisions:

Sub-section (2): If a Double Taxation Avoidance Agreement (DTAA) applies, the assessee can opt for the more beneficial provisions between the Act and the agreement.

Sub-section (2A): Anti-avoidance rules under Chapter X-A (GAAR) apply regardless of whether they benefit the assessee.

Sub-section (3): Undefined terms will be interpreted as per official government notifications unless inconsistent with the Act or the agreement.

Sub-section (4): A non-resident assessee must furnish a Tax Residency Certificate (TRC) from their home country to claim DTAA benefits.

Sub-section (5): Additional prescribed documents and information must be submitted along with the TRC.

Explanations:

Explanation 1: Taxing foreign companies at a higher rate than domestic ones is not considered discriminatory.

Explanation 2: “Specified territory” refers to any foreign area notified by the Central Government.

Explanations 3 & 4: Define how terms in agreements should be interpreted based on the agreement, the Act, or official notifications.

Section 90A – Agreements Between Specified Associations

Specified associations in India (e.g., trade bodies) can enter into agreements with their counterparts in notified foreign territories for:

1. Scope and Purpose

Section 90A allows a specified association in India to enter into an agreement with a specified association in a notified foreign territory. The Central Government can adopt and implement such an agreement by publishing a notification in the Official Gazette.

These agreements may cover:

• Relief for double taxation of the same income in both India and the foreign territory.
• Avoidance of double taxation to promote trade and investment.
• Exchange of information to prevent tax evasion or investigate avoidance.
• Recovery of taxes across borders.

2. Applicability and Benefits

• If an agreement is notified, and applies to an assessee, the more beneficial provisions between the agreement and the Income Tax Act will apply.
• However, Chapter X-A (GAAR) will apply even if it is not beneficial to the assessee.

3. Interpretation of Terms

• If any term is undefined in both the Act and the agreement, it will take the meaning provided in a Central Government notification.
• Such meanings shall apply retrospectively from the date the agreement took effect.

4. Conditions for Non-Residents

• A non-resident assessee cannot claim relief under such an agreement unless they obtain a Tax Residency Certificate (TRC) from their home country.
• Additional documents and prescribed information must also be submitted.

5. Key Definitions

• Specified association: Any institution, body, or association (incorporated or not), functioning under Indian or foreign law, notified by the Central Government.
• Specified territory: Any area outside India notified by the Central Government for the purpose of this section.

6. Clarification

Higher tax rates imposed on companies incorporated in the foreign territory as compared to Indian companies shall not be treated as discriminatory or less favourable treatment.

In essence, Sections 90 and 90A empower India to enter into tax agreements that provide relief from or prevent double taxation, protect against tax evasion, and streamline cross-border tax compliance, while ensuring the anti-avoidance framework remains intact.

Judicial Interpretations

1. Union of India and Anr. v. Azadi Bachao Andolan and Anr. (2003)

In Union of India v. Azadi Bachao Andolan (2003), the Supreme Court of India reversed the Delhi High Court’s judgment that had quashed CBDT Circular No. 789 of 2000. This circular clarified that a Certificate of Residence issued by the Mauritius authorities sufficed to avail tax benefits under the Indo-Mauritius Double Taxation Avoidance Convention (DTAC), 1983. The High Court held the circular ultra vires, asserting it interfered with the quasi-judicial powers of assessing officers and encouraged treaty shopping.

The Supreme Court, however, upheld the circular and the validity of the DTAC, ruling that section 90 of the Income Tax Act empowers the government to enter into such treaties. It held that treaty benefits cannot be denied merely due to tax exemptions in Mauritius, and clarified that “liable to taxation” does not equate to “actual payment of tax.”

The Court emphasised the principle of stare decisis, the binding nature of CBDT circulars under Section 119, and the liberal interpretation of tax treaties, thereby endorsing the legality of tax planning via treaty routes unless expressly prohibited.

2. Mansarovar Commercial Pvt. Ltd. v. Commissioner of Income Tax (2023)

In Mansarovar Commercial Pvt. Ltd. v. CIT Delhi (2023), the Supreme Court dealt with whether the Income Tax Act, 1961 applied to companies incorporated in Sikkim before the Act was extended to the state. The appellant companies, registered under the Sikkim Companies Act, 1961, claimed their income for A.Ys. 1987–88 to 1989–90 was earned solely in Sikkim and taxed under the Sikkim State Income-tax Manual, 1948.

The Revenue, however, asserted that these companies were effectively controlled from Delhi by their auditor, Rattan Gupta, and hence, were resident Indian companies under Section 6(3) of the Act, making them liable under the Indian Income Tax Act, 1961.

The Supreme Court upheld the Delhi High Court's findings, affirming that the companies' real control and management lay in Delhi, not Sikkim. The Court emphasised that de facto control, not mere registration in Sikkim, determines residency for tax purposes. It also validated the service of notice under Section 148 on Rattan Gupta, holding him to be effectively the principal officer.

The Court dismissed the argument that reassessment under Section 147 was invalid due to the absence of an original assessment, relying on Sun Engineering Works (1992). Furthermore, it upheld the mandatory levy of interest under Sections 234A and 234B, citing Anjum M.H. Ghaswala (2002), and rejected ITAT’s reliance on the Ranchi Club case, which was held to be bad law. The appeals were dismissed, reaffirming the jurisdiction of Delhi tax authorities and applicability of the Income Tax Act, 1961 to the appellants.

Procedural Aspects and Compliance

Form 10FA: Application for Tax Residency Certificate (TRC) from Indian authorities.

Form 10FB: Certificate of residency issued to individuals for claiming DTAA benefits.

Disclosures: RNORs and NRs must report only Indian-source income, but must comply with FATCA/CRS where applicable.

Key Highlights from the Income Tax Bill, 2025

The Income Tax Bill, 2025 introduces a simplified "tax year" concept while retaining the existing residency criteria and classifications

Introduction of the 'Tax Year' Concept

The new Income Tax Bill proposes replacing the terms "assessment year" and "previous year" with a unified "tax year" to simplify tax compliance and reduce confusion among taxpayers. 

Residency Criteria Remain Largely Unchanged

An individual is considered resident if:

• Present in India for 182 days or more in a tax year, or
• Present for 60 days or more in a tax year and 365 days in the preceding four years.

Exceptions:

• Indian citizens leaving India for employment or ship crew: 182-day rule applies, not 60.
• NRIs/PIOs visiting India: If income exceeds ₹15 lakh, the 60-day rule becomes a 120-day threshold.
• Indian citizens earning over ₹15 lakh in India and not taxed elsewhere will still be classified as (Resident but Not Ordinarily Resident) RNOR, not full residents. (Amendments Introduced by Finance Act, 2020)
• No change in RNOR/NOR/Non-resident classifications.

 No Changes to Existing Residency Classifications

The three existing categories for individual taxpayers remain:

• Resident and Ordinarily Resident (ROR)
• Resident but Not Ordinarily Resident (RNOR)
• Non-Resident (NR)​

The new residency rules and other provisions outlined in the Income Tax Bill, 2025, are set to come into effect from April 1, 2026, aligning with the start of the financial year 2026–27. ​

Conclusion

Residential status is a fundamental concept in Indian tax law, acting as a gateway to determine the extent of taxability. With changing global economic dynamics and increased cross-border movement, the Income Tax Act has evolved to plug tax avoidance and provide clarity.

References

[1] Income Tax Act, 1961 

[2] Finance Act, 2020

[3] Union of India and Anr. v. Azadi Bachao Andolan and Anr., 2003 AIR SCW 5766

[4] Mansarovar Commercial Pvt. Ltd. v. Commissioner of Income Tax, Civil Appeal No. 5769 of 2022

[5] Budget 2025-2026

[6] Income Tax Bill, 2025

Important Link

Law Library: Notes and Study Material for LLB, LLM, Judiciary, and Entrance Exams