All About Income Tax

• Income tax represents a levy on the earnings of both individuals and entities.
• Governments receive significant revenue from income tax, which is used to fund public services and programs.
• Tax regulations and laws differ based on the jurisdiction.
• Income tax is a direct tax, meaning it is remitted directly to the government by the income earner.

Charge of Income Tax

• Section 4 stipulates that income tax applies to the total income earned in the previous year by every person.
• Tax rates are determined by the finance act of the relevant assessment year.
• The financial year immediately preceding the assessment year is known as the previous year.
• The assessment year is a 12-month period starting on April 1 each year.
• A "person" includes individuals, Hindu Undivided Families (HUFs), companies, firms, Associations of Persons (AOPs), Bodies of Individuals (BOIs), local authorities, and artificial juridical persons.
• Total income is calculated according to the Income-tax Act, 1961.
• Income tax is computed on total income after all applicable deductions and exemptions.

Residential Status

• In India, residential status plays a crucial role in determining the taxability of an assessee's income.
• The Income-tax Act, 1961, classifies taxpayers by residential status: Resident and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR), and Non-Resident (NR).
• Residential status is determined for each previous year (financial year).
• The scope of income taxable in India is determined by residential status.

Determining Residential Status of an Individual

• For any given previous year, an individual is either a resident or a non-resident in India.
• A 'resident' individual is further categorized as either 'ordinarily resident' or 'not ordinarily resident'.
• An individual must meet at least one of two basic conditions to be considered a resident in India:
  • Presence in India for a total of 182 days or more during the previous year.
  • Presence in India for a total of 365 days or more during the four years immediately preceding the previous year, and at least 60 days in the relevant previous year.
• Meeting either condition qualifies an individual as a resident, while failing both results in non-resident status.
• Special cases modify the 60-day condition:
  • For Indian citizens leaving India for employment abroad during the previous year, the 60 days is replaced by 182 days.
  • For Indian citizens or persons of Indian origin visiting India during the previous year, the 60 days is replaced by 182 days.
  • A person is considered of Indian origin if they, or either parent or grandparent, were born in undivided India.

Determining "Ordinarily Resident" Status

• Besides fulfilling one of the basic residency conditions, an individual must also meet two additional criteria to be considered "ordinarily resident" in India:
  • Residency in India for at least 2 out of the 10 years prior to the relevant previous year.
  • Physical presence in India for 730 days or more during the 7 years immediately preceding the relevant previous year.
• Resident individuals who do not meet both additional conditions are classified as "Resident but Not Ordinarily Resident" (RNOR).

Residential Status of HUF

• The residential status of a Hindu Undivided Family (HUF) hinges on the location of control and management of its affairs.
• An HUF is a resident if the control and management of its affairs are situated wholly or partly in India.
• An HUF is a non-resident if the control and management of its affairs are located entirely outside India.
• Determining "Ordinarily Resident" Status of HUF:
  • An HUF is considered "ordinarily resident" if its manager (Karta) meets the two additional conditions required for individuals.
  • If the Karta does not meet these conditions, the HUF is classified as "Resident but Not Ordinarily Resident" (RNOR).

Residential Status of a Firm or Association of Persons

• The location of control and management of affairs determines the residential status of a firm or an Association of Persons (AOP).
• A firm or AOP is a resident in India if the control and management of its affairs are situated wholly or partly within India during the relevant previous year.
• It is a non-resident if the control and management of its affairs are situated wholly outside India.

Residential Status of a Company

• A company's residential status is determined as follows:
  • An Indian company is always a resident in India.
  • A foreign company is considered a resident in India only if its Place of Effective Management (POEM) is in India during the relevant previous year.
  • POEM refers to the location where critical management and commercial decisions essential for the entity's business as a whole are effectively made.

Scope of Total Income Based on Residential Status

• An assessee's residential status dictates the scope of their total income.
• Residents and Ordinarily Residents (RORs) are taxed on:
  • Income received or deemed to be received in India during the previous year.
  • Income accruing or arising or deemed to accrue or arise in India during the previous year.
  • Income accruing or arising outside India during the previous year.
• Residents but Not Ordinarily Residents (RNORs) are taxed on:
  • Income received or deemed to be received in India during the previous year.
  • Income accruing or arising or deemed to accrue or arise in India during the previous year.
  • Income accruing or arising outside India only if it is derived from a business controlled in or a profession set up in India.
• Non-Residents (NRs) are taxed on:
  • Income received or deemed to be received in India during the previous year.
  • Income accruing or arising or deemed to accrue or arise in India during the previous year.
• Income accruing or arising outside India is generally not taxable for non-residents unless it is received in India.

Key Implications of Residential Status

• Tax Incidence: Residential status has a significant impact on the taxability of income.
• Global Income: RORs are taxed on their global income, while NRs are generally taxed only on income sourced in India.
• Tax Planning: Understanding residential status is essential for tax planning and ensuring compliance.
• Double Taxation Relief: Residential status affects eligibility for Double Taxation Avoidance Agreements (DTAA).