Basic Concept of Income Tax LESSON 2

There are different tests to be applied for different types of person, let us understand test for each category of
person:

TEST OF RESIDENCE FOR INDIVIDUAL

Resident
Basic Conditions
Under Section 6(1) of the Income-tax Act, an individual is said to be resident in India in any previous year if
period of physical stay in India is
a. 182 days or more in that previous year, OR
b. 60 days or more in that Previous Year AND 365 days or more in Preceding 4 years
If an assessee fails to meet both the above criteria in any Previous Year, then he is considered as Non-Resident
for tax purpose in that Previous Year.

Exception to the Basic Condition

In case of the following individuals:
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian
ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958, or for the purposes of
employment outside India, the provisions of the second condition shall apply in relation to that year as
if for the words “sixty days (60 days)”, occurring therein, the words “one hundred and eighty-two days
(182 days)” had been substituted.
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of
section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions
of the second condition shall apply in relation to that year as if for the words “sixty days (60 days)”,
occurring therein, the words “one hundred and eighty-two days (182 days)” had been substituted.
However, in case of the citizen or person of Indian origin in the above cases having total income,
other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year,
for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been
substituted. [Amended vide Finance Act, 2020]
Deemed Resident: An Individual will be considered as Deemed Resident in the below case:
l Individual being a Citizen of India, AND
l having Total Income in excess 15 lakhs in the Previous Year (Other than foreign Source) AND
l not liable to tax in any other country/territory, by reason of domicile, residence or any similar criteria.
[Section 6(1A) i.e. concept of Deemed Resident introduced vide Finance Act, 2020]

Non-Resident (NR)
If an individual does not satisfy any of the above basic conditions then, he will be treated as Non-Resident.
It must be noted that the fulfillment of any one of the above conditions (a) or (b) as applicable will make an
individual resident in India for tax purposes. Further it is to be noted that these conditions are alternative and
not cumulative in their application.

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EP-TL&P Basic Concept of Income Tax

Resident and Ordinarily Resident (ROR)

An individual may become a resident and ordinarily resident in India if he satisfies both the following conditions
given u/s 6(1) besides satisfying any one of the above mentioned conditions:
(i) he is a resident in atleast any two out of the ten previous years immediately preceding the relevant
previous year, and
(ii) he has been in India for 730 days or more during the seven previous years immediately preceding the
relevant previous year.

Resident but Not Ordinarily Resident (RNOR)

An individual is not ordinarily resident in any previous year if –
(a) he has been a non-resident in India in nine out of the ten previous years preceding that year; or
(b) he has during the seven previous years preceding that year been in India for a period of, or periods
amounting in all to, seven hundred and twenty-nine days (729 days) or less;
(c) a citizen of India, or a person of Indian origin, having total income, other than the income from foreign
sources, exceeding fifteen lakh rupees during the previous year, who has been in India for a period
or periods amounting in all to one hundred and twenty days or more but less than one hundred and
eighty- two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation: “income from foreign sources” means income which accrues or arises outside India (except income
derived from a business controlled in or a profession set up in India.

Important Points
l The fact that an assessee is resident in India in respect of one year does not automatically mean that
he would be resident in the preceding or succeeding years as well. Consequently, the residential
status of the assessee should be determined for each year separately. This is in view of the fact
that a person resident in one year may become non-resident or not ordinarily resident in another
year and vice versa.
l It must also be noted that the residential status of an individual for tax purposes is neither based upon nor
determined by his citizenship, nationality and place of birth or domicile. This is because of the fact that, for
tax purposes, an individual may be resident in more than one country in respect of the same year.
l The common feature in both the above conditions is the stay of the individual in India for a specified
period. The period of stay required in each of the conditions need not necessarily be continuous
or consecutive nor it is stipulated that the stay should be at the usual place of residence, business
or employment of the individual. Purpose of stay is immaterial in determining the residential
status.
l The stay may be anywhere in India and for any length of time at each place in cases where the stay in
India is at more places than one, what is required is the total period of stay should not be less than the
number of days specified in each condition.
l While determining residential status, the day of leaving and returning to India should be considered as
a stay in India.
l Person of Indian Origin is one who is, or either of his parents or grandparents were born in Undivided
India.

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Basic Concept of Income Tax LESSON 2

l India means territory of India, its territorial waters, continental shelf, Exclusive Economic Zone (upto 200
nautical miles) and airspace above its territory and territorial waters.
l Where the exact arrival and departure time is not available then the day he comes to India and the day
he leaves India is counted as stay in India.

Illustration 3:
Mr. A, an Indian Citizen, is living in Mumbai since 1950, he left for China on July 1, 2019 and comes back
on August 7, 2024. Determine his residential status for the assessment year 2025-26.
Solution:
Stay in India for a minimum period of 182 days in the previous year : Mr. A has stayed in India
for 237 (viz. 25 + 30 + 31 + 30 + 31 + 31 + 28 + 31) days in the previous year 2024-25.
So, this test is satisfied.
So, Mr. A shall be a resident in India during the previous year 2024-25. (Assessment Year 2025-26). Keeping
in view the facts of the given case, Mr. A satisfies the two additional conditions also namely: He is resident
in two out of ten previous years preceding the relevant previous year.

PY Stay in PY (days) Stay during PY Basic Resident/Non-

(days) Condition Resident
Satisfied

2023-24 Nil - None Non-Resident

2022-23 Nil - None Non-Resident

2021-22 Nil - None Non-Resident

2020-21 Nil - None Non-Resident

2019-20 30+31+30+1= 92 365 days Second Resident

2018-19 365 365 First Resident

His stay in India is also more than 730 days in 7 previous years preceding the relevant previous year. As
he left for China on 1st July 2019.

PY Stay (days)

2023-24 Nil

2022-23 Nil

2021-22 Nil

2020-21 Nil

2019-20 92

2018-19 365

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EP-TL&P Basic Concept of Income Tax

2017-18 366

Total Stay in 7 Previous Years 823

Hence, Mr. A is resident and ordinay resident In India for the assessment year 2025-26

Illustration 4:
Mr. Steve Waugh, the Australian cricketer comes to India for 100 days every year. Find out his
residential status for AY 2025-26.
Solution:
Step 1 : The total stay of Mr. Steve Waugh in the last 4 preceding years is 400 days and his stay in India
during the previous year is 100 days. Since, he satisfied the second condition in section 6(1), he is
resident.
Step 2 : Since his total stay in India in the last 7 years preceding the previous years is 700 days, he does
not satisfy the minimum requirement of 730 days in 7 years.
Therefore the residential status of Mr. Steve Waugh for the assessment year 2025-26 is Resident but
not ordinarily resident in India.

Illustration 5:
Dr. A, an Indian Citizen and a Professor in IIM, Lucknow, left India on September 15, 2024 for USA to take
up a Professor’s job in MIT, USA. Determine his residential status for the assessment year 2025-26.
Solution:
Dr. A being a citizen of India and who has gone out of the country for employment, will be governed by 182 days
test only and therefore the second condition under section 6(1), i.e. 60 days during relevant previous year
shall not be applicable.
Dr. A stayed in India for 168 (viz. 30 + 31 + 30 + 31 + 31 + 15) days only in the relevant previous year.
Hence, Dr. A shall be a non-resident in India for the assessment year 2025-26 as condition by stay of 182
days. in relevant previous year is not satisfied.

Illustration 6:
Mr. Anil, an Indian citizen, leaves India on 22nd September, 2024 for the first time to work as an Engineer
in France. Determine his residential status for AY 2025-26.
Solution:
During the previous year 2024-25, Mr. Anil, an Indian citizen, was in India for 175 days (i.e. 30 + 31 + 30 + 31 +
31 + 22). He does not satisfy the minimum criteria of 182 days. Also since he is an Indian citizen leaving
India for the purpose of employment outside India, the second condition u/s 6(1) is not applicable to
him.
Therefore Mr. Anil is non-resident for the AY 2025-26.

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Basic Concept of Income Tax LESSON 2

CASE LAW

April 3, 2009 Manoj Kumar Reddy V. Income Tax Officer (International Taxation) ITAT

Facts of the Case: The case relates to AY 2005-06. The assessee was an employee of an Indian company.
On 23.01.2004, the employer Indian company issued a deputation letter to the assessee and directed him
to work on some specified project in USA. As per the deputation order, it was mentioned that he will remain
continued to be employed under the Indian company only.

During the deputation period, he came to India and stayed in India from 18.08.2004 to 06.09.2004. After
completing his work he returned back to India on 31.01.2005 at 4 A.M. Summary of his stay in India is given
below:-

Previous Year No. of days in India

2000-01 365

2001-02 365

2002-03 365

2003-04 306

2004-05 78

Following contentions were observed by ITAT in this case:-

l During PY 2004-05, total stay of assessee in India was for a period less than 182 days. Hence, first
limb of Section 6(1) shall not apply.

l As far as second limb of Section 6(1) is concerned. It is getting applicable as stay in India during
the PY is for 78 days i.e. more than 60 days and total stay in all 4 PY preceding PY 2004-05 is
exceeding 365 days. However, benefit given in explanation 1 to the second limb also needs to be
examined.

Explanation 1 clause (a) applies where assessee leaves India for employment purpose. ITAT relied on
decision of Authority of Advance Ruling in case of British Gas India (P) Ltd. [2006] 285 ITR 218 (New Delhi)
where it was held that for purpose of “employment outside India”, even assessee on deputation sent outside
India by an Indian employer is also covered. However, clause (a) of Explanation 1 shall apply for that year
only in which the assessee is leaving India for employment, i.e. PY 2003-04 in this case. Hence, Clause (a)
of Explanation 1 is applicable for PY 2003-04 only not for PY 2004-05.

Clause (b) to Explanation 1: The assessee was for a “visit” in India from outside India during 18.08.2004
to 06.09.2004. However, he returned back to India on 31.01.2005. The period after 31.01.2005 cannot be
treated as “visit”. Hence, clause (b) to Explanation 1 cannot apply. However, to determine period of stay
under second limb of Section 6(1) period of visit shall be excluded. Hence, total stay during PY 2004-05 will
be reckoned from 31.01.2005 to 31.03.2005.

Judgement: ITAT held that assessee’s total stay was for a period of 59 days only. 31.01.2005 was not
included because he arrived in India at 4 A.M. The residential status of assessee - Non-Resident.

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Basic Concept of Income Tax LESSON 2

situated outside India. However, the payroll expenditure in respect of the MD, the CEO and the sales head being
employees resident in India exceeds 50% of the total payroll expenditure. Therefore, A Co. is not engaged in
active business outside India.
Example 3: The basic facts are same as in Example 1. Further facts are that all the directors of the A Co. are
Indian residents. During the relevant previous year 5 meetings of the Board of Directors are held of which two
were held in India and 3 outside India with two in country X and one in country Y.
Interpretation: A Co. is engaged in active business outside India as the facts indicated in Example 1 establish.
The majority of board meetings have been held outside India. Therefore, the POEM of A Co. shall be presumed
to be outside India.
Example 4: The facts are same as in Example 1 but it is established by the Assessing Officer that although
A Co.’s senior management team signs all the contracts, for all the contracts above Rs. 10 lakh the A Co.
must submit its recommendation to B Co. and B Co. makes the decision whether or not the contract may
be accepted. It is also seen that during the previous year more than 99% of the contracts are above Rs.
10 lakh and over past years also the same trend in respect of value contribution of contracts above Rs. 10
lakh is seen.
Interpretation: These facts suggest that the effective management of the A Co. may have been usurped by the
parent company B Co. Therefore, PoEM of A Co. may in such cases be not presumed to be outside India even
though A Co. is engaged in active business outside India and majority of board meeting are held outside India.
For Detailed POEM Guidelines:
http ://[Link]/news/circular06/[Link]

SCOPE OF TOTAL INCOME [SECTION 5]

Section 5 of Income Tax Act, 1961 provides Scope of total Income in case of person who is a resident, in the case
of a person not ordinarily resident in India and person who is a non-resident. Income can be from any source
which (a) is received or is 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 such year ; or (c) accrues or arises to him
outside India during such year .
Scope of total income has been defined on the basis of Residential status
(A) Resident and Ordinarily Resident Assessee
According to Sub-section (1) of Section 5 of the Act the total income of a resident and ordinarily resident
assessee would consist of :
(i) income received or deemed to be received in India during the accounting year by or on behalf of
such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting
year;
(iii) income which accrues or arises to him outside India during the accounting year.
It is important to note that under clause (iii) only income accruing or arising outside India is included.
Income deemed to accrue or arise outside India is not includible.
(B) Resident but Not Ordinarily Resident In India
Proviso to section (1) of section 5 the total income in case of resident but not ordinarily resident in India

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EP-TL&P Basic Concept of Income Tax

(i) income received or deemed to be received in India during the accounting year by or on behalf of
such person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the accounting
year;
(iii) income which accrues or arises to him outside India during the previous year if it is derived from a
business controlled in or a profession set up in India.
(C) Non-Resident
Sub-section (2) of Section 5 provides that the total income of a non-resident would comprise of :
(i) income received or deemed to be received in India in the accounting year by or on behalf of such
person;
(ii) income which accrues or arises or is deemed to accrue or arise to him in India during the previous
year.

Rule of Taxation on the basis of Residential Status

Nature of Income ROR RNOR NR

Income received in India (Whether accrued in or outside India) Taxed Taxed Taxed

Income deemed to be received in India (Whether accrued in or outside Taxed Taxed Taxed
India)

Income accruing or arising in India (Whether received in India or outside Taxed Taxed Taxed
India)

Income deemed to accrue or arise in India (Whether received in India Taxed Taxed Taxed
or outside India

Income received and accrued outside India from a business controlled Taxed Taxed Not Taxed
or a profession set up in India

Income received and accrued outside India from a business controlled Taxed Not Not
from outside India or a profession set up outside India Taxed Taxed

Income earned and received outside India but later on remitted to Not Not Not Taxed
India (Whether tax incidence arises at the time of remittance) Taxed Taxed

Explanation 1 - Income accruing or arising outside India shall not be deemed to be received in India within the
meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in
India.
Explanation 2 - For the removal of doubts, it is hereby declared that income which has been included in
the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or
arisen to him shall not again be so included on the basis that it is received or deemed to be received by
him in India.

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 RESIDENCE AND SCOPE OF TOTAL INCOME 2.15

1.5 Residential status of local authorities and artificial

juridical persons
Resident: Local authorities and artificial juridical persons would be resident in
India if the control and management of its affairs is situated wholly or partly in
India.
Non-resident: Where the control and management of the affairs is situated
wholly outside India, they would become non-residents.

2. SCOPE OF TOTAL INCOME

Section 5 provides the scope of total income in terms of the residential status of
the assessee because the incidence of tax on any person depends upon his
residential status in India. The scope of total income of an assessee depends upon
the following three important considerations:
(i) the residential status of the assessee;
(ii) the place of accrual or receipt of income, whether actual or deemed; and
(iii) the point of time at which the income had accrued to or was received by or
on behalf of the assessee.

The ambit of total income of the three classes of assessees would be as follows:
(1) Resident and ordinarily resident (ROR)
The total income of an ROR would, under section 5(1), consist of:
(i) income received or deemed to be received in India during the previous year;
(ii) income which accrues or arises or is deemed to accrue or arise in India
during the previous year; and

(iii) income which accrues or arises outside India even if it is not received or
brought into India during the previous year.
In simpler terms, an ROR has to pay tax on the total income accrued or deemed
to accrue, received or deemed to be received in or outside India during the
relevant previous year.

© The Institute of Chartered Accountants of India

 2.16 INCOME TAX LAW

(2) Resident but not ordinarily resident (RNOR)

Under section 5(1), the total income of an RNOR would consist of –
(i) income received or deemed to be received in India during the previous year;

(ii) income which accrues or arises or is deemed to accrue or arise in India

during the previous year; and
(iii) income derived from a business controlled in or profession set up in India,
even though it accrues or arises outside India.
Note – All other income accruing or arising outside India which is not received or
deemed to be received or deemed to accrue or arise in India would not be included
in his total income.
(3) Non-resident
A non-resident’s total income under section 5(2) includes:
(i) income received or deemed to be received in India in the previous year; and
(ii) income which accrues or arises or is deemed to accrue or arise in India
during the previous year.

Note: All assessees, whether resident or not, are chargeable to tax in respect of
their income accrued, arisen, received or deemed to accrue, arise or to be
received in India whereas a resident alone (resident and ordinarily resident in the
case of individuals and HUF) is chargeable to tax in respect of income which
accrues or arises outside India.

Clarification regarding liability to income-tax in India of a non-resident

seafarer receiving remuneration in NRE (Non-Resident External) account
maintained with an Indian Bank [Circular No.13/2017, dated 11.04.2017 and
Circular No.17/2017, dated 26.04.2017]
Income by way of salary, received by non-resident seafarers, for services rendered
outside India on a foreign going ship (with Indian flag or foreign flag) and
received into the NRE bank account maintained with an Indian bank shall not be
included in the total income.

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 RESIDENCE AND SCOPE OF TOTAL INCOME 2.17

Residential Status and Scope of Total Income: Whether the following incomes
are to be included in Total Income?

Scope of total Resident and Resident but not Non-Resident

Income Ordinarily Ordinarily
Resident (ROR) Resident
(RNOR)
Income received Yes Yes Yes
or deemed to be
received in India
during the
previous year
Income accruing Yes Yes Yes
or arising or
deeming to
accrue or arise in
India during the
previous year
Income accruing Yes, even if such Yes, but only if No
or arising outside income is not such income is
India during the received or derived from a
previous year brought into India business controlled
during the in or profession set
previous year up in India;
Otherwise, No.

ILLUSTRATION 5
From the following particulars of income furnished by Mr. Anirudh pertaining to the
year ended 31.3.2025, compute the total income for the A.Y. 2025-26, if he is:
(i) Resident and ordinary resident;
(ii) Resident but not ordinarily resident;

(iii) Non-resident

Particulars `

(a) Short term capital gains on sale of shares of an Indian Company, 15,000
received in Germany

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 2.18 INCOME TAX LAW

(b) Dividend from a Japanese Company, received in Japan 10,000

(c) Rent from property in London deposited in a bank in London, later 75,000
on remitted to India through approved banking channels

(d) Dividend from RP Ltd., an Indian Company 6,000

(e) Agricultural income from land in Gujarat 25,000

SOLUTION
Computation of total income of Mr. Anirudh for the A.Y. 2025-26
Resident Resident Non-
Particulars & but not Resident
ordinarily ordinarily
resident resident
` ` `
1) Short term capital gains on sale of 15,000 15,000 15,000
shares of an Indian company, received
in Germany
2) Dividend from a Japanese company, 10,000 - -
received in Japan
3) Rent from property in London 52,500 - -
deposited in a bank in London [See
Note (i) below]
4) Dividend from RP Ltd., an Indian 6,000 6,000 6,000
Company
5) Agricultural income from land in
Gujarat [See Note (ii) below] - - -
Total Income 83,500 21,000 21,000

Notes:
(i) It has been assumed that the rental income is the gross annual value of the
property. Therefore, deduction @30% under section 24, has been provided
and the net income so computed is taken into account for determining the
total income of a resident and ordinarily resident.

© The Institute of Chartered Accountants of India

 RESIDENCE AND SCOPE OF TOTAL INCOME 2.19

`
Rent received (assumed as gross annual value) 75,000
Less: Deduction under section 24 (30% of ` 75,000) 22,500
Income from house property 52,500

(ii) Agricultural income is exempt under section 10(1).

2.1 Meaning of “Income received or deemed to be

received”
All assessees are liable to tax in respect of the income received or deemed to be
received by them in India during the previous year irrespective of -
(i) their residential status, and
(ii) the place of its accrual.
Income is to be included in the total income of the assessee immediately on its
actual or deemed receipt. The receipt of income refers to only the first occasion
when the recipient gets the money under his control. Therefore, when once an
amount is received as income, remittance or transmission of that amount from
one place or person to another does not constitute receipt of income in the
hands of the subsequent recipient or at the place of subsequent receipt.

Income deemed to be received in India

[Section 7]

Contribution in excess of 12% Contribution by the

Central Government or Amount transferred from
of salary to Recognised unrecognised provident
provident fund or interest any other employer in the
P.Y. under a pension fund to recognised
credited in excess of 9.5% p.a provident fund (being the
(Annual accretion to the credit scheme referred u/s
80CCD employer's contribution
of RPF) and interest thereon)

2.2 Meaning of Income ‘accruing’ and ‘due’

Accrue refers to the right to receive income, whereas due refers to the right to
enforce payment of the same. In other words, when the right to receive income

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