Indian Tax Residency Rules and Income Incidence
VII. Residential Status and Incidence of Taxation
A. Determination of Residential Status of an Individual (Section 6)
The residential status of an individual is determined for each Previous Year and is purely based on the duration of stay in India. It is separate from citizenship, domicile, or nationality.
The individual can be classified into one of the following three categories:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Step 1: Check for ‘Resident’ Status (R)
An individual is a Resident (R) if they satisfy at least one of the following two Basic Conditions under Section 6(1):
| Basic Condition | Description |
|---|---|
| Condition 1 (182-Day Rule) | Stay in India for 182 days or more during the relevant Previous Year (PY). |
| Condition 2 (60/120-Day Rule) | Stay in India for 60 days or more during the relevant PY AND 365 days or more during the four years immediately preceding the PY. |
- If an individual satisfies neither of the above conditions, they are a Non-Resident (NR).
- If they satisfy at least one condition, they are a Resident (R), and we move to Step 2.
Important Exceptions to the 60-Day Rule:
The 60-day limit in Condition 2 is substituted with 182 days for the following Indian citizens/Persons of Indian Origin (PIO):
- An Indian citizen who leaves India during the PY for the purpose of employment outside India (or as a member of the crew of an Indian ship).
- An Indian citizen or PIO who comes to India on a visit during the PY, and their total Indian income (excluding foreign sources) does not exceed ₹15 Lakh.
The 60-day limit is substituted with 120 days if the Indian citizen/PIO comes on a visit, and their total Indian income (excluding foreign sources) exceeds ₹15 Lakh.
Step 2: Check for ‘Ordinarily Resident’ Status (ROR)
A Resident (R) must satisfy both of the following two Additional Conditions under Section 6(6) to be classified as Resident and Ordinarily Resident (ROR):
| Additional Condition | Description |
|---|---|
| Condition A (2/10 Rule) | Has been a Resident in India in at least 2 out of 10 years immediately preceding the relevant PY. |
| Condition B (730-Day Rule) | Has been in India for a total period of 730 days or more during the 7 years immediately preceding the relevant PY. |
- If the Resident satisfies both Additional Conditions, they are ROR.
- If the Resident satisfies neither or only one of the Additional Conditions, they are Resident but Not Ordinarily Resident (RNOR).
B. Incidence of Residence on Tax Liability (Section 5)
The Incidence of Taxation refers to the extent or scope of an individual’s income that is subject to tax in India. The scope of total income is exclusively governed by the residential status of the assessee.
The taxability of any income depends on its nature: Indian Income (received or accrued/arisen in India) or Foreign Income (accrued and received outside India).
| Residential Status | Taxability Rule (Scope of Total Income) | Incidence of Tax |
|---|---|---|
| Resident and Ordinarily Resident (ROR) | Taxable on Global Income (Indian Income + ALL Foreign Income). | Maximum Incidence: ROR is taxed on income earned anywhere in the world. |
| Resident but Not Ordinarily Resident (RNOR) | Taxable on Indian Income PLUS Foreign Income derived from a business controlled from or a profession set up in India. | Moderate Incidence: Pure foreign income (e.g., rent from a foreign house, passive investment income) is exempt. |
| Non-Resident (NR) | Taxable only on Indian Income (received or accrued/arisen/deemed to accrue or arise in India). | Minimum Incidence: NR is taxed only on income sourced in India. |
VIII. Incomes Excluded from Total Income (Exempt Incomes)
Exempt Incomes are incomes specifically listed in the Income Tax Act (primarily in Section 10) which are not included in the total income of an assessee and are therefore not subject to tax. They are permanently excluded from the tax net.
Ten Examples of Exempt Incomes (Section 10)
| S. No. | Section | Exempt Income | Brief Explanation |
|---|---|---|---|
| 1. | Sec. 10(1) | Agricultural Income | Income derived from agricultural land situated in India. (Completely exempt from Central Income Tax). |
| 2. | Sec. 10(2A) | Partner’s Share in Firm’s Profit | The share of profit received by a partner from a firm is exempt because the firm itself is liable to pay tax on its total income. |
| 3. | Sec. 10(4) | Interest on NRE Account | Interest credited to a Non-Resident External (NRE) Account of a Non-Resident (NR) or Resident but Not Ordinarily Resident (RNOR) individual. |
| 4. | Sec. 10(5) | Leave Travel Concession (LTC/LTA) | Concession or assistance received by an employee for travel expenses incurred on leave in India (subject to rules and limits). |
| 5. | Sec. 10(10) | Gratuity on Retirement | Gratuity received by a Central/State Government employee is fully exempt. For non-government employees, it is exempt subject to prescribed monetary limits. |
| 6. | Sec. 10(10D) | Maturity Proceeds of Life Insurance Policy | Any sum received under a Life Insurance Policy, including bonus, is exempt (subject to conditions related to the premium paid, particularly for policies issued after 01.04.2012). |
| 7. | Sec. 10(11) & 10(12) | PF & PPF Interest | Interest credited to a Statutory Provident Fund (SPF) or Public Provident Fund (PPF) is generally fully exempt. Interest on Recognised PF is exempt subject to specified contribution limits. |
| 8. | Sec. 10(16) | Scholarships for Education | Scholarships granted to meet the cost of education are completely exempt, irrespective of the amount. |
| 9. | Sec. 10(17) | Daily Allowance of MP/MLA | Daily allowances received by Members of Parliament (MPs) or Members of Legislative Assembly (MLAs) are fully exempt. |
| 10. | Sec. 10(37) | Capital Gain on Transfer of Urban Agri Land (Compulsory Acquisition) | Capital gain arising from the compulsory acquisition of urban agricultural land (as defined) is exempt if the land was used for agricultural purposes for the preceding two years. |