RESIDENTIAL STATUS & SCOPE OF TOTAL INCOME(Sections 5, 6, 7 & 9 – Income Tax Act, 1961)

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RESIDENTIAL STATUS & SCOPE OF TOTAL INCOME

(Sections 5, 6, 7 & 9 – Income Tax Act, 1961)

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Introduction

In India, income tax is charged based on the residential status of a person, not only on citizenship.
A person may be an Indian citizen but still be a non-resident for tax purposes, or a foreigner may become resident if they stay in India for a sufficient period.

The residential status helps determine how much of a person’s income is taxable in India.
These provisions are covered under Sections 5, 6, 7, and 9 of the Income Tax Act, 1961.

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Section 6 – Residential Status

Section 6 defines how to decide whether a person is Resident or Non-Resident in India.
The taxability of income depends on this classification.

A. Residential Status of an Individual (Section 6(1))

An individual is Resident in India if they satisfy any one of the following conditions:

1. The person has stayed in India for 182 days or more during the previous year,
   OR
2. The person has stayed in India for 60 days or more during the previous year and for 365 days or more in the 4 years immediately before that year.

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Exceptions to the 60-Day Rule

For Indian citizens and Persons of Indian Origin (PIOs) who come to India for a visit, the period of 60 days is replaced by 182 days.
This means that even if such a person stays in India for less than 182 days, they are still treated as non-resident.

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Types of Residents

1. Resident and Ordinarily Resident (ROR):
   A person who is resident in India and also satisfies both of the following conditions:

   • Stayed in India for 2 years or more out of the 10 preceding years, and
   • Stayed in India for 730 days or more during the 7 preceding years.
     RORs are taxable on global income.

2. Resident but Not Ordinarily Resident (RNOR):
   A person who is resident but does not satisfy both of the above conditions.
   RNORs are taxed only on income earned or received in India or income from a business controlled from India.

3. Non-Resident (NR):
   A person who does not satisfy any of the basic conditions.
   NRs are taxed only on income earned or received in India.

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B. Residential Status of Other Entities

1. Hindu Undivided Family (HUF), Firm, or Association of Persons (AOP):
   They are resident if control and management of their affairs is wholly or partly in India.

2. Company (Section 6(3)):
   A company is resident if:

   • It is an Indian company, or
   • Its Place of Effective Management (POEM) is in India during that year.

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Section 5 – Scope of Total Income

Once residential status is determined, Section 5 defines the scope of total income – that is, which incomes are taxable in India.

Category	Income Received in India	Income Accrued in India	Income Received Outside India
Resident & Ordinarily Resident (ROR)	Taxable	Taxable	Taxable (Global Income)
Resident but Not Ordinarily Resident (RNOR)	Taxable	Taxable	Not taxable unless from business controlled from India
Non-Resident (NR)	Taxable	Taxable	Not taxable

Example:

• Mr. A (ROR) earns rent from property in London → Taxable in India.
• Mr. B (RNOR) earns profit from business in Dubai controlled from India → Taxable.
• Mr. C (NR) earns salary in the USA → Not taxable in India.

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Section 7 – Income Deemed to be Received in India

Even if income is not actually received in India, some incomes are treated as if received in India under Section 7. These are called deemed incomes.

Examples:

1. Employer’s contribution to an employee’s provident fund in India.
2. Interest credited to an employee’s provident fund.
3. Pension payable outside India from an Indian employer.

Case Law: CIT v. Anjum M.H. Ghaswala (2001)
Held: Income credited in books of account in India is treated as “deemed to be received,” even if not physically received.

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Section 9 – Income Deemed to Accrue or Arise in India

Section 9 deals with income that appears to arise outside India but is deemed to accrue or arise in India.
It mainly applies to non-residents who have income connected with India.

Examples of Deemed Income:

1. Business Connection in India:
   Income arising through a branch, agent, or office in India is taxable.
   (Example: A foreign company selling goods through an Indian agent.)

2. Income from Property or Source in India:
   Rent from property situated in India or interest received from an Indian bank is taxable.

3. Salary for Services Rendered in India:
   Even if paid outside India, salary for work done in India is taxable.

4. Capital Gains from Assets in India:
   Income from transfer of property or shares situated in India is taxable.

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Important Case Laws

1. CIT v. Keshav Mills Ltd. (1953)

   • The court held that taxability depends upon residential status.
   • Residents are taxed on global income, non-residents only on Indian income.

2. CIT v. Toshoku Ltd. (1980)

   • A non-resident agent earning commission outside India was not taxable in India since the income did not accrue or arise in India.
   • Principle: Only income arising from operations in India is taxable.

3. Vodafone International Holdings BV v. Union of India (2012)

   • Vodafone purchased shares of a foreign company that indirectly held shares of an Indian company.
   • The Supreme Court held that such an offshore transaction was not taxable in India.
   • Principle: Income must have a direct connection or “nexus” with India to be taxed under Section 9.

4. CIT v. Anjum M.H. Ghaswala (2001)

   • Clarified that deemed receipt (e.g., credited in books) is taxable under Section 7.

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Summary Table

Section	Subject	Key Point
Section 5	Scope of Total Income	Defines which income is taxable based on residency
Section 6	Residential Status	Classifies a person as Resident, RNOR, or Non-Resident
Section 7	Deemed to be Received in India	Treated as received even if not actually received
Section 9	Deemed to Accrue or Arise in India	Income connected to India is taxable even if earned abroad

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Conclusion

Residential status is the foundation of income taxation in India.
Sections 5 to 9 collectively determine who is taxed, on what income, and to what extent.
Residents are taxed on their global income, while non-residents are taxed only on income that has a connection with India.

In short, tax liability in India depends not only on where income is earned but also on where the person resides.

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