One of the most important concepts under the Income-tax law is determination of “Residential Status”. The taxability of a person in India does not depend upon citizenship alone; rather, it depends upon whether the person qualifies as:

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

A common misconception is that an Indian citizen working abroad automatically becomes a Non-Resident, or that a foreign citizen cannot become taxable in India.

However, under the provisions of the Income Tax Act, residential status is determined primarily based on physical presence in India and certain additional conditions prescribed under the law.

This article provides a practical and simplified understanding of residential status and its implications.

Why Residential Status is Important?

Residential status determines:

• Whether foreign income is taxable in India;
• Whether overseas bank interest needs to be disclosed;
• Applicability of foreign asset reporting;
• Eligibility for certain exemptions and DTAA relief.

Therefore, determining the correct residential status is the first and most crucial step while filing an Income-tax Return (ITR).

Step 1 – Determine Whether the Person is Resident or Non-Resident

An individual shall be treated as Resident in India if he satisfies either of the following basic conditions during the relevant tax year.

Basic Condition 1 – 182 Days Test

A person becomes Resident if he stays in India for 182 days or more during the relevant tax year.

OR

Basic Condition 2 – 60 Days + 365 Days Test

A person also becomes Resident if he stays 60 days or more in current year and 365 days or more in preceding 4 tax years.

If none of the above conditions are satisfied, the person becomes a Non-Resident (NR) for the current tax year.

Special Relaxation for Indian Citizens Leaving India for Employment

The Income-tax law provides relaxation to Indian citizens leaving India for employment outside India.

In such cases:

• the 60-day condition does not apply; and
• only the 182-day test becomes relevant.

This provision commonly applies to:

• employees shifting abroad,
• expatriates,
• professionals accepting overseas employment.

Practical Example

Mr. A leaves India for employment in USA and stays in India for only 110 days during the financial year.

Since only the 182-day test applies and he stays in India is for only 110 days, which is less than the 182 days period, Mr. A shall qualify as a Non-Resident.

Visiting Indians and Persons of Indian Origin (PIO)

A different rule applies where:

• Indian citizens residing abroad; or
• Persons of Indian Origin (PIO)

comes to India on a visit, the 60-day condition is replaced with 182 days.

However, where Indian income exceeds Rs.15 lakh in the current tax year, the threshold changes from 60 days to 120 days.

Practical Position

Deemed Residency Provision

The law also contains a “deemed residency” provision. An Indian citizen may become deemed resident if:

• he is not liable to tax in any other country; and
• his Indian income exceeds ₹15 lakh.

This provision mainly targets individuals who avoid taxation globally by not becoming tax resident anywhere.

However, this provision generally does not apply where the individual is already liable to tax in another country, such as employment taxation in Singapore, UAE, UK, etc.

Step 2 – Resident Does Not Automatically Mean ROR

Many people believe that once a person becomes Resident, the analysis ends there. That is incorrect. After determining that a person is Resident, the next step is to determine whether such resident is:

• Resident and Ordinarily Resident (ROR); or
• Resident but Not Ordinarily Resident (RNOR).

RNOR is therefore a sub-category of “Resident.”

Who is RNOR?

A Resident becomes RNOR if he satisfies either of the following conditions:

• Non-resident in 9 out of preceding 10 tax years, or
• Stay in India for 729 days or less during preceding 7 tax years

If neither condition is satisfied, the person becomes Resident and Ordinarily Resident (ROR).

Important Practical Understanding

A person cannot directly become RNOR without first becoming Resident.

The correct sequence under the law is:

• Check whether the person is Resident or Non-Resident
• If Non-Resident → analysis ends
• If Resident → then determine: ROR or RNOR

Therefore, even if a person satisfies RNOR conditions, he shall still remain Non-Resident if he does not first satisfy the basic conditions for becoming Resident.

Taxability Based on Residential Status

The residential status directly affects the scope of taxable income in India.

*Generally Not Taxable. Taxability in India depends upon whether the said income has been taxed in other countries. If not taxed in other countries, then it shall be taxed in India.

Foreign Income – Important Exception

For RNOR and NR taxpayers, foreign income is generally not taxable in India, unless such income:

• is derived from a business controlled from India; or
• arises from a profession set up in India.

Thus, overseas salary, foreign bank interest, and foreign investments generally remain outside Indian taxation for NR and RNOR individuals.

Practical Example – Foreign Bank Account

Suppose an Indian citizen is employed and residing in Singapore and qualifies as a Non-Resident in India.

In such a case, Interest earned from a Singapore bank account may generally not be taxable in India.

However, if interest is earned from an Indian Bank account, it will be taxable in India even for a Non-Resident.

Accordingly, identifying whether a bank account is Indian or foreign becomes extremely important while preparing and filing the Income-tax Return.

Foreign Asset Reporting in Income Tax Return

It is important to note that Foreign Asset Reporting in Income Tax return is mandatorily applicable only to all resident and Ordinarily residents. Foreign Asset Reporting is not applicable to Non-residents and Resident but not ordinarily resident.

Conclusion

Residential status forms the foundation of income-taxability under Indian tax laws. Before determining taxability, disclosure requirements, or DTAA applicability, it is essential to correctly determine the residential status.

In practice, residential status provisions become highly relevant for:

• NRIs,
• expatriates,
• returning Indians,
• overseas employees,
• global entrepreneurs,
• and individuals having foreign assets or overseas income.

A proper understanding of these provisions ensures accurate tax compliance while avoiding unnecessary disputes, notices, and litigation.

For professional assistance and personalized guidance, you may consult qualified tax professionals such as Taxunplug for your tax and regulatory compliance needs.

The information provided in above blog is for general informational only and should not be considered as legal or tax advice. Request you to please follow latest updated in reference to above details. We advise to consult with a qualified tax professional such as “Taxunplug” for all your tax needs.

The post RESIDENTIAL STATUS UNDER INCOME-TAX LAW – COMPLETE GUIDE TO ROR, RNOR & NR STATUS appeared first on Tax Unplug.

Background of the Case

The case involved appeals filed by the Revenue before the ITAT Delhi Bench, against the orders of the CIT (Appeals) concerning AY 2012–13 and 2013–14. The assessee is a Non-Banking Financial Company engaged in trading in government securities, debt instruments, and other money market instruments. During the scrutiny assessment under the Income Tax Act, the Assessing Officer made several additions including disallowance under Section 14A, disallowance of interest expenditure under Section 36(1)(iii), and disallowance relating to provision for diminution in the market value of securities held as stock-in-trade.

On appeal, the Commissioner (Appeals) deleted major portions of these additions, retaining only a small disallowance. Aggrieved by the relief granted to the assessee, the Revenue preferred appeals before the Tribunal challenging the deletion of these disallowances.

Arguments by the Appellant (Revenue)

The Revenue contended that the Commissioner (Appeals) erred in deleting the disallowances made by the Assessing Officer. It was argued that the assessee had earned exempt income and therefore the provisions of Section 14A were applicable, warranting disallowance of expenditure incurred in relation to such income. The Revenue further argued that the deletion of disallowance under Section 36(1)(iii) relating to interest expenditure was not justified as borrowed funds were allegedly used in a manner inconsistent with the provisions of the Act. Additionally, the Revenue challenged the deletion of the disallowance relating to the provision for diminution in the value of securities held by the assessee. According to the Department, such provision represented a contingent or notional loss and therefore should not have been allowed as a deduction while computing taxable income.

Respondent’s Response (Assessee)

The assessee submitted that it was an NBFC registered with the Reserve Bank of India and engaged in the business of trading in securities, which constituted its stock-in-trade. It was argued that the investments and securities were part of its regular business operations and were valued in accordance with the guidelines issued by the Reserve Bank of India as well as accepted accounting principles. The assessee further contended that the diminution in the value of securities represented a genuine valuation loss arising from the method of valuing stock-in-trade at cost or market value whichever is lower. It was also argued that the Assessing Officer had incorrectly invoked the provisions of Section 14A as the securities were held as stock-in-trade and not as investments for earning exempt income. Therefore, the disallowances made by the Assessing Officer were unjustified and had rightly been deleted by the Commissioner (Appeals).

Court Findings and Decision

The ITAT Delhi examined the facts and the reasoning adopted by the Commissioner (Appeals) and found no infirmity in the relief granted to the assessee. The Tribunal observed that the assessee, being engaged in the business of trading in securities, had consistently valued its stock-in-trade in accordance with recognized accounting principles and regulatory guidelines. The Tribunal relied on judicial precedents which recognize that banks and financial institutions are entitled to value their stock-in-trade at cost or market value whichever is lower, and any resultant diminution represents a legitimate business loss. It was further observed that such valuation losses cannot be treated as contingent in nature when they arise from accepted accounting practices followed consistently by the assessee.

Considering these aspects, the Tribunal upheld the order of the Commissioner (Appeals) and dismissed the appeals filed by the Revenue for both assessment years.

To download official order, Click Here

“The site is for information purposes only and does not provide legal advice of any sort. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute an attorney-client relationship. The information on this site is not intended to be a substitute for professional advice.”

The post ITAT Delhi Upholds Deletion of Section 14A Disallowance for NBFC: Provision for Diminution in Value of Securities Held as Stock-in-Trade Allowed as Deduction appeared first on Tax Unplug.

Background of the Case

The appellant, Uber India Systems Private Limited, approached the High Court under Article 226 of the Constitution challenging a Show Cause Notice dated 12.06.2024 issued by the GST authorities. The impugned notice sought to demand tax and impose penalties for the financial years 2018–19, 2019–20 and 2020–21 through a single consolidated proceeding. Aggrieved by the clubbing of multiple tax periods in one notice, the appellant contended that such action was arbitrary and contrary to established legal principles. It was argued that each financial year constitutes a separate unit of assessment and cannot be combined into a single show cause proceeding. The appellant also sought interim protection restraining the department from proceeding with adjudication. The matter was heard by a Division Bench of the High Court at Amaravati.

Arguments by the Appellant

The appellant primarily contended that issuance of a common show cause notice for multiple taxation periods was legally unsustainable. It was submitted that assessments under GST are period-specific, and therefore, separate notices must be issued for each financial year. Reliance was placed on the earlier judgment of the High Court in S.J Constructions vs. The Assistant Commissioner, wherein it was held that different taxation periods cannot be clubbed in a single show cause notice. The appellant argued that the impugned notice violated this settled position of law. It was further submitted that such consolidation causes procedural prejudice and undermines fairness in adjudication. On these grounds, the appellant sought quashing of the notice while leaving liberty to the department to proceed in accordance with law.

Respondent’s Response

The departmental authorities opposed the writ petition and defended the issuance of the impugned show cause notice. It was submitted that the notice was issued within the statutory framework and called upon the appellant to explain why tax and penalties should not be imposed for the relevant periods. The respondents argued that interference at the stage of show cause notice should be limited. The department also sought vacating of the interim protection earlier granted to the appellant. It was contended that the adjudication process should be allowed to proceed in the normal course. However, the principal issue before the Court remained whether multiple financial years could be combined in a single notice.

Court Findings and Decision

The Andhra Pradesh High Court observed that the impugned notice admittedly covered more than one taxation period, namely from 2018–19 to 2020–21. Referring to its earlier decision in S.J Constructions, the Court reiterated that separate show cause notices must be issued for each taxation period or financial year. Following the binding precedent, the Court held that a common notice clubbing different periods is not permissible in law. Accordingly, the impugned show cause notice dated 12.06.2024 was set aside. However, the Court clarified that the authorities are at liberty to initiate fresh proceedings in accordance with law by issuing separate notices. The writ petition was allowed, and there was no order as to costs.

To download official order, Click Here

“The site is for information purposes only and does not provide legal advice of any sort. Viewing this site, receipt of information contained on this site, or the transmission of information from or to this site does not constitute an attorney-client relationship. The information on this site is not intended to be a substitute for professional advice.”

The post High Court of Andhra Pradesh Quashes Common Show Cause Notice Covering Multiple Tax Periods appeared first on Tax Unplug.