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| Residential Status Under the Income Tax Act: An Updated Overview (2025) |
Understanding your residential status is the first and most critical step in determining your taxable income under Indian tax law. Whether you earn income solely in India or across borders depends largely on whether you are classified as a resident or a non-resident. Recent updates—including changes proposed in the Income Tax Bill 2025—have refined these rules, ensuring clarity and easing compliance for taxpayers.
Why Residential Status Matters
Your classification as a resident or non-resident not only determines which income is taxable in India but also whether global income is included in your total taxable income. In simple terms:
- Residents are taxed on their worldwide income.
- Non-residents are taxed only on income that is received or accrued in India.
Categories of Residential Status
Under the Income Tax Act, an individual can be categorized as:
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Resident:
- Resident and Ordinarily Resident (ROR): These individuals have deeper ties with India and are taxed on their global income.
- Resident but Not Ordinarily Resident (RNOR): Often applicable to returning NRIs or those with limited recent presence, whose tax liability is confined only to income accruing in India.
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Non-Resident:
- Taxable only on income that is either received in India or is deemed to accrue or arise in India.
Note: Only individual taxpayers and Hindu Undivided Families (HUFs) may be further classified into ROR or RNOR; other entities are simply categorized as resident or non-resident.
Basic Conditions for Determining Residency
An individual is generally considered a resident in India if at least one of the following primary conditions is met during the relevant financial (or tax) year:
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The 182-Day Rule:
If you are physically present in India for 182 days or more in a tax year, you are deemed a resident. -
The 60-Day Plus 365-Day Rule:
Even if you spend fewer than 182 days in India in a tax year, you will still be considered a resident if:- You are present in India for at least 60 days in the tax year, and
- You have been in India for a cumulative total of 365 days or more during the four financial years immediately preceding the current one.
Updated Exceptions and Special Conditions
Recent updates provide certain relaxations:
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Exemptions for Indian Citizens and Crew Members:
Indian citizens who leave India for employment abroad or as crew members of an Indian ship are not bound by the 60-day condition. Their residency status is determined solely by the 182-day rule. -
High-Income NRIs and Persons of Indian Origin (PIOs):
Under the new provisions proposed in the Income Tax Bill 2025, if an Indian citizen or PIO earns total income (excluding income from foreign sources) of over ₹15 lakh in a tax year, the threshold in the second condition is modified. Instead of the standard 60-day rule, a 120-day rule applies—meaning that if such individuals spend between 120 and 182 days in India, they may be classified as resident but not ordinarily resident (RNOR). -
Deemed Residency:
Even if the basic day-count criteria are not met, an Indian citizen who is not liable to tax in any other country and whose total income (other than from foreign sources) exceeds ₹15 lakh will be deemed a resident. This “deemed resident” rule ensures that high-earning citizens maintain tax accountability in India.
Determining RNOR vs. ROR
Once you are classified as a resident, further tests decide whether you are an ordinary resident (ROR) or a resident but not ordinarily resident (RNOR):
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Resident and Ordinarily Resident (ROR):
To qualify, you must have been a resident in at least 2 out of the 10 preceding tax years or have stayed in India for at least 730 days in the 7 years immediately preceding the current tax year. ROR status implies that your global income is subject to taxation in India. -
Resident but Not Ordinarily Resident (RNOR):
If you do not meet the above conditions—for example, if you have been an NRI for most of the last decade or if your stay in India is limited (for instance, between 120 and 182 days under the high-income provision)—you will be classified as RNOR. In this case, only income accruing in India is taxable.
Special Considerations for HUFs and Companies
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Hindu Undivided Families (HUFs):
An HUF is deemed resident if the control and management of its affairs is exercised wholly or partly in India. Moreover, if the family head (karta) is a resident and ordinarily resident, the HUF will automatically be treated as such. -
Companies:
A company is considered a tax resident if it is incorporated in India or if its place of effective management is in India. This means that even a foreign company could be regarded as resident if key management decisions are made in India.
The Road Ahead: Income Tax Bill 2025
Tabled in Parliament on February 13, 2025, the Income Tax Bill 2025 is part of an effort to simplify the tax system by reducing redundant provisions and clarifying existing rules. Although the fundamental criteria for determining residential status remain aligned with the Income Tax Act, 1961, several key updates—such as the modified day thresholds for high-income NRIs/PIOs and the deemed residency provision—reflect the Government’s focus on clarity and reducing litigation.
The new bill is expected to come into effect from April 1, 2026, and taxpayers are advised to keep abreast of further clarifications that will be issued through FAQs and guidelines by the Central Board of Direct Taxes (CBDT).
Key Takeaways
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Primary Rule:
Spending 182 days or more in India in a tax year establishes residency. -
Alternate Rule:
Even with a shorter stay (60 days plus 365 days over four years), you can be deemed a resident unless you qualify for the prescribed exceptions. -
Exceptions:
Indian citizens employed abroad or working as crew members enjoy a relaxed condition; high-income NRIs/PIOs have a modified 120-day threshold. -
RNOR vs. ROR:
The distinction affects whether global income is taxed (ROR) or only income from India (RNOR). -
Deemed Residency:
High-earning Indian citizens with no tax liability elsewhere will be considered residents even if the usual physical presence criteria are not met.
This updated overview is designed to help students, professionals, and tax consultants understand the current framework for determining residential status under Indian tax law, incorporating the latest developments as the country transitions to a simplified and clearer tax regime.