Residential status and incidence of tax
Law of Taxation · Unit II · Topic 6 of 20 · 6 min read
On this page
- 1. Individuals: the basic tests, section 6(2)
- 2. Deemed resident: section 6(7)
- 3. Resident but not ordinarily resident: section 6(13)
- 4. Other persons
- 5. Scope of total income: section 5
- 6. Income deemed to accrue or arise in India: section 9 [section 9]
- 7. Problem (January 2026, Q. 9(c))
- How this is examined
Cases checked to exist. Read the judgment before quoting a holding.
Every case cited here has been checked to exist — the citation resolves and names the right parties. The propositions attributed to each case have not been verified line by line against the judgment. Case names link through to the full judgment: read it before quoting a holding in an examination answer, and never carry a proposition from notes into court on trust.
1. Individuals: the basic tests, section 6(2)
An individual is resident in India in a tax year if he satisfies either of two conditions:
- (a) he is in India for 182 days or more in that tax year; or
- (b) he is in India for 60 days or more in that tax year and for 365 days or more in the four tax years preceding it.
If neither is satisfied he is a non-resident.
Where the 60-day rule does not apply.
- An Indian citizen who leaves India in the tax year for employment outside India, or as a member of the crew of an Indian ship: only the 182-day test applies (section 6(3)).
- An Indian citizen or person of Indian origin who, being outside India, comes on a visit to India: the 60-day rule does not apply, so only 182 days counts (section 6(4)); but if his total income other than income from foreign sources exceeds fifteen lakh rupees, the 60 days in clause (b) becomes 120 days (section 6(5)).
2. Deemed resident: section 6(7)
An Indian citizen is deemed to be resident if (a) he is not liable to tax in any other country by reason of domicile, residence or similar criteria, and (b) his total income other than from foreign sources exceeds fifteen lakh rupees. This catches citizens who arrange to be resident nowhere. It does not apply to someone already resident under the basic tests (section 6(8)).
3. Resident but not ordinarily resident: section 6(13)
A resident individual (or an HUF, judged by its manager) is not ordinarily resident (NOR) if:
- he has been a non-resident in nine out of the ten preceding tax years; or
- he has been in India for 729 days or less in the seven preceding tax years; or
- he is a citizen or person of Indian origin with Indian income above fifteen lakh rupees who is resident only because of the 120-day rule (in India for 120 days or more but less than 182); or
- he is a citizen deemed resident under section 6(7).
A resident who is not NOR is commonly called “resident and ordinarily resident” (ROR).
4. Other persons
- HUF, firm, AOP: resident unless the control and management of its affairs is situated wholly outside India during the tax year (section 6(9)). Even a small part of control in India makes it resident.
- Company: resident if it is an Indian company, or if its place of effective management is in India in that year (section 6(10)). POEM is the place where key management and commercial decisions necessary for the business of the company as a whole are, in substance, made.
- Every other person: resident unless control and management is wholly outside India (section 6(11)).
- A person resident for one source is resident for all his sources in that year (section 6(12)).
5. Scope of total income: section 5
Income falls into three geographical categories: (1) received or deemed received in India; (2) accruing or arising, or deemed to accrue or arise, in India; (3) accruing or arising outside India.
- ROR (section 5(1)): all three. Global income is taxed.
- NOR (section 5(1)(c)): (1) and (2), and from (3) only income derived from a business controlled in or a profession set up in India.
- Non-resident (section 5(2)): only (1) and (2).
Income is not deemed received in India merely because it appears in a balance sheet prepared in India (section 5(3)), and an amount taxed on accrual is not taxed again on receipt (section 5(4)). Remittance to India of income already received abroad is not a receipt in India.
6. Income deemed to accrue or arise in India: section 9 [section 9]
For a non-resident this is the provision that matters, because only Indian income is taxed.
- Income through or from any business connection, property, asset or source of income in India, or the transfer of a capital asset in India (section 9(2)). A share of a foreign company that derives its value substantially from Indian assets is deemed situated in India (section 9(10)).
- Salary earned in India is deemed to accrue in India (section 9(3)(a)). Salary payable for services rendered in India is regarded as earned in India, wherever it is paid, and so is pay for a rest or leave period preceded and followed by service in India.
- Salary paid by the Government to an Indian citizen for service outside India (section 9(3)(b)).
- Dividend paid by an Indian company outside India (section 9(4)); interest, royalty and fees for technical services paid by the Government or by residents, subject to exceptions (section 9(5) onwards).
Section 7 deals with income deemed to be received in the tax year, such as the taxable accretion to a recognised provident fund.
7. Problem (January 2026, Q. 9(c))
‘A’ Ltd., a foreign company, pays outside India salary to its employee ‘C’, a foreign national and a non-resident, for services rendered in India. Discuss their tax liability.
Issue. Whether salary paid abroad to a non-resident foreign national for work done in India is taxable in India; and the position of the foreign employer.
Law. A non-resident is taxed on income received in India or accruing or deemed to accrue in India (section 5(2)). Under section 9(3)(a), salary for services rendered in India is deemed earned in India regardless of the place of payment. There is a limited exemption in Schedule IV (Table: Sl. No. 3) [section 10(6)(vi)] for remuneration of a foreign-national employee of a foreign enterprise if (a) the enterprise is not engaged in any trade or business in India, (b) his stay in India does not exceed 90 days in the tax year, and (c) the remuneration is not deductible from the employer’s income chargeable in India. A tax treaty may give further relief (dependent personal services article), and the treaty applies where more beneficial (section 159).
Application. C’s salary relates to services rendered in India, so it is deemed to accrue in India, and the fact that A Ltd. pays it abroad makes no difference. As a non-resident, C is taxable on it under the head “Salaries”. Only if all three Schedule IV conditions are met (in particular a stay of 90 days or less and no business of A Ltd. in India) will it be exempt. A Ltd., as the person responsible for paying salary chargeable in India, must deduct tax at source under section 392 [section 192]; if it fails, it is deemed an assessee in default under section 398 [section 201]. If A Ltd. has a business connection or permanent establishment in India through C’s work, its own profits attributable to that connection are also taxable in India under section 9(2).
Conclusion. C is taxable in India on the salary unless the short-stay exemption or a treaty applies; A Ltd. is liable to deduct tax at source and may itself be taxable if it has a business connection in India.
How this is examined
The salary problem above was set in January 2026. Residential status is also a standard essay: “explain the provisions relating to determination of residential status and its effect on incidence of tax”. Problems usually give days of stay over several years and ask for the status; set out the two basic tests, apply them year by year, then the NOR conditions, then the section 5 consequence.
Now try the real questions: Law of Taxation past question papers.