Understanding Residential Status for Income Tax in India

When paying income tax in India, your residential status plays a vital role under the Residential Status Income Tax Act. It doesn’t matter whether you are an Indian citizen or a foreign national. How long you have stayed in India during a financial year and in the past few years matters.

Under Section 6 of the Income Tax Act, the Indian government has laid out specific rules to determine whether you are a Resident and Ordinarily Resident (ROR), a Resident but Not Ordinarily Resident (RNOR), or a Non-Resident (NR). Each category is treated differently regarding tax liability and tax on mutual funds or other investments.

Defining Residential Status

Your residential status income tax defines how your income will be taxed in India. Even if you earn or live abroad, you can still be liable to pay tax here, depending on how many days you have spent in the country.

Importance of Determining Residential Status

Why is residential status important?

Because your tax obligations depend on it. The government uses residential status to decide:

• Whether your global income will be taxed in India.
• Which deductions or exemptions apply to you?
• How TDS in India is applied.
• Whether you need to file an income tax return in India.

Key Factors Determining Residential Status

To determine your resident status as per income tax, Section 6 uses the number of days you stay in India during a financial year (1st April to 31st March) and the past four years.

You are a Resident if:

• You’ve stayed in India for 182 days or more during the financial year OR
  
• You’ve stayed in India for 60 days or more in the financial year and 365 days or more in the past 4 years.
  

Exceptions:

• For Indian citizens or Persons of Indian Origin (PIO) who visit India, the 60-day condition is replaced with 182 days.
  
• For an Indian citizen leaving India for employment abroad, the 182-day rule applies.
  

Categories of Residential Status

Once you know you’re a resident or not, it’s time to classify further. As per the Residential Status Income Tax Act, a person can be:

1. Resident and Ordinarily Resident (ROR)
   
2. Resident but Not Ordinarily Resident (RNOR)
   
3. Non-Resident (NR)
   

Resident and Ordinarily Resident (ROR)

You are classified as a Resident and Ordinarily Resident (ROR) if you meet certain conditions under the Residential Status Income Tax Act. First, you must qualify as a resident in the current financial year. Additionally, you should have been a resident in at least 2 out of the last 10 financial years preceding the current year. Finally, you must have stayed in India for 730 days or more during the last 7 financial years. Meeting all three conditions confirms your ROR status for income tax purposes.

Tax Implications

• Your global income is taxable in India.
  
• All income must be reported, whether earned in India or abroad (like foreign salary, interest on overseas bank accounts, etc.).
  
• TDS rules and slabs apply as per usual Indian resident rates.
  
• You are eligible for all tax deductions and exemptions under Indian law.
  

Resident but Not Ordinarily Resident (RNOR)

You are classified as a Resident but Not Ordinarily Resident (RNOR) under the Residential Status Income Tax Act if you meet the basic criteria for residency—either staying in India for 182 days or more during the current financial year, or 60 days in the current year along with 365 days in the last four years—but do not satisfy the additional conditions for being an ordinarily resident. 

Specifically, you are considered RNOR if you were not a resident in at least 2 out of the last 10 financial years, or if your stay in India during the last 7 financial years was less than 730 days.

Tax Implications

• Only income earned or received in India is taxable.
  
• Foreign income is not taxable unless derived from a business controlled or a profession set up in India.
  
• Some foreign assets and income can remain tax-free.
  

This status is useful for returning NRIs, who are gradually transitioning to being fully taxable in India.

Non-Resident (NR)

You are considered a Non-Resident (NR) under the Residential Status Income Tax Act if you do not meet any of the conditions required to qualify as a resident. This typically means you have stayed in India for less than 182 days during the current financial year and have not fulfilled the alternative condition of staying 60 days in the current year, along with 365 days in the preceding four years. 

As a non-resident, your tax liability in India is limited to income earned or received within the country.

Tax Implications

• Only income earned or received in India is taxable.
  
• Income earned abroad is not taxed in India.
  
• TDS in India is often deducted at higher rates.
  
• You may not be eligible for some deductions or exemptions.
  

Tax Implications for Each Residential Status 

Let’s look at how taxes differ based on your residential status.

Tax Rates for ROR

• Taxed as per normal slab rates.
  
• Global income is included.
  
• Full exemptions vs deductions under Sections like 80C, 80D, etc. can be claimed.
  

Tax Rates for RNOR

1. Income earned or received in India is taxed as per slab rates:
   Any income you earn or receive in India is subject to taxation based on the applicable income tax slab rates for individuals.
   
2. Foreign income is exempt, unless linked to an Indian business/profession:
   Foreign income is generally not taxable in India unless earned through a business or profession controlled or set up in India.
   
3. Eligible for some deductions but not all:
   Under the new tax regime, only a few deductions, such as NPS or EPF, are allowed; popular ones like 80C, 80D, and HRA are not permitted.
   

Tax Rates for NR

1. Only Indian income is taxable:
   Non-residents are taxed only on income that is earned or received in India. Foreign income is not taxable unless it arises from a business connection in India.
   
2. No benefit of basic exemption limit in certain cases:
   In some cases, especially for NRO accounts or special incomes like dividends and capital gains, NRs do not get the ₹2.5 lakh basic exemption limit applicable to residents.
   
3. TDS is higher, especially on interest, rent, or capital gains:
   Tax Deducted at Source (TDS) for NRs is often at higher rates—ranging from 20% to 30%—on earnings like interest, rental income, or capital gains from Indian assets.
   

Tax Deduction and Exemptions

• ROR: Can claim full deductions like 80C (PF, LIC), 80D (health insurance), etc.
  
• RNOR and NR: Some deductions may not be available, especially on foreign income.
  
• Tax on mutual funds for NRIs is subject to special rules—long-term and short-term gains are taxed differently, and TDS is auto-deducted.
  

Determining Your Residential Status: A Step-by-Step Guide

Step-by-Step Calculation Process

First, calculate the days you have stayed in India during the current financial year.

Next, check if you meet either of the following conditions:

• You have stayed in India for 182 days or more, or
  
• You have stayed in India for 60 days or more in the current year and at least 365 days over the last 4 financial years.
  

If you meet either of these conditions, you qualify as a Resident under the Residential Status Income Tax Act.

Then, verify if you were a resident in at least 2 out of the last 10 financial years. Also, check whether you have stayed in India for 730 days or more during the last 7 years.

• If both conditions are met, you are classified as a Resident and Ordinarily Resident (ROR).
  
• If not, you are a Resident but Not Ordinarily Resident (RNOR).
  

If you do not meet the initial residency conditions, you are considered a Non-Resident (NR).

Examples

Example 1:

Ravi stayed in India for 200 days during the financial year 2024–25 and had spent 400 days in India over the last four financial years. Based on this, he qualifies as a Resident under the Residential Status Income Tax Act. Furthermore, if he were a resident in at least 2 out of the past 10 financial years and has stayed in India for 800 days or more during the last 7 years, he would be classified as a Resident and Ordinarily Resident (ROR) for income tax purposes.

Example 2:

Priya, who has been working in Dubai for the past eight years, visited India for 150 days during the current financial year. Since she does not meet either of the basic residency conditions under the Residential Status Income Tax Act—namely, staying in India for 182 days or more, or fulfilling the 60-day plus 365-day rule—she is classified as a Non-Resident (NR) for income tax purposes.

Common Scenarios and Clarifications

• NRI returning to India permanently: Will be RNOR for 2-3 years. 
• Students studying abroad: If they visit India for short periods, still NR. 
• Seafarers: Special rules apply based on ship logs and port of calls.
  

Seeking Professional Advice

Even with simple rules, the residential status income tax act can get complex in real-life situations. It’s best to consult a chartered accountant or tax advisor, especially if you:

• Earn from multiple countries. 
• Own assets or mutual funds abroad. 
• Have recently changed employment status.

Changes in Residential Status and their Tax Implications

Switching between Residential Statuses

You might change from:

• NR to RNOR when you return to India. 
• RNOR to ROR after spending more time in India. 
• ROR to NR if you move abroad.
  

Tax implications of changes in status

• Your foreign income might become taxable once you’re ROR.
  
• You may lose access to DTAA (Double Taxation Avoidance Agreement) benefits as a resident.
  
• Mutual fund taxation changes depending on whether you are ROR or NR.
  
• TDS may be lower once you become an ROR.

Conclusion

Understanding your residential status under Section 6 of the Income Tax Act is essential to manage your taxes smartly. Whether you’re an NRI, a returning resident, or planning to move abroad, being aware of these rules helps you stay compliant, avoid double taxation, and make smarter investment decisions. 

Additionally, consulting a stock market advisory can help you understand how your residential status impacts investments, capital gains, and tax liabilities, ensuring your financial strategy aligns with tax laws and market trends.

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