Knowing Your Residential Status and Income Tax Implications

by PRI YA on JUNE 19, 2012

The total income of an assessee under five heads of income tax can not be computed unless we know residential status of individual. Income tax Act has given few technical condition to determine whether an individual is resident or non resident Indian (NRI). Further if an individual is Resident inIndia, we have to determine whether he is 1) Resident and ordinary resident in India OR 2) Resident and Not ordinary resident inIndia

Rules for deciding Residential Status of an Individual

An individual is said to be resident in India if he satisfies any of the following two conditions 1) He is in India for a period or periods amounting to 182 days in all or more in the relevant previous year OR 2) He is in India for 60 days or more during the relevant previous year and has been in India for 365 days or more during the four previous years immediately preceding previous year.
Exceptions of Resident in India Rule
There are two exceptions to above rule.

1) In case of an individual, who is citizen of India and who leaves India in any previous year for the purpose of employment outside India, the period of 60 days, in condition no 2 above shall be substituted by 182 days. Similar is the case for member of a crew of an Indian ship 2) In case of an individual, who is citizen of India, or is a person of Indian Origin, who is outside India, comes on visit to India in any previous year, the period of 60 days in condition no 2 above will be substituted by 182 days.

Rules for Resident and Ordinary Resident

Income tax law has given rules for deciding Resident and Not ordinary resident via sec 6(6). So an individual shall be resident and not ordinary resident if he satisfies any one of the following conditions: 1) He has been NRI in 9 out of 10 previous years immediately preceding the relevant previous year OR 2) He has been in India for a period of 729 days or less in 7 previous years immediately preceding the relevant previous year. So for an individual to call as a Resident and Ordinary resident he should satisfy both of the conditions below: 1) He has been Resident in India at least 2 out of 10 previous years immediately preceding the relevant previous year and 2) 2) He has been inIndiafor 730 days or more , during 7 years immediately preceding the relevant previous year. Example: Mr. Dubey , a citizen of USA has been staying in India since 1989. He leaves India on 1607-2011 for a visit to USA and returns on 04-01-2012. What could be his residential status for previous year 2011-2012?? For this Mr. Dubey satisfies first condition amongst two basic condition of stay in India for 182 days or more. He was in India for 193 days in 2011-2012. So he is Resident in India. Now lets check if he is resident and ordinary resident in India.

a)

Examine first condition which says he should be Resident for at least 2 out of 10 previous years

prior to relevant previous year. In this case Mr.Dubey was in India for all the years. b) Now examine second condition which says 730 days stay in India during 7 previous years prior to relevant previous year. As he was in India for all the 7 years prior to previous years so this condition also fulfilled. As the both the conditions have been satisfied we conclude Mr.Dubey is Resident and Ordinary Resident inIndia.

Scope of Income and incidence of Income tax

Following chart shows the overall scope of income and its income tax chargeability in case of Resident and Non Resident Income Resident and Resident and Not Taxable Non- Resident Taxable

Ordinary Resident ordinary Resident 1. Income received or deemed to be Taxable received inIndiawhether earned in India or elsewhere 2. Income which accrues or arise or Taxable deemed to accrue or arise in India during the previous year, whether received in India or elsewhere. 3. Income which accrues or arises outside India and received outside India from a business controlled from India 4. Income which accrues or arises outside India and received outside India in the previous year from any other source. 5. Income which accrues or arises outside India and received outside India during the years preceding the previous year and remitted to India during the previous year. Not taxable Not taxable Not taxable Taxable Not taxable Not taxable Taxable Taxable Not taxable Taxable Taxable

Issues of shares:

Definition of 'Issue of Shares'

The number of authorized shares that is sold to and held by the shareholders of a company, regardless of whether they are insiders, institutional investors or the general public. Also known as "issued stock".

meaning of issue of shares: Issued shares include the stock that a company sells publicly in order to generate capital and the stock given to insiders as part of their compensation packages. Unlike shares that are held as treasury stock, shares that have been retired are not included in this figure. The amount of issued shares can be all or part of the total amount of authorized shares of a corporation. The total number of issued shares outstanding in a company is most often shown in the annual report.

(1) On receipt of application money

Bank Account To Share Application A/c (Being the application money on....shares..@ Rs..per share)

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(2) On allotment of shares

(a) First of all application money on allotted shares is transferred to shares capital account by passing the following entry.

Share Application Account To Share Capital A/C (Being the application money transferred to Share Capital Account)

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(b) Those applicants who could not be allotted any share, their application money

will be returned. For the following entry will be passed.

Share Application Account To Bank Account (Being the application money of shares returned)

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(3) On the allotment of share, the allotment money becomes due to the company. For this, the company will pass the following entry

Share Allotment Account To Share Capital Account Being the Share allotment money due on ....share @ Rs...per share as per resolution dated...)

(4) On receipt of allotment money, the entry is

Bank A/c To Share Allotment A/c (Being the receipt of allotment money)

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(5) On making the first call due from shareholders the entry is

Share First Call Account To Share Capital Account (Being the first call money due on... shares @ Rs...per shares as per resolution of the Directors dated.....)

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(6) On receipt of the first call money, the entry is

Bank Account To Share First Call Account (Being share first call money...shares @ Rs....per share received)

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Note: Similar entries will be passed for second call, third and final call, if any. Any amount received from or paid to any shareholder ins not to be credited or debited to shareholder account but collectively it will be either debited or credited to share application account, share allotment account or share call amount. As and when any amount is received or become due, it will be entered either in share application and allotment account or share call account.