DIRECT TAX – LAWS AND PRACTICE

Overview of Lesson 1.5

Income -tax Act, 1961 specifies that income tax is charged on a person based on his
residential status during the previous year. There are three categories of
persons based on residential status viz. Resident, Resident but not ordinarily
resident (only for individual and HUF) and non-resident. The tax burden falls
heavily on a resident.

Relation between residential status and incidence of Tax [sec. 5]

According to the Act, incidence of tax on a taxpayer depends on his residential
status and also on the place and time of accrual and receipt of income.

Indian Income
An income will be termed as an Indian Income if:

• The income accrues (or arises or deemed to accrue or arise) in India

during the previous year and is received (or deemed to be received) in
India during the previous year, or;
• The income is received (or deemed to be received) in India during the
previous year, but it accrues (or arises or is deemed to accrue or arise)
outside India during the previous year, or;
• The income is received (or deemed to be received) outside India during
the previous year, but it accrues (or arises or deemed to accrue or arise)
in India during the previous year.

Foreign Income
If the following two conditions are satisfied, then such income is “Foreign
Income”. Both the conditions should be satisfied for an income to be termed as
foreign income:

1. The Income is not received (or not deemed to be received) in India, and;
2. The Income does not accrue or arise (or does not deemed to accrue or arise)
in India.
The scope of the total income of an assessee depends on the following
considerations-
i) The residential status of the assessee- Assessees are either ( a) resident
in India, or (b) non-resident in India. As far as resident individuals and Hindu
undivided families are concerned, they can be further divided into two categories
( a) resident and ordinarily resident, or (b) resident but not ordinarily resident.
Based on the status, their tax liability varies, for example, for resident and
ordinarily resident one’s total income is taxable whether the income is Indian
income or foreign income. For resident but not ordinarily resident total Indian
income is taxable but only two types of foreign income (business income which is
controlled wholly or partly from India and income from profession which is set
up in India) are taxable. For Non resident, only Indian income is taxable.

ii) The place of accrual or receipt of income – the place of accrual or receipt
of income determines whether the particular income will be taxed under whom.
As mentioned earlier, if the income is accrued / deemed to be accrued or
received/ deemed to be received in India, it is termed as Indian Income and it
will be taxable for all the assessee. But if the place of accrual or receipt is outside
India, we need to look at the residential status of the assessee to determine his
scope of total income.

Section -5 of the Income Tax Act, 1961 provides Scope of total Income in case
of person who is a resident, in the case of a person not ordinarily resident in India
and person who is a non-resident. Income can be from any source which is (a)
received or is deemed to be received in India in such year by or on behalf of such
person; or ( b) accrues or arises or is deemed to accrue or arise to him/her in
India during such year ; or (c) accrues or arises to him outside India during such
year .

Scope of total Income under section 5 of Income Tax Act, 1961

Sr. Particulars Resident Resident Non

No Ordinary Not Resident
Resident Ordinary (NR)–
(ROR) Resident 5(2)
(RNOR) –
5(1)

1 Income received in India Taxable Taxable Taxable

2 Income Deemed to be receive in India Taxable Taxable Taxable

 3 Income accrues or arises in India Taxable Taxable Taxable

4 Income deemed to accrues or arises in Taxable Taxable Taxable

India

5 Income accrues or arises outside Taxable NO NO

India

6 Income accrues or arises outside Taxable Taxable NO

India from business/profession
controlled/set up in India

7 Income Other than Above (No Taxable NO NO

Relation In India)
Note-
1. Residential status is as per section 6 of Income Tax Act, 1961.
2. Deemed income is not actually accrued but is supposed to be accrued notionally.
3. The income accrued is the point of time when the assessee obtains the rights
to receive it.

Explanation 1 & 2:-

Income accruing or arising outside India shall not be deemed to be received in

India within the meaning of this section by reason only of the fact that it is taken
into account in a balance sheet prepared in India.

Income which has been included in the total income of a person on the basis that
it has accrued or arisen or is deemed to have accrued or arisen to him shall not
again be so included on the basis that it is received or deemed to be received by
him in India.

Certain Examples of incomes which treated as incomes deemed to have

accrued or arisen in India:

• If Mr. X Transfer his Residential Property situated in Delhi, then Capital gain
arising on transfer of such Capital Asset is deemed to accrue in India. It means
Capital gain arising on transfer of property situated in India.
• Income from business connection in India.
• Dividend paid by an Indian company.
• Income from any property, asset or other source of income located in India.
INDIA:

As per Section. 2(25A) of the Income Tax Act, 1961, the term “India” means the
territory of India as referred to in article 1 of the Constitution, its territorial
waters, seabed and subsoil underlying such waters, continental shelf, exclusive
economic zone or any other maritime zone as referred to in the Territorial
Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones
Act, 1976 and the air space above its territory and territorial waters.

Case Study:

Srishti lives and works in the USA. She checked her Form 26AS online and found
out that a TDS entry of Rs 20,000 is mentioned. This TDS had been deducted at
30% on interest earned by her in her NRO account. Srishti has no other income
in India.

Does Srishti have to pay any tax in India, and is she required to file an
income tax return?
Whether your income will be taxed in India or not, depends upon your residential
status.

First, let’s find out Srishti’s residential status. She is an Indian citizen and has
gone to the US for her job – she will be a resident if she spends 182 days or more
in India. Srishti left India on 3rd July 2017 and came back to India on 15th March
2018. Therefore in the financial year that begins on 1st April 2017 and ends on
31st March 2018, Srishti has spent less than 182 days in India. Since she is an
Indian citizen on employment abroad, to qualify as a resident she must spend 182
days or more in India. Therefore, Srishti is an NRI for the purpose of income tax
in India.

For Srishti, only her income which is earned or accrued in India shall be taxable
in India. Her income in the USA is not taxable in India since she is an NRI.
Interest earned in India is taxable for an NRI. (Do note that interest on NRO
account is taxable whereas interest earned on NRE account is exempt from tax).

Srishti needs to add up all the income she has earned in India. The interest earned
on the NRO account of Rs 70,000 is Srishti’s only income. For FY 2017-18, the
minimum income which is exempt from tax is Rs 2.5 lakhs. Srishti’s total income
in India is less than the minimum exempt amount, and therefore she does not have
to pay any tax on it. In fact, since no tax is payable by her, she must claim a
refund of the TDS deducted on her interest income.
A refund can only be claimed by filing an income tax return for that financial year.