Residence in India {Section - 6, Income-tax Act, 1961-2020}

6. For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two
days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods
amounting in all to three hundred and sixty-five days or more, is in India for a period or
periods amounting in all to sixty days or more in that year.
Explanation 1.—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an
Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of
1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall
apply in relation to that year as if for the words "sixty days", occurring therein, the words
"one hundred and eighty-two days" had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to
clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous
year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words
"sixty days", occurring therein, the words "one hundred and eighty-two days" had been
substituted [and in case of [the citizen or person of Indian origin] the citizen or person of
Indian origin having total income, other than the income from foreign sources, exceeding
fifteen lakh rupees during the previous year, for the words "sixty days" occurring therein, the
words "one hundred and twenty days" had been substituted].
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India
and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India
shall, in respect of such voyage, be determined in the manner and subject to such conditions as may
be prescribed.
Following clause (1A) shall be inserted after clause (1) of section 6 by the Finance Act, 2020, w.e.f.
1-4-2021 :
(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having
total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the
previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in
any other country or territory by reason of his domicile or residence or any other criteria of similar
nature.
Following Explanation shall be inserted after clause (1A) of section 6 by the Taxation and Other Laws
(Relaxation and Amendment of Certain Provisions) Act, 2020, w.e.f. 1-4-2021 :
Explanation.—For the removal of doubts, it is hereby declared that this clause shall not apply in case
of an individual who is said to be resident in India in the previous year under clause (1).
(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in
any previous year in every case except where during that year the control and management of its
affairs is situated wholly outside India.
(3) A company is said to be a resident in India in any previous year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation.—For the purposes of this clause "place of effective management" means a place where
key management and commercial decisions that are necessary for the conduct of business of an entity
as a whole are, in substance made.
(4) Every other person is said to be resident in India in any previous year in every case, except where
during that year the control and management of his affairs is situated wholly outside India.
(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any
source of income, he shall be deemed to be resident in India in the previous year relevant to the
assessment year in respect of each of his other sources of income.
(6) A person is said to be "not ordinarily resident" in India in any previous year if such person is—
(a) an individual who has been a non-resident in India in nine out of the ten previous years
preceding that year, or has during the seven previous years preceding that year been in India
for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or
(b) a Hindu undivided family whose manager has been a non-resident in India in nine out of the
ten previous years preceding that year, or has during the seven previous years preceding that
year been in India for a period of, or periods amounting in all to, seven hundred and twenty-
nine days or less [; or
(c) a citizen of India, or a person of Indian origin, having total income, other than the income
from foreign sources, exceeding fifteen lakh rupees during the previous year, as referred to in
clause (b) of Explanation 1 to clause (1), who has been in India for a period or periods
amounting in all to one hundred and twenty days or more but less than one hundred and
eighty-two days; or
(d) a citizen of India who is deemed to be resident in India under clause (1A).
Explanation.—For the purposes of this section, the expression "income from foreign sources" means
income which accrues or arises outside India (except income derived from a business controlled in or
a profession set up in India) [and which is not deemed to accrue or arise in India]].

AN INDIVIDUAL’S RESIDENTIAL STATUS AS PER INCOME TAX ACT

According to the Income Tax Act, 1961, residential status of a person is one of the important criteria
in determining the tax implications. The residential status of a person can be categorised into Resident
and Ordinarily Resident (ROR), Resident but Not Ordinarily Resident (RNOR) and Non- Resident
(NR).
Resident
A resident taxpayer is an individual who satisfies any one of the following conditions:
 Resides in India for a minimum of 182 days in a year, or
 Resided in India for a minimum of 365 days in the immediately preceding four years and
for a minimum of 60 days in the current financial year.
For example, consider the case of Mr. D, who is business head for Asia Pacific regions for a private
firm. Mr. D was born and brought up in India. He has to travel to various locations of the continent
for business purposes. He has spent 200 days travelling in the current financial year. Also, he has
been travelling abroad from the past two years and has stayed out of India for about 400 days in this
period.
Let us evaluate whether Mr. D was resident in India for the current financial year.
Condition I (Resides in India for a minimum of 182 days in a year) – Not satisfied
To figure out the resident status of Mr. D, you will understand that he has only spent 165 days in India
during the current financial year. Hence, he does not satisfy the first condition.
Condition II (Resides in India for a minimum of 365 days in the immediately preceding four
years and for a minimum of 60 days in the current financial year) – Satisfied
However, It is given that Mr. D has been travelling only from the past two years. Also, it is said that
he has travelled for 400 days in the past two years. That means, in the past four years, Mr. D has
stayed in India for more than 365 days (1061 days).
Hence, Mr. D has resided for atleast 60 days in the current financial year and for more than 365 days
in the immediately preceding four financial years. Therefore, Mr. D satisfies the second condition.
Hence, if any one of the above two condition is satisfied he is a resident taxpayer.
(a) Resident and Ordinarily Resident (ROR) and
(b) Resident but Not Ordinarily Resident (RNOR)
There is a further classification under the resident status – Resident and Ordinarily Resident (ROR)
and Resident but Not Ordinarily Resident (RNOR).
In addition to the basic conditions, if both the below conditions are met, he will be a ROR:
  He has resided in India for at least 2 out of 10 immediate previous years.
 He has resided in India for at least 730 days in seven immediately previous years.
In above example Mr. D has satisfied as resident of India. Let us further classify whether Mr. D is
ROR or RNOR
If both the additional conditions are satisfied then Mr. D is ROR
Considering the example, Mr. D was travelling out of India since past 2 years only. Hence, the first
condition is satisfied as he resided in India for at least 2 years out of the immediate previous 10
years. Also, he has fulfilled the criteria of residing for at least 730 days in seven immediately
preceding years. Therefore, he can be considered as Resident Ordinarily Resident.
If any one of the additional conditions is satisfied then Mr. D is RNOR.
Alternatively, consider that he had to work from the headquarters of his firm, located in Kota
Kinabalu, Malaysia for the past six years. He has only visited his parents for a week, twice a year
during this time. That means, he has resided in India for 449 days in the past six years and the same
applies for the current financial year too. In this case, first condition is satisfied but not the second.
Therefore, Mr. D is Resident Not Ordinarily Resident.
Non-Resident
An individual who does not satisfy the basic conditions of resident can be considered as a non-
resident.
For example, Ms. G went to London to join a reputed university for a graduation course (three
years). While studying there, her professor suggested her to join a post-graduate course at the same
university (two years). She had to get an internship certificate to complete the course. Upon
completion, the firm offered her a permanent position. She has been an employee there for the past
four years. That is, Ms G has stayed out of India for nine years now. She receives rental income from
the property that she inherited from her parents. Both the basic condition are not satisfied. That
makes Ms. G a non-resident.
Note:
The condition of minimum 60 days stay in the current financial year will get extended to 182 days in
all the cases if:
 A person is a citizen of India and he leaves India for the purpose of employment during the
current financial year.
 A person who stays outside India, being a citizen of India or a Person of Indian Origin (PIO),
and comes on a visit to India during the year.
 RESIDENTIAL STATUS OF COMPANIES: CONCEPT OF PLACE OF
EFFECTIVE MANAGEMENT (“POEM”)
Section 6(3) deals with conditions to be satisfied for a Company to be treated as resident in India in
any previous year. Prior to the introduction of the concept of POEM, a Company was said to be
resident in India in any previous year if it was an Indian company or during that year, the control and
management of its affairs was situated wholly in India.
The Finance Act, 2015 amended the above provision so as to provide that a Company would be
resident in India in any previous year if it is an Indian company or its Place of Effective Management
(POEM) in that year is in India. The ‘POEM’ was defined to mean “a place where key management
and commercial decisions that are necessary for the conduct of the business of an entity as a whole
are in substance made.”
In order to bring clarity about the applicability criteria of certain Income tax provisions, the concept of
POEM has been deferred for one year the same has been made applicable w.e.f. previous year 2016-
17.
The concept of POEM is important to determine the residential status of a foreign company operating
in India. For Example, a foreign company fulfilling the conditions of POEM will be deemed as Indian
Resident and the global income of such foreign company is taxable in India.
Section 6(3) of the Income tax Act, 1961 provides that a Company is said to be resident
in India in any previous year if:
 The Company is an Indian Resident; OR
 Its place of effective management, in that year, is in India

Analysis:
 In case the Company is registered under the Companies Act, 2013 or any other
previous Company law is termed as Indian Company and the principles of POEM
are of no relevance for such Company since an Indian Company is always an
Indian Resident.
 Determination of whether the Place of Effective Management (POEM) is India for
any Company is relevant for foreign company since the residential status will
determine the vicinity of income which will be taxable in India. For Example, in
case of a foreign company is having POEM in India, then the global income of
such Company will be treated as “taxable in India”.
 The percentage of tax rate will not be determined by the residential status but
Company needs to check whether it is a Domestic Company or not. In case the
Company is a Domestic Company (i.e. Indian Company or any other Company which
has made prescribed arrangements for declaration and payment of dividend within
India), then the lower rate of tax i.e. 30% or 29% or 25% (as the case may be will be
levied) otherwise the income will be taxable at higher rate of 40%. Needless to
mention that the tax is further increased by Surcharge and Cess as applicable.
 The POEM is required to be determined each year since the residential status is
required to be ascertained each year.
 Circular 8/2017 dated February 23, 2017  issued by CBDT has clarified that the
provisions of POEM will not be applicable to a Company having turnover of Rs. 50
crores or less in a financial year.
Guidelines determining POEM (whether in India):
General Principle: The POEM in case of a Company engaged in active business outside
India shall be presumed to be outside India if the majority meetings of the board of
directors of the company are held outside India.
Analysis:
 Conditions when POEM in India is not applicable to a Company:
o Company is engaged in active business outside India; and
o Majority of Board Meeting are held Outside India.

 Active Business Outside India:

A Company is said to be active business outside India if its passive income is not
more than 50% of the total income of such Company and:
♦ Assets in India are < 50% of the total assets
(Assets will be taken as average of opening and closing);
♦ Employees in India < 50% of the total employees
(No. of employees will be taken as average of opening and closing);
♦ Payroll Expenses in India < 50% of the total payroll expenses.

Passive Income means Income in relation to transactions of purchase and  sale with

Associated Enterprises (AEs) or Income generated from Royalty, Dividend, Interest, Rental
or Capital Gains. 
 It is to clarify that merely because the Board of Directors (BOD) follows general and
objective principles of global policy of the group laid down by the parent entity which
may be in the field of Payroll functions, Accounting, Human resource (HR) functions,
IT infrastructure and network platforms, Supply chain functions, Routine banking
operational procedures, and not being specific to any entity or group of entities per
se; would not constitute a case of BOD of companies standing aside and in such case
also the BOD are considered to be effectively managing the business of the Company.
 The Company needs to analyse the data of assets, no. of employees etc. in relation
to the relevant previous year and two years prior to that year in order to determine
that whether Company is having any active business outside India.

Specific Principles:
The Guidance further provides that in cases of Companies other than those that are
engaged in active business outside India referred to in above, the determination of POEM
would be a two stage process, namely:
Stage 1: First stage would be identification or ascertaining the person or persons who actually
make the key management and commercial decision for conduct of the company’s business
as a whole (WHO TAKE THE DECISIONS).
Stage 2: Second stage would be determination of place where these decisions are in fact
being made (WHERE THE DECISIONS ARE IMPLEMENTED). 
In case the decisions undertaken by the company are in India (not such decisions which are
of routine nature taken by middle or lower-level management) and such decisions taken by
the bord or senior management have actually been implemented in India, then the poem shall
be considered as in India and the company will be deemed as Indian resident. 
D. EXAMPLES:
Example: Company A Co. is a sourcing entity, for an Indian multinational group,
incorporated in country X and is 100% subsidiary of Indian company (B Co.). The
warehouses and stock in them are the only assets of the company and are located in country
X. All the employees of the company are also in country X. The average income wise
breakup of the company’s total income for three years is,
 30% of income is from transaction where purchases are made from parties which are
non-associated enterprises and sold to associated enterprises;
 30% of income is from transaction where purchases are made from associated
enterprises and sold to associated enterprises;
 30% of income is from transaction where purchases are made from associated
enterprises and sold to non-associated enterprises; and
 10% of the income is by way of interest.
Solution: Since passive Income of the Company is less than 50% i.e. 40% of the total income
of such entity and both the assets and employees are working in country X, therefore the
Company is deemed to have active business outside India.