Foundation — The framework of Indian income tax, the key concepts, and residential status

7.1 The framework

Four layers, in order of authority — learn the order:

Ministry: Finance. Administration: CBDT. Do not say "SEBI" or "RBI" — this chapter is about the direct-tax machinery, and CBDT is the answer every time administration is asked about.

Why an investment adviser needs this:

The same transaction — buying and selling a share — can be business income for one person and capital gains for another. The security, the holding period and the capacity of the person all change the answer. That is the thread running through Module 9.

7.2 Key concepts

7.2.1 Previous year versus assessment year

The statutory definitions:

• Section 2(9) defines assessment year as A PERIOD OF 12 MONTHS COMMENCING ON THE 1ST DAY OF APRIL EVERY YEAR.
• Section 3 defines previous year as THE FINANCIAL YEAR IMMEDIATELY PRECEDING THE ASSESSMENT YEAR.

The simplest way to hold it: you EARN in the previous year and you are ASSESSED in the assessment year. Income of FY 2025-26 (PY 2025-26) is taxed in AY 2026-27. The AY is always one year later than the PY.

Where candidates lose the mark: a question gives a financial year and asks for the assessment year, or vice versa. Add one to go from PY to AY; subtract one to go from AY to PY.

7.2.2 Person — Section 2(31)

Section 2(31) defines person to INCLUDE seven categories:

And a rule that surprises people:

So an AOP, a BOI, a local authority or an artificial juridical person is a "person" under the Act even if making money was never its purpose. A residents' welfare association formed only to maintain a garden is still a person. That is the specific point the Act makes, and it is examinable — note that the rule applies to (e), (f) and (g) only, not to individuals, HUFs, companies or firms.

Seven categories. Count them. A question asking "which of the following is NOT a person under section 2(31)?" will usually offer something like "a minor child" (who is an individual) or "a branch office" as the distractor.

7.2.3 Assessee — Section 2(7)

Two limbs, and the second is the one people forget:

1. A person liable to pay tax or any other sum under the Act.
2. A person in respect of whom any PROCEEDING has been initiated — and the proceeding may be about income, LOSS or REFUND.

So a person claiming a refund is an assessee. A person who has only a loss to declare is an assessee. You do not have to owe anything to be one. Every assessee is a person; not every person is an assessee.

7.3 Income — Section 2(24)

"Inclusive" is the key word, and it is worth a mark on its own. An exhaustive definition would say "income means only these things". An inclusive definition says "income includes these things — and anything else that is in the nature of income." You cannot escape tax by pointing out that your receipt is not on the list.

The more relevant clauses the workbook lists:

Note items 4 and 5 carefully. A gift from a relative is outside this; a gift from a non-relative covered by section 56 is income. And buying a flat from a stranger for well below its stamp-duty value is not clever bargaining — the difference is income in your hands.

7.4 Residential status

Residential status is NOT citizenship

Three separate questions, three separate answers, and they need not agree:

1. Whose citizen are you? — a matter of nationality law, nothing to do with tax.
2. Are you resident under the Income Tax Act? — decides what income India taxes.
3. Are you resident under FEMA? — decides what you may invest in and remit.

The workbook's comparison table — a favourite examination target:

Two contrasts to memorise: FEMA status is judged day to day and can turn on intention; income-tax status is fixed once for the whole financial year and turns purely on days and income, with no role for intention at all. FEMA decides what you may do with your money; the Income Tax Act decides what India will tax.

7.4.1 Why residential status matters

Residential status comes FIRST. It is not a detail to be checked at the end — nothing can be computed until it is settled.

The change from FY 2020-21:

Three inputs now, not one: citizenship, days of stay, and Indian-source income. The Finance Act, 2020 made this change with effect from FY 2020-21 (AY 2021-22).

The three categories:

The deemed resident — Section 6(1A)

Read the two conditions as a pair — BOTH must hold:

1. Indian income exceeds Rs 15 lakh in the previous year, and
2. He is NOT LIABLE TO TAX IN ANY OTHER COUNTRY by reason of domicile, residence or similar criteria.

This is the "stateless tax resident" rule. It targets the Indian citizen who arranges his affairs so as to be tax-resident nowhere. It does NOT apply to a citizen who pays tax in Dubai, Singapore or anywhere else — only to one who is liable nowhere.

The definition of foreign-source income:

And the consequence:

That last line is a gift of a question. A deemed resident is never ROR. Always RNOR. Which means he is taxed on Indian income and on foreign income only from a business controlled in or a profession set up in India — not on his worldwide income.

7.4.2 Resident in India — the three parts

The Act now applies different tests to different kinds of people. The workbook splits them into three parts.

Part 1 — Indian citizens

An Indian Citizen is treated as resident in India:

The pattern to hold on to: 182 days always makes you resident. The 120-day test applies only to a visiting Indian citizen or PIO whose Indian income exceeds Rs 15 lakh, and it comes with a 365-days-in-4-preceding-years condition. The 60-day test is the ordinary rule for someone neither visiting nor leaving, again with the 365-in-4 condition. Clause (f) is the deemed resident rule of section 6(1A).

Part 2 — Foreign nationals who are Persons of Indian Origin

A Person of Indian Origin is defined as one where HE OR EITHER OF HIS PARENTS OR ANY OF HIS GRANDPARENTS WERE BORN IN UNDIVIDED INDIA.

Learn that definition exactly: self, parents, or grandparents — born in UNDIVIDED India. "Undivided India" matters — it takes in territory that is now Pakistan and Bangladesh.

A PIO will be treated as a resident in India:

Note what is absent from Part 2: there is no deemed-resident clause. Section 6(1A) applies only to Indian citizens. A PIO who is not an Indian citizen cannot be a deemed resident however large his Indian income.

Part 3 — All other foreign nationals

All other foreign nationals (other than persons of Indian origin) will be treated as resident in India:

This is the plain, old rule: 182 days, or 60 days plus 365 in four years. No income test, no visit test, no deemed residence. The simpler the person's connection with India, the simpler the test.

Resident but Not Ordinarily Resident

The logic in one line: you are first tested for RESIDENT. Only if you are resident do you then test for NOT ORDINARILY. And note the direction — ANY ONE condition makes you RNOR; you must fail all of them to be ROR.

The two numbers to memorise: 9 out of 10, and 729 days in 7 years. Note 729, not 730 — it is "729 days or less", i.e. less than 730. Examiners use 730 as a distractor.

7.4.3 Residential status of an HUF

Resident:

Non-resident:

The word doing all the work is WHOLLY. An HUF is non-resident only if control and management are entirely outside India. A single decision taken in India makes it resident. That is a very low bar, deliberately so.

Resident and Not Ordinarily Resident (HUF) — the tests apply to the MANAGER, not the family:

Same two numbers as for an individual — 9 out of 10, and 729 days in 7 years — but applied to the manager (Karta).

7.5 Scope of income — what each status actually pays tax on

Resident and Ordinarily Resident

A resident and ordinarily resident assessee (individual and HUF) shall be liable to pay tax in India on:

Resident but Not Ordinarily Resident

Clause (c) is the whole difference between RNOR and NR. The RNOR pays Indian tax on foreign income only when the foreign income traces back to a business controlled from India or a profession set up in India. Everything else foreign is untaxed.

Non-Resident

Nothing foreign at all.

Table 7.1 — the grid you must be able to reproduce

Read the table down the columns and the pattern is obvious: the ROR column is all "taxable"; the NR column is taxable only for the two Indian rows; the RNOR sits between them, differing from the NR by exactly one row. If you can draw this four-by-three grid from memory, you have the whole of section 7.5.

The workbook's four residential-status examples

Example 1 — Mr C, returning Indian citizen

Mr C, an Indian citizen, worked in London for some years and returned to India in FY 2024-25. His stay:

Answer: Mr C's stay in FY 2024-25 is more than 182 days. Hence, he is a RESIDENT. Now for the ordinarily-resident test, he needs to satisfy any one of: stayed 729 days or less in the last seven years, or being a non-resident in 9 out of 10 preceding years.

Mr C has spent 578 days in the 7 years preceding the financial year (264 + 70 + 70 + 50 + 50 + 34 + 40 = 578) and hence satisfies the first condition. Mr C is also a non-resident in nine out of ten preceding financial years. Hence, he is a RESIDENT BUT NOT ORDINARILY RESIDENT in India for FY 2024-25.

He satisfies both conditions, though only one was needed.

Example 2 — Mr A's US bank account

Mr A is a resident and ordinarily resident in FY 2024-25 and has interest income on a US bank balance. Taxable in India?

Answer: YES. Since Mr A is a resident and ordinarily resident, he will be liable to tax on his WORLDWIDE INCOME in India.

And if he were RNOR instead?

Answer: In that case, THE INTEREST INCOME FROM THE USA BANK ACCOUNT WILL NOT BE TAXED IN INDIA. Bank interest abroad is not income from a business controlled in India or a profession set up in India, so it falls outside the RNOR's scope.

Example 3 — Mr Vilayati, a PIO coming to India for employment

Mr Vilayati, a foreign national who is a PIO, was overseas for 20 years and non-resident throughout, spending about 30 days a year in India. He comes to India for employment on 1 April 2024 and stays for the entire year thereafter. He holds foreign bonds paying interest abroad.

(a) Status for FY 2024-25, 2025-26 and 2026-27?

• FY 2024-25: Stay exceeds 182 days, so resident. He is a non-resident in nine of the ten preceding years and has spent less than 730 days in the preceding 7 years. Either alone is enough. RESIDENT BUT NOT ORDINARILY RESIDENT.
• FY 2025-26: The same position would continue. RNOR again.
• FY 2026-27: Stay again exceeds 182 days, so resident. But now: he will not satisfy the condition of being non-resident in 9 out of 10 preceding years, since he is a resident in both FY 2024-25 and 2025-26. He has also spent more than 730 days in the preceding 7 financial years. He does not satisfy either of the 2 conditions laid down. Hence, he will be RESIDENT AND ORDINARILY RESIDENT for FY 2026-27.

(b) Is the bond interest taxable in India?

He is RNOR for FY 2024-25 and FY 2025-26, during which years the bond interest is NOT TAXABLE in India. FROM FY 2026-27 IT WILL BECOME TAXABLE IN INDIA.

This example is the single most instructive one in the chapter. It shows RNOR as a transitional status — a two-year window in which a returning person's foreign income escapes Indian tax, before ROR status arrives and the worldwide net closes.

Example 4 — Mr Gora, a foreign national long settled in India

Mr Gora is a non-Indian-origin citizen of the UK, working in a permanent job in India since 2005, with a work visa, and has not left India since.

(a) "Mr Gora will become an Indian citizen automatically after 10 years of staying in India." True or false?

FALSE: CITIZENSHIP NEVER COMES AUTOMATICALLY, NO MATTER HOW MANY YEARS ONE STAYS IN A COUNTRY.

(b) "He is a resident and ordinarily resident in FY 2024-25 for Income Tax purposes." True or false?

TRUE: AS HE STAYED FOR MORE THAN 182 DAYS FOR MANY YEARS NOW.

(c) "Mr Gora has rental income in the UK. As a foreigner he will not pay any taxes on such income in India." True or false?

FALSE: AS RESIDENT AND ORDINARILY RESIDENT (TAX) PAYS TAX ON THEIR GLOBAL INCOME IN INDIA.

Part (c) is the point of the whole example. Being a foreign citizen gives no protection at all. Residential status, not passport, decides the scope of Indian tax — and a foreign national who has lived here since 2005 is as fully taxed on his worldwide income as any Indian citizen.