Residential Status & Scope of Total Income (ss.5–9) — Law of Taxation Notes

Residential Status & Scope of Total Income (ss.5–9)

An American scientist, appointed in India in 2002, went to Uganda on deputation years later, then came back — and the exam keeps asking whether India can tax his foreign salary. Everything turns on one thing: how many days he was in India. Residential status, decided by a day-count, is the single gateway that decides how much of a person’s world income India may tax.

Why residence comes first

India taxes a resident on his world income, but a non-resident only on income that has an Indian connection. So before you can say what is taxable, you must fix the person’s residential status. It has nothing to do with citizenship — a foreigner can be a resident, an Indian citizen can be a non-resident.

Three statuses for an individual (s.6):

A. Resident — basic conditions (s.6(1)). An individual is resident in India in a previous year if he satisfies either:

he is in India for 182 days or more during the previous year; or
he is in India for 60 days or more during the previous year and 365 days or more during the four preceding previous years.

(The 60-day limb is extended to 182 days for an Indian citizen leaving India for employment abroad, and for an Indian citizen/PIO visiting India — a relaxation, subject to the high-income deeming rule in recent amendments.)

B. Resident and Ordinarily Resident (ROR) vs Resident but Not Ordinarily Resident (RNOR) — s.6(6). A resident is ROR unless he falls into RNOR. He is RNOR (an in-between status) if either:

he was a non-resident in India in 9 out of the 10 preceding previous years; or
he was in India for 729 days or less during the 7 preceding previous years.

C. Non-Resident (NR). Anyone who is not a resident — i.e. fails both basic conditions.

Scope of total income (s.5) — what each status is taxed on:

ROR — taxed on all income, whether Indian or foreign (world income).
RNOR — taxed on Indian income plus foreign income only if it is derived from a business controlled from, or a profession set up in, India. Other foreign income is not taxed.
NR — taxed only on income received or deemed received in India, or accruing/arising or deemed to accrue/arise in India (s.9).

Section 5(1): the total income of a resident includes all income “received or… deemed to be received in India”, “accrues or arises or is deemed to accrue or arise… in India”, and income that “accrues or arises… outside India” during the year.

Income deemed to accrue in India (s.9) — even for a non-resident, certain income is taxed because it has an Indian source: income from a business connection in India, from property/asset in India, salary for services rendered in India, dividends paid by an Indian company, interest/royalty/fees for technical services from Indian payers. Salary is taxed where the service is rendered, not where it is paid.

⚠️ DON’T CONFUSE — Resident vs Non-Resident vs RNOR

ROR = full member: taxed on world income. NR = outsider: taxed only on Indian-source income. RNOR = the in-between (a returning NRI, a newcomer): taxed on Indian income and foreign income only from a business controlled from India — his ordinary foreign income escapes. Decide resident vs NR first (the day-count), then, if resident, ROR vs RNOR (the 9-of-10 / 729-day tests).

🧩 WORKED EXAMPLE — Foreign salary of a non-resident for services in India

Facts. ‘X’ Ltd., a foreign company, pays salary outside India to ‘Y’, a foreign national and non-resident, for services ‘Y’ rendered in India.

Rule. Under s.9(1)(ii), salary is deemed to accrue in India if it is earned in India, i.e. for services rendered in India — regardless of where it is paid or who pays it. A non-resident is taxed on Indian-source income (s.5(2)).

Apply. Although the payer is foreign and the payment is made abroad, the services were rendered in India, so the salary is deemed to accrue in India.

Conclusion. The salary is taxable in India in ‘Y’s hands, even though ‘Y’ is a non-resident and was paid abroad. Place of service, not place of payment, decides.

🧩 WORKED EXAMPLE — Money remitted to a father in India

Facts. An engineer from Mysore goes to the USA on a job visa (becoming a non-resident) and sends ₹10,00,000 to his father in Mysore for a family function.

Rule. A non-resident is taxed only on income received or accruing in India (s.5(2)). Salary earned abroad for services rendered abroad is foreign-source income; a remittance of already-earned money is not a fresh accrual of income.

Apply. The salary was earned in the USA for services rendered there — foreign-source income of a non-resident, not taxable in India. The ₹10 lakhs sent home is a transfer of that money, not new income.

Conclusion. Neither the foreign salary nor the remittance is taxable in India. (Had he been ROR, the world salary would be taxable — but the remittance itself still would not be a second taxable event.)

In Simple Terms: Count the days in India. 182+ days (or 60+365) makes you a resident; residents pay on their world income. Fail those and you are a non-resident, taxed only on Indian income. RNOR is a halfway status for returning/arriving persons. Salary is taxed where you do the work, not where you are paid.

flowchart TD
    ROOT["Individual: how many days in India?"]:::root
    ROOT --> R{"182+ days OR (60+ days and 365 in prior 4 yrs)?"}:::leaf
    R -->|"No"| NR["NON-RESIDENT<br/>Indian-source income only"]:::sub
    R -->|"Yes"| RES["RESIDENT"]:::leaf
    RES --> Q{"NR in 9 of 10 yrs OR <=729 days in 7 yrs?"}:::leaf
    Q -->|"Yes"| RNOR["RNOR<br/>Indian income + India-controlled business income"]:::sub
    Q -->|"No"| ROR["ROR<br/>WORLD income"]:::sub
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef sub fill:#F2F2F2,stroke:#555,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

Case Laws

V.V.R.N.M. Subbayya Chettiar v CIT (1951) — residence of a HUF turns on where control and management is situated.
CIT v Cochin Company (1968) — “control and management” means the head and brain, the controlling power, not routine work.

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