Chapter 2: Residence and Scope of Total Income

Chapter 2: Residence and Scope of Total Income 


1. Define Residential Status and explain the different types of residential status under the Income Tax Act, 1961.

Introduction: As per Section 6 of the Income Tax Act, 1961, residential status determines the tax liability of an individual based on their physical presence in India during a specified period (previous year). It is essential to determine an individual's tax obligations, such as whether they are taxable on global income or only on income sourced in India.

Body:

There are three types of residential status under the Act:

  1. Resident:
    • An individual is considered a Resident if they fulfill either of the following conditions:
      • They are in India for 182 days or more during the previous year.
      • They are in India for 60 days or more in the previous year and have been in India for at least 365 days in the preceding four years.
    • A Resident is taxable on global income (i.e., income earned both in India and outside India).
    • Example: An individual working in India who stays in the country for more than 182 days.
  2. Non-Resident (NR):
    • An individual who does not satisfy the conditions for being a Resident is a Non-Resident.
    • A Non-Resident is taxable only on income earned in India.
    • Example: A person working in a foreign country for most of the year and earning income outside India.
  3. Resident but Not Ordinarily Resident (RNOR):
    • An individual qualifies as an RNOR if they meet the criteria to be a Resident but have not been a resident of India for 9 out of the 10 previous years or have stayed in India for less than 729 days in the last seven years.
    • An RNOR is liable to pay tax on income earned in India and income outside India that is received in India.
    • Example: A person who has stayed abroad for many years and returns to India for a short period.

Conclusion: Understanding the residential status helps determine the extent of an individual’s tax liabilities based on their physical presence in India and income sourced from both India and abroad.

2. Explain the scope of total income and how it differs for residents, non-residents, and RNORs.

Introduction: The scope of total income defines what constitutes the income that is subject to tax. It depends on an individual’s residential status and determines the income that is taxable in India.

Body:

  1. Scope of Total Income for a Resident:
    • A Resident is taxable on their global income, which includes all income earned in India and abroad, regardless of where it is received.
    • Example: A resident working in India and earning income from foreign sources like rent from a property abroad or salary from a foreign employer is liable to tax on the entire income.
  2. Scope of Total Income for a Non-Resident (NR):
    • A Non-Resident is taxable only on income earned in India. Income earned outside India, even if received in India, is not subject to tax.
    • Example: A non-resident who earns rental income from a property in India will be taxable only on that income, not on income from foreign sources.
  3. Scope of Total Income for a Resident but Not Ordinarily Resident (RNOR):
    • An RNOR is taxable on:
      • Income earned or received in India, and
      • Income earned outside India, only if it is received in India during the relevant previous year.
    • Example: If an RNOR receives income from a foreign investment in India, it will be taxed in India, but income from foreign sources not received in India will not be taxed.

Conclusion: The scope of total income varies depending on the residential status, ensuring that residents pay tax on global income, while non-residents are only taxed on their income in India.

3. Explain the concept of "Previous Year" and "Assessment Year" and their relationship under the Income Tax Act, 1961.

Introduction: Under the Income Tax Act, 1961, the terms Previous Year and Assessment Year play a crucial role in the taxation process. The Previous Year is the period in which the income is earned, while the Assessment Year is the period in which the income is assessed and taxed.

Body:

  1. Previous Year:
    • The Previous Year is the financial year in which the income is earned. It runs from April 1st to March 31st of the following year.
    • For example, if the Previous Year is 2022-23, the income earned during this period will be assessed in the subsequent Assessment Year.
  2. Assessment Year:
    • The Assessment Year is the year in which the income earned in the previous year is assessed for tax purposes. It starts on April 1st and ends on March 31st of the next calendar year.
    • For example, if the Previous Year is 2022-23, the Assessment Year will be 2023-24.
  3. Relationship Between Previous Year and Assessment Year:
    • The income earned in the Previous Year is assessed and taxed in the Assessment Year.
    • Example: Income earned by a taxpayer in 2022-23 will be assessed in 2023-24, and the taxpayer will file the return of income in the Assessment Year.

Conclusion: The Previous Year is the year in which income is earned, and the Assessment Year is the year in which it is assessed for tax. This system helps taxpayers and tax authorities distinguish between the year of income and the year of assessment.

4. What is the significance of determining residential status under the Income Tax Act, 1961?

Introduction: The determination of residential status under the Income Tax Act, 1961, is crucial for understanding an individual’s tax liability. It dictates whether a person is taxed on their global income or only on income earned within India.

Body:

  1. Determines the Scope of Taxable Income:
    • Residents are taxed on global income, while Non-Residents are only taxed on income earned in India.
    • This distinction ensures that taxpayers are taxed according to their physical presence in India.
  2. Tax Filing and Compliance:
    • The residential status determines the applicable tax return forms and the nature of the tax filing.
    • Example: A resident individual may need to report foreign income, whereas a non-resident only needs to report income sourced from India.
  3. Exemptions and Deductions:
    • Residents are eligible for various exemptions and deductions available under the Income Tax Act, while Non-Residents and RNORs may have different exemptions available.
    • Example: The exemption on foreign income may differ for residents and non-residents.

Conclusion: The residential status affects the extent of income taxable in India, the filing process, and the eligibility for exemptions or deductions, making it a critical factor for tax calculation.

5. Discuss the taxation of income in the hands of a Non-Resident under the Income Tax Act, 1961.

Introduction: A Non-Resident (NR) under the Income Tax Act, 1961 is an individual who does not meet the criteria for being a Resident. The tax liability of a Non-Resident is limited to income earned or received in India.

Body:

  1. Taxable Income for Non-Residents:
    • A Non-Resident is taxable only on income sourced in India or received in India. This includes:
      • Income from salary earned in India.
      • Income from house property located in India.
      • Capital gains from the sale of capital assets in India.
      • Income from business or profession carried out in India.
  2. Non-Residents and Foreign Income:
    • Income earned outside India is not subject to tax in India, even if it is received in India. However, if a Non-Resident has income sourced from India, it will be taxed in India.
  3. Tax Rates for Non-Residents:
    • Non-Residents are subject to the same tax rates as residents, but there may be different provisions related to tax deductions and exemptions.

Conclusion: A Non-Resident is taxed only on India-sourced income, and they are not liable for tax on their foreign income unless it is received in India.

General Tips for Writing 5-Mark Answers:

  • Use Legal References: Always cite sections from the Income Tax Act to demonstrate your understanding.
  • Be Clear and Concise: Structure your answer logically, defining terms first, explaining in the body, and concluding.
  • Use Examples: Real-world examples help explain concepts more clearly.
  • Avoid Over-explaining: Focus on the key points and maintain clarity.

By preparing answers with this structured approach, you'll be well-equipped to handle any 5-mark questions in Chapter 2: Residence and Scope of Total Income of the Income Tax Law exam for CA Intermediate.

 


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