Budget 2020 Analysis: Amendments in Section 6 (Residence in India) for residential status

Taxability of a particular income of a person under income tax act (“The Act”) depends on his residential status which needs to be determined by applying the provisions of section 6 of the Act. In Finance bill, 2020, an amendment in section 6 has been proposed by the government which after getting assent of president will have a major impact on the scope of residence in India under the Act.

AMENDMENT IN SECTION 6-

Following are three amendments in section 6 i.e. Residence in India:

Amendment 1: In clause (1), in Explanation 1, in clause (b), for the words “one hundred and eighty-two days”, the words “one hundred and twenty days” shall be substituted;

Amendment 2: After clause (1), the following clause shall be inserted,

(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, shall be deemed to be resident in India in any 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.”;

Budget 2020 Analysis: Amendments in Section 6 (Residence in India)

Amendment 3: For clause (6) in section 6, the following clause shall be substituted,

(6) A person is said to be “not ordinarily resident” in India in any previous year, if such person is

1. An individual who has been a non-resident in India in seven out of the ten previous years preceding that year; or

2. A Hindu undivided family whose manager has been a non-resident in India in seven out of the ten previous years preceding that year.

DETAILED ANALYSIS OF ALL AMENDMENTS

AMENDMENT 1-

OLD PROVISION

As per current provision, a person will be resident if he satisfies any one of the following conditions-

1. If he is in India for 182 days or more during the previous year, or

2. If he is in India for 60 days or more in previous year and 365 days or more during 4 previous years preceding to that year.

Explanation 1 clause (b)

A person being a citizen of India, or a person of Indian origin who, being outside India comes on a visit to India in any previous year, then in his case 60 days in above provision needs to be read as 182 days. So, this makes second condition above irrelevant for these persons and these persons will be resident only if they satisfy first condition i.e. stays in India for 182 days or more during the previous year.

IMPACT OF AMENDMENT

Now in finance bill, it has been proposed that words “182 days” in clause (b) of explanation 1 will be substituted by words “120 Days”. Now, this amendment will make second condition of residence relevant for these persons also. Now, these persons can also be resident if he is in India for 120 days or more during the previous year and 365 days or more during 4 previous years preceding to that year.

EXAMPLE

AMENDMENT 2

OLD PROVISION

Earlier a person can be a resident of India only if he satisfies any of two conditions discussed above in OLD PROVISION paragraph of AMENDMENT 1 above.

IMPACT OF AMENDMENT

Now, with the insertion of a new clause 1A in section 6, we have third criteria with which a person needs be tested for his residential status in India. According to this new clause an India citizen shall be deemed to be the resident 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. This provision widens the scope of Residential status as per section 6.

AMENDMENT 3

OLD PROVISION

A person can be a said as an ordinarily resident only if he satisfies both the below mentioned conditions-

1. If he is resident in India in any 2 previous years out of 10 previous years preceding to the relevant previous year, and

2. If he stays in India for 730 days or more during the 7 previous years preceding to the relevant previous year.

An HUF can also be said as an ordinarily resident if its manager satisfies both the above mentioned conditions.

IMPACT OF AMENDMENT

Now an amendment has been proposed under which only one condition has been kept to test whether as person is ordinarily resident or not. After the amendment, a person can be said as ordinarily resident only if he was resident for at least 4 previous years out of 10 previous years preceding to the relevant previous year. This can also be said as if a person was not resident for any 7 previous years out of 10 previous years preceding to the relevant previous year, then he will be not ordinarily resident.

Similarly, An HUF can also be said as an ordinarily resident if its manager satisfies the above mentioned condition.