How is residential status calculated in income tax?

An individual’s residential status in India for income tax purposes determines the taxability of their global income. There are three primary categories of residential status:

1. Resident (Ordinary Resident): An individual is considered a resident (ordinary resident) if they meet any of the following conditions:

a. Stay in India for at least 182 days in the relevant financial year (FY).

b. Stay in India for 60 days in the relevant FY and 60 days in the preceding FY, totaling 120 days over two consecutive FYs.

c. Stay in India for 60 days in the relevant FY and 182 days in the two preceding FYs, totaling 242 days over three consecutive FYs.

• Resident but Not Ordinarily Resident (RNOR): An individual is considered a resident but not ordinarily resident (RNOR) if they meet the following conditions:

a. They are a resident of India in the relevant FY but not an ordinary resident.

b. Their total income (other than from foreign sources) exceeds Rs. 15 lakhs in the relevant FY.

c. They have no tax liability in any other country or territory by reason of their domicile, residence, or any other similar criterion.

Determining Your Tax Residency Status in the US

Determining your tax residency status in the US is crucial for understanding your tax obligations. The Internal Revenue Service (IRS) employs two primary tests to determine an individual’s tax residency status: the green card test and the substantial presence test.

Green Card Test

If you are a lawful permanent resident (LPR) of the United States at any time during the calendar year, you are considered a U.S. resident for tax purposes for that entire year. This means you are subject to U.S. taxes on your worldwide income, regardless of where you actually earn or receive it.

Substantial Presence Test

If you are not a U.S. citizen or LPR, you may still be considered a U.S. resident for tax purposes if you meet the substantial presence test. This test considers the number of days you are physically present in the United States during the calendar year.

To meet the substantial presence test, you must be present in the United States for:

At least 31 days during the calendar year, or

• At least 183 days during the three-year period that includes the current calendar year, counting days from the first day of the current year to the last day of the previous two years.

If you meet either of these conditions, you are considered a U.S. resident for tax purposes for the entire calendar year, even if you leave the United States before the end of the year.

Exceptions to the Substantial Presence Test

There are a few exceptions to the substantial presence test. These exceptions include:

• The closer connection exception: If you have a closer connection to another country than to the United States, you may not be considered a U.S. resident even if you meet the substantial presence test. To qualify for this exception, you must:

Be a resident of another country for tax purposes.

Maintain a closer connection to that country than to the United States. This means you must have more significant ties to that country, such as a permanent home, a spouse or common-law partner, or dependents in that country.

File a Form 8843 with the IRS to claim the exception.

• The tax treaty exception: If you are a resident of a country that has a tax treaty with the United States, you may be exempt from the substantial presence test if you meet certain conditions specified in the treaty.

Tax Implications of U.S. Residency

If you are considered a U.S. resident for tax purposes, you are subject to U.S. taxes on your worldwide income. This means you must report all of your income, regardless of where it is earned or received, on your U.S. tax return. You may also be subject to U.S. estate and gift taxes.

Determining Your Tax Residency Status

Determining your tax residency status in the United States can be complex. It is important to consult with a tax advisor to determine your specific residency status and tax obligations.

• Non-Resident (NR): An individual is considered a non-resident (NR) if they do not meet the criteria for either resident (ordinary resident) or resident but not ordinarily resident (RNOR).

The residential status of an individual determines the taxability of their income from various sources, including income from India, Us Income Tax For Us Citizens Living Abroad, and capital gains. Resident individuals are taxable on their global income, while NRI individuals are only taxable on their income earned in India. RNOR individuals are taxable on their global income, but they can claim tax benefits on their foreign income if they meet certain conditions. To determine an individual’s residential status, Indian tax authorities consider various factors, including their physical presence in India, their permanent home, their center of vital interests, and their habitual abode. The assessment of residential status can be complex, and it is advisable to consult with a tax advisor for accurate determination and tax planning.