🏠 Residential Status & Scope of Total Income (Sections 5 to 9)

Understanding the residential status of a taxpayer is crucial under Indian tax law, as it determines how much of their income is taxable in India. Sections 5 to 9 of the Income Tax Act, 1961 govern the scope of total income based on a person’s residential status.

📘 1. Legal Basis: Section 5 — Scope of Total Income

Section 5 lays the foundation of how income is taxed based on residential status.

✅ Residents (Ordinarily Resident – ROR)

Taxable on:

• 🌍 Global income
  
  
• 💰 Income received or accrued anywhere in the world
  
  

✅ Resident but Not Ordinarily Resident (RNOR)

Taxable on:

• 🏡 Income received or accrued in India
  
  
• 💼 Income from a business or profession controlled from India
  
  

✅ Non-Resident (NR)

Taxable only on:

• 🇮🇳 Income received in India
  
  
• 🏦 Income deemed to accrue or arise in India
  
  

🔎 2. Section 6 — Determination of Residential Status

👤 For Individuals:

You are a Resident in India if:

• Present in India for ≥ 182 days in a financial year, or
  
  
• Present in India for ≥ 60 days in that year and 365 days in the preceding 4 years
  
  

Exceptions apply for Indian citizens/Past NRIs visiting India.

👥 For Companies:

• Indian company = always resident
  
  
• Foreign company = resident only if control and management is in India
  
  

📌 Concept of “Place of Effective Management (POEM)” applies to foreign companies.

⚖️ 3. Section 7 — Income Deemed to Be Received in India

Section 7 specifies what is considered ‘received’ income even without physical transfer.

Includes:

• 👨‍👧 Employer’s contribution to Recognized Provident Fund
  
  
• 🏛 Interest accrued on Provident Fund exceeding notified limit
  
  
• 🪙 Annual accretion to retirement funds deemed received during previous year
  
  

🧾 4. Section 8 — Accrual of Income

Deals with:

• 📅 When salary becomes due (monthly accrual basis)
  
  
• 💳 Advance salary
  
  
• 📦 Arrears of salary
  
  

This ensures timing of taxation aligns with “due or received” principle.

📜 5. Section 9 — Income Deemed to Accrue or Arise in India

This is crucial for taxing foreign entities and NRIs.

Covered Under:

• 🏢 Business income through operations in India
  
  
• 👷 Salary for services rendered in India
  
  
• 📄 Income from property, asset or source located in India
  
  
• 📈 Capital gains from transfer of assets situated in India
  
  
• 💼 Fees for technical services, royalty, or interest from Indian sources
  
  

📌 Includes indirect transfers of Indian assets by foreign companies (Vodafone case).

💼 6. Relevance of DTAA (Double Taxation Avoidance Agreements)

DTAA overrides domestic law if more beneficial to the assessee.

Benefits:

• 🛡 Avoid double taxation
  
  
• 📄 Reduced TDS rates on dividends, interest, royalties
  
  
• 🤝 Tie-breaker rules to resolve dual residency
  
  

Example: If an NRI is taxed in both India and USA, DTAA will help claim relief via credit or exemption.

⚠️ Common Tax Traps to Avoid

• ❗ Assuming NRI status without checking 4-year presence rule
  
  
• ❗ Ignoring deemed accrual rules for India-based assets
  
  
• ❗ Double taxation due to lack of DTAA awareness
  
  
• ❗ Not reporting foreign income as ROR
  
  

📚 Real-Life Examples

Example 1:

Mr. A, working in the US for 3 years, stays in India for 130 days in FY 2024–25. He qualifies as RNOR. His US salary is not taxable in India.

Example 2:

Ms. B, a foreign consultant, earns $10,000 from an Indian client. Even if paid abroad, this is deemed to accrue in India → Taxable in India.

📝 Key CBDT Circulars & Judicial Precedents

• 🏛 CBDT Circular No. 11 of 2002 — Clarifies POEM guidelines
  
  
• ⚖️ Vodafone International Holdings B.V. v. UOI — Landmark indirect transfer ruling
  
  
• ⚖️ Azadi Bachao Andolan v. UOI — Upheld treaty override under Section 90
  
  

🧠 Final Takeaway

Understanding your residential status and corresponding tax liability is essential for compliance and strategic planning. Sections 5 to 9 cover a wide spectrum — from global taxation rules to nuanced deemed income provisions.