Scope of Tax
Scope of Tax
Taxability of income in India depends on a person’s residential status. For tax purposes, the residential status of an individual is classified as:
• Ordinarily Resident
• Not Ordinarily Resident
Taxability of Ordinary Resident (OR)
Ordinary Residents are chargeable to tax in India in respect of their worldwide income. This includes even foreign income even if it is not received or brought into India. There is no escape from taxability in India even if the remittance of income is restricted by the foreign country.
Non-residents are chargeable to tax in India on the following “Indian source incomes”:
• Income received1 in India, whether earned in India or elsewhere;
• Income deemed to be received in India, whether earned in India or elsewhere;
•Income which accrues or arises2 in India, whether received in India or elsewhere;
•Income which is deemed to accrue or arise in India, whether received in India or elsewhere.
Taxability of Non-Resident (NR)
1 Income is said to be received when it first reaches the person.
2 Income is said to accrue or arise when the right to receive the income becomes vested in the person and such income must be due to the person.
NR can, however, claim the beneficial provisions of the Indian Income tax law or the applicable Double Taxation Avoidance Agreement, in order to avoid possible double taxation.
Taxability of Resident Not Ordinarily Resident(NOR)
The NOR status is unique to India. No other country has such an intermediate residential status. The NOR residential status is mainly intended as a relief from taxability during the transitory period from NR
Not Ordinarily Residents are chargeable to tax in India on the following incomes:
• Indian source income;
• Income which accrues or arises outside India from business controlled / profession set up in
As compared to an NR, NOR is additionally chargeable to tax in India in respect of their income accruing outside India from a business controlled from India or from a profession set up in India.
The expression 'business controlled in India' means that the 'head and brain' of the business - the controlling power - should be situated in India and should direct the business activities from India. Thus, foreign passive incomes like interest, dividend, royalty etc. would not be taxable in India for a person who is NOR. Even share of profit of a partnership firm or any other business income would not be taxable in India, if the business in respect of which such income arises is not controlled from India. If business is controlled from India, then the income is taxable in India. In other words, all foreign sourced income of a NOR is normally not taxable in India unless it is derived from a business controlled in or a profession set up in India.