Tax Residency in India
1. Criteria for Determining Tax Residency in India
According to Section 6 of the Income Tax Act, 1961, an individual is considered a resident in India for tax purposes if they meet any of the following conditions:
- They are present in India for a period of 182 days or more during the financial year.
- They have been in India for a period of 60 days or more during the financial year and have also been in India for a period of 365 days or more during the four preceding financial years.
- Their total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the financial year.
For entities, the Income Tax Act provides criteria based on the entity's incorporation or management and control in India.
The rationale behind these criteria is to ensure that individuals and entities with significant ties to India, either through physical presence or establishment, are subject to taxation on their worldwide income. By establishing clear criteria for tax residency, the legislation aims to prevent tax evasion and ensure that individuals and entities contribute to India's tax revenues in line with their economic activities within the country.
2. Impact of International Tax Treaties on Tax Residency Criteria
India has entered into numerous tax treaties (Double Taxation Avoidance Agreements or DTAAs) with various countries to prevent double taxation and promote cross-border trade and investment. These treaties may modify or provide exceptions to the standard criteria for tax residency as defined in domestic law.
For instance, under the India-Mauritius tax treaty, an individual is considered a resident of India if they are liable to tax in India by reason of their domicile or residence therein. However, if an individual is also considered a resident of Mauritius under the domestic law of Mauritius, the tie-breaker rule in the treaty will apply.
The treaty specifies that in such cases, the individual will be deemed a resident of the country in which they have a permanent home available to them. If they have a permanent home available in both countries, they will be deemed a resident of the country in which their personal and economic relations are closer (center of vital interests).
These treaty-specific modifications aim to provide clarity and prevent double taxation by establishing clear rules for determining tax residency in cases involving cross-border activities. They reflect the mutual agreement between India and Mauritius to facilitate tax compliance and enhance economic cooperation between the two countries.
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