Tax in India or abroad? Residential status matters

Individuals who work or earn income abroad while traveling frequently may find themselves uncertain about whether they should pay income tax in India or their destination country. The key to answering this question lies in understanding their residential status for the relevant tax year, as outlined by the Income Tax Act, 2025.

According to Section 6 of the Income Tax Act, 2025, and the Frequently Asked Questions (FAQs) on the Income Tax Department's website, an individual will be considered a tax resident if they reside in India for 182 days or more during the relevant tax year. Alternatively, an individual can be classified as a resident if they are present in India for 60 days or more in that year and have stayed in India for 365 days or more across the previous four years.

These conditions remain unchanged from those prescribed under Section 6(1) of the Income Tax Act, 1961.

Despite the similarities, the Income Tax Department has clarified that the basic conditions for determining individual residency have not changed under the Income Tax Act, 2025. This means that the previously mentioned 182-day or 60-day plus 365-day rule continues to apply.

The new residential status rules will come into effect for tax years beginning on or after April 1, 2026, impacting individuals who qualify as residents, non-residents, deemed residents, or not ordinarily resident. These provisions will be applied separately from the rules under the Income Tax Act, 2025, with no overlapping application of the two Acts for the same tax year. The relevant dividing line is the commencement date of the tax year, not the date when tax proceedings are carried out.

In cases where an individual's stay in India spans both existing and new tax regimes, residential status is determined independently for each individual tax year. For instance, if an individual's stay in India extends across the fiscal years 2025-26 and 2026-27, their tax residency for FY 2025-26 (AY 2026-27) will be determined based on their period of stay up to March 31, 2026, per the Income Tax Act, 1961.

Conversely, residential status for FY 2026-27 will be assessed under the provisions of the Income Tax Act, 2025, with the period of stay from April 1, 2026, onwards being taken into account for this determination. However, while applying the "60 days stay in the relevant tax year + 365 days stay in the preceding four tax years" test, the stay during FY 2025-26 and earlier years must also be considered as deemed relevant.