NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Taxation (NISM XXI-A)

Basics of Income Tax and Residential Status Explained

Updated 11 October 2026

Income tax is charged on income earned in the previous year and taxed in the assessment year. Income falls under five heads. An individual is a resident (ROR or RNOR) or a non-resident, decided by days stayed in India. This decides whether foreign income is taxable in India. A deemed resident is a resident but not ordinarily resident (RNOR).

Understand Basics of Income Tax and Residential Status

Income tax in India is governed by the Income-tax Act and charged on the total income of a person. Persons include individuals, HUFs, companies, firms and others. For a PMS distributor, you need the base rules because a PMS client's tax depends on who the client is and what kind of income the portfolio produces.

Two years matter. The previous year is the financial year in which income is earned, from 1 April to 31 March. The assessment year is the next financial year, in which that income is assessed and the return is filed. Income earned in the year ending 31 March 2025 is assessed in the assessment year 2025-26. So income is earned in the previous year and taxed in the assessment year.

Total income is classified under five heads of income: salaries, income from house property, profits and gains of business or profession, capital gains, and income from other sources. Each head has its own rules for computing income. Securities income usually falls under capital gains, business income, or other sources (such as dividend and interest).

Tax rates depend on the type of person and the kind of income. Individuals are taxed at slab rates that rise with income, and a new regime and an old regime exist; the exact slabs change by Finance Act, so check the latest NISM workbook. Some incomes, such as certain capital gains, have special rates.

Residential status decides the scope of taxability. It is decided for each previous year, and it is based on physical stay in India, not on citizenship. A resident is taxed on income from anywhere in the world. A non-resident is taxed only on income that is received in India, accrues or arises in India, or is deemed to do so. Residents are further split into resident and ordinarily resident (ROR) and resident but not ordinarily resident (RNOR), which affects foreign income. A deemed resident is treated as RNOR.

Key formulas to remember

Previous year: Previous year = financial year from 1 April to 31 March in which income is earned; Assessment year is the financial year immediately following it.
Basic condition 1 for resident individual: Stay in India ≥ 182 days in the previous year; If met, the individual is resident.
Basic condition 2 for resident individual: Stay ≥ 60 days in the previous year AND ≥ 365 days in the 4 preceding years; If met, the individual is resident. Either condition 1 or 2 is enough.
Relaxation to the 60-day limit: 60 days becomes 182 days for a citizen who leaves India as a crew member or for employment abroad, and for a citizen or person of Indian origin who visits India. For a visitor whose Indian income exceeds ₹15 lakh, it becomes 120 days; The general relaxed limit is 182 days. For a citizen or person of Indian origin who visits India, the limit falls to 120 days only if Indian income (other than income from foreign sources) exceeds ₹15 lakh. The 120-day case does not apply to a citizen leaving as crew or for employment abroad. The 365 days in the 4 preceding years test still applies in all cases.
Deemed resident rule: Indian citizen with Indian income > ₹15 lakh AND not liable to tax in any other country = deemed resident; This is a separate rule. It applies even if the person's days of stay do not meet the basic conditions. A deemed resident is a resident but not ordinarily resident (RNOR).
Scope of tax: Resident: global income. Non-resident: India-sourced income only; RNOR is taxed mostly like a non-resident on foreign income, except income from a business controlled in or profession set up in India.
RNOR test for a resident individual: RNOR if non-resident in 9 of the 10 preceding years, OR stay ≤ 729 days in the 7 preceding years, OR a deemed resident, OR a citizen or person of Indian origin visiting India with Indian income > ₹15 lakh who stays 120 days or more but under 182 days. Otherwise ROR; These tests apply only to an individual who is already resident, either under the basic conditions or as a deemed resident. A non-resident is not tested for RNOR. Meeting any one of these conditions makes the resident an RNOR. The 120 to 181 day condition applies only to the visiting citizen or person of Indian origin with Indian income above ₹15 lakh. If none is met, the resident is ROR and taxed on global income.
Five heads of income: Salaries | House property | Business or profession | Capital gains | Other sources; Securities gains and dividends fall mainly under the last three.

How to solve Basics of Income Tax and Residential Status questions

Use this method for any question on year concepts, heads or residential status.

1Identify what is asked: year concept, head of income, tax rate, or residential status.
2For year questions, find the financial year in which income was earned. That is the previous year. Add one year for the assessment year.
3For head questions, ask what the income is: employment pay, rent, trading or business profit, sale of a capital asset, or anything else. Match it to the head.
4For residential status, note the person type first. This page covers individuals.
5Count days in India in the previous year. If 182 or more, the person is resident. Stop.
6If fewer than 182, test 60 days in the year plus 365 days in the four preceding years, and check if a relaxation (visiting citizen, crew or employment abroad) replaces 60 with 182.
7Apply the scope: resident is taxed on global income, non-resident on India income only.
8Check that your answer uses the exact words in the options before marking.

Quickest way: The 182-day shortcut

When to use it: Use it for residential status MCQs with days of stay given.

If days in the year are 182 or more, the answer is resident. No need to look further.
If days are below 60, the person cannot be resident by the basic conditions. But check the deemed resident rule: a citizen with Indian income above ₹15 lakh who is not liable to tax in any other country is still a resident, but not ordinarily resident (RNOR).
If days are between 60 and 181, you must check 365 days in the four preceding years.
Then decide the scope: resident means global income, non-resident means India income only.

Common mistakes in Basics of Income Tax and Residential Status

Treating citizenship as the test for residential status.
Students link resident with Indian passport holder.
Fix: Residential status is based on days of stay in India in the previous year, not citizenship or domicile.
Mixing up previous year and assessment year.
Both names are close and the years overlap in calendar terms.
Fix: Income is earned in the previous year and assessed in the next year. The previous year comes first.
Applying the 60-day condition without the 365-day condition.
Students remember only one number.
Fix: The 60-day test needs 365 days in the four preceding years as well. Both must be met.
Thinking a resident is taxed only on Indian income.
Confusion with non-resident scope.
Fix: A resident is taxed on global income. A non-resident is taxed only on India-sourced income.
Putting all securities income under capital gains.
Students link investing with capital gains.
Fix: Gains may be capital gains or business income depending on facts, and dividend and interest usually fall under other sources.

Worked examples

Example 1

Ravi earns salary from 1 April 2024 to 31 March 2025 and sells shares in January 2025. Name the previous year and assessment year for these incomes.

Show the solution

The income was earned between 1 April 2024 and 31 March 2025.
That financial year is the previous year: 2024-25.
The assessment year is the following year: 2025-26.

Answer: Previous year 2024-25; assessment year 2025-26.

Example 2

Meera, an Indian citizen, stayed in India for 190 days in the previous year. In the 10 preceding years she was non-resident in 2 years, and she stayed 1,900 days in India in the 7 preceding years. She earned income abroad that was not received in India. Is the foreign income taxable in India?

Show the solution

Count the days: 190 days is at least 182 days.
She meets the first basic condition, so she is resident for the year.
Test for RNOR. Condition 1: non-resident in 9 of the 10 preceding years? She was non-resident in only 2, so this fails.
Condition 2: stay of 729 days or fewer in the 7 preceding years? Her stay was 1,900 days, so this fails.
Neither RNOR condition is met, so she is resident and ordinarily resident (ROR).
A ROR is taxed on global income, so the foreign income is taxable in India.

Answer: Meera is a resident and ordinarily resident, so her foreign income is taxable in India.

Exam tips

Memorise 182 days, 60 days and 365 days. Questions often change one number to make a trap option.
Read the year carefully. Questions may give a calendar year, but the previous year always runs 1 April to 31 March.
Learn the five heads in order and match each type of income to its head.
Residential status is decided for each year separately. A person can be resident one year and non-resident the next.
Check the latest workbook for slab rates and limits, as these change by Finance Act.

Practice questions from Taxation (NISM XXI-A)

Basics of Income Tax and Residential Status: frequently asked questions

What is the difference between previous year and assessment year?

The previous year is the financial year in which you earn income. The assessment year is the next financial year, in which that income is assessed and your return is filed.

How is the residential status of an individual decided?

It depends on days of stay in India in the previous year. Staying 182 days or more makes the person resident. Otherwise, 60 days in the year plus 365 days in the four preceding years can also make them resident, subject to relaxations.

Does a non-resident pay tax on foreign income?

No. A non-resident is taxed only on income received in India, or that accrues or arises, or is deemed to do so, in India. A resident is taxed on global income.

Which heads of income matter most for PMS clients?

Capital gains, business income and income from other sources matter most. Gains on portfolio securities usually fall under capital gains, while dividend and interest usually fall under other sources.