Section 6(2) of the Income Tax Act – Residential Status for Companies and Entities

Before any tax can be calculated, the Income Tax Department first identifies whether you’re resident or non-resident for that year. Why? Because your residential status decides if your income earned abroad will be taxed in India or not.

For individuals, residency depends on the number of days they stay in India. But for companies, Hindu Undivided Families (HUFs), firms, and associations of persons (AOPs), the law looks at control and management.

This is where Section 6(2) of the Income Tax Act comes in. It sets the rulebook for identifying whether these entities are “resident” in India — and therefore liable to pay tax on global income.

What Section 6(2) Says

Section 6(2) states:

“A Hindu Undivided Family, firm or other association of persons is said to be resident in India in every case except where during that year the control & management of its affairs is situated wholly outside India.”

That means, if an entity’s decisions — strategic, financial, or managerial — are made even partly in India, it becomes a resident.
Only when the entire control & management is outside India does it get classified as a non-resident."

In simpler words, as long as India has a say in the entity’s affairs, the entity remains a resident for tax purposes.

Why This Section Exists

Let’s imagine a scenario: a partnership firm operates from Singapore but its major decisions — like approving budgets, signing contracts, and managing accounts — happen from Mumbai. Without Section 6(2), such a firm could easily avoid Indian taxes by claiming to be “foreign”.

This section closes that loophole. It ensures that if the brain of the business is in India, the income is also taxed in India.

Section 6(2) in Simple Terms

Here’s the easiest way to remember it:

• If management or decisions happen in India → Resident
• If everything happens outside India → Non-resident

And once a firm, company, or HUF becomes resident, its global income (not just Indian income) can be taxed here.

So, this section is not about where the business operates physically — it’s about where it is controlled from.

Also Read: Minimum Alternate Tax (MAT) for Companies

Understanding Control and Management

“Control and management” doesn’t mean where the company is registered.
It refers to where key decisions are made. The Income Tax Department focuses on the location where strategic calls — not day-to-day tasks — are taken.

Example (E1):
If an HUF has its Karta (the family head) residing in India & taking all financial decisions here, that HUF is resident in India even if family members live abroad.

Example (E2):
If a firm is registered in Dubai but its core policies and investment approvals are done by partners sitting in Bengaluru, it’s still resident in India under Section 6(2).

How This Differs for Individuals

Section 6(1) deals with individuals and has clear stay-based tests:

An individual is said to be resident in India in any previous year if they:

1. Stay in India for 182 days or more during the financial year, or
2. Stay for 60 days or more in the current year & 365 days or more in the four preceding years.

There’s also a special rule for Indian citizens earning total income in excess of ₹15 lakh outside India but staying in India for extended periods — they can be treated as “deemed residents.”

While individuals rely on physical presence, Section 6(2) focuses on place of decision-making for organizations.

Entities Covered Under Section 6(2)

This section applies to three major categories:

1. Hindu Undivided Family (HUF)
   • A Hindu Undivided Family, firm or other association of persons is said to be resident in India if its control & management are even partly in India.
   • For HUFs, this is usually determined by the Karta’s location, since they make all key financial and administrative decisions.
2. Partnership Firms
   • For firms, it depends on where the partners manage business affairs.
   • If meetings, banking, and strategy decisions occur in India, the firm will be treated as resident — regardless of where its projects or clients are based.
3. Association of Persons (AOPs)
   • An AOP includes groups formed for a joint purpose, like contractors or consortiums. If their planning & leadership functions are managed from India, they fall under Indian tax residency.

Section 6(2) and Companies

While this section primarily defines residency for non-individual entities, Section 6(2) pertains to companies as a foundational reference.
In short:

• Domestic companies (incorporated in India) are automatically resident.
• Foreign companies are resident if their place of effective management (POEM) is in India — meaning, major management & commercial decisions are made here.

So, if a foreign company’s real decision-making happens in India — even via board meetings or parent control — it can be taxed as an Indian resident company.

Also Read: Actual Cost of Assets and Its Relevance

Key Difference Between “Resident” and “Non-Resident” Entities

This difference can significantly impact tax liability, especially for firms or HUFs with foreign operations.

Real-Life Examples

Example 1: HUF
A Karta based in Delhi oversees all investments & property sales. Even if the family owns assets abroad, because control is in India, the HUF is a resident.

Example 2: Partnership Firm
A Dubai-registered consulting firm’s strategic direction, finances, and client contracts are managed by Indian partners from Pune. It’s a resident firm under Section 6(2)."

Example 3: Company
A company incorporated in Singapore but whose directors & main decisions operate from India falls under Indian tax residency due to effective management being located here.

Importance of Section 6(2)

This section protects India’s tax base by ensuring entities cannot shift headquarters abroad just to avoid taxes.
It helps the Income Tax Department identify the real center of power — not just paperwork locations.

In simpler words, you can outsource work but not responsibility. If your mind & money decisions are in India, taxes follow.

Determining Residency — Common Factors Considered

When assessing where an entity is controlled from, authorities look at:

• Where partners or Karta hold meetings
• Where key contracts are approved
• Where bank accounts are operated
• Who signs financial statements
• Location of main records or data

If most of these point to India, residency is assumed.

Also Read: Decoding Cost of Acquisition and Improvement

Misconceptions About Section 6(2)

• Myth 1: Only registered address matters.
  ➤ False. It’s about actual control, not mailing address.
• Myth 2: If directors travel abroad, the company becomes non-resident.
  ➤ False. It depends on where real decision-making happens.
• Myth 3: Only Indian citizens can trigger residency.
  ➤ False. Even foreign citizens managing from India can make a firm “resident.”

Impact of Residency on Taxation

Once an entity becomes resident:

• It must report global income in India.
• It can claim relief under Double Taxation Avoidance Agreements (DTAAs) if applicable.
• It must file the correct ITR forms (ITR-5 for firms, ITR-6 for companies, etc.).
• It may be subject to advance tax & audit provisions under Sections 44AB or 115JB (for companies).

Non-residents, on the other hand, only pay tax on income earned or received in India.

Key Takeaways

✅ Section 6(2) ensures India taxes entities truly managed from its territory.
✅ Residency depends on control and management, not just location of business activities.
✅ If control is even partly in India → resident.
✅ If control is wholly outside India → non-resident.
✅ Residency determines whether global income becomes taxable here.

Final Thoughts

Section 6(2) acts like the compass that points to where an organization truly “belongs.”
It ensures that entities earning total income in excess of ₹15 lakh or those effectively managed from India are fairly taxed here.
By clearly stating that a Hindu undivided family, firm or other association of persons is said to be resident in India unless management is fully abroad, it simplifies a complex concept into one clear rule — control equals tax responsibility.

So, the next time you plan your business structure, always check where your real decision-making lies — because that’s what determines your tax residency.

Not sure whether your business qualifies as resident or non-resident under Section 6(2)? Our experts at Callmyca.com can help you evaluate control, prepare compliant filings, & optimize your tax liability.
Let’s make your tax journey clear, compliant, and worry-free — because the right advice today can save you heavy penalties tomorrow.