Tax incidence on an assessee depends on his residential status. For instance, whether an income, accrued to a person outside India, is taxable in India depends upon the residential status of the person in India. Similarly, whether an income earned by a foreign national in India (or outside India) is taxable in India depends on the residential status of the individual, rather than on his citizenship. Therefore, the determination of the residential status of a person is very significant in order to find out his tax liability.

The residential status of an assessee is to be determined in respect of each previous year as it may vary from previous year to previous year. The foreign investors may be Indian nationals residing outside India, person of Indian origin and other foreign investors including corporations.

Under Section 2(31) of the Income Tax Act, the term person includes an individual, a Hindu Undivided Family, a Partnership Firm, a Company, an Association of Persons, a Body of Individual, a Local Authority and every other Artificial Juridical Entity. Similarly, under FEMA, clause (u) of Section 2, person includes all the above categories and also any agency, office or branch owned or controlled by any such person.

The residential status of a person has been dealt under the Income Tax Act, 1961, Foreign Exchange Management Act, 1999 (FEMA), Companies Act, 1956 and under the proposed Direct Tax Code Bill 2009.