When you move out of India to study, employment, or for any other purpose, understanding your residential status is very much important. Hence, let us understand who is NRI as per FEMA and Income Tax Act?
Who decides your Residential Status in India?
There are two entities which decides your residential status in India.
# FEMA (Foreign Exchange Management Act)
FEMA in a simple way will decide where you have to invest in India if you are an NRI. There are regulations under the FEMA law for undertaking transactions with Non-residents i.e inbound or outbound investments, capital account or current account transaction etc. There are certain restrictions and approval procedure covered in the regulation which a Non-resident has to comply with at the time of undertaking any such transaction.
# Income Tax Act
Income Tax Act will decide how the income from various investments will be taxed for an individual. For example, how the income tax should be taxed on Mutual Funds, FDs or any other investments NRI invested in India.
Hence, your residential status in India decided by two authorities. In the case of FEMA, the status will be more of an intention and in the case of IT Act, it is more of the days you stayed in India during the Financial Year.
Who is NRI as per FEMA and Income Tax Act?
Let us now discuss more into these regulatoins and how they decide our residential status.
Who is NRI as per FEMA Act?
FEMA law is regulated by RBI and the Central government, enforced by the Directorate of Enforcement (ED), and executed by Authorised person/dealers. Hence, to decide which bank accounts can be opened in India if you are a Non-resident, you need to determine the residential status as per FEMA law.
The definition for non-resident is provided under Section 2 of Foreign Exchange Management Act. Residence under FEMA is defined as:-
# Person resident in India
A person is a resident in India if his numbers of days stay in India in the preceding financial year for more than 182 days. However, there are exceptions in this. It means, even if a person is resident due to the fact that he was in India for more than 182 days in the preceding year, he will be a non-resident if he satisfies conditions in any of the exceptions.
A person who has gone out of India or who stays outside India:-
i. for employment outside India; or
ii. for carrying on a business or vocation outside India; or
iii. for any other purpose, in such circumstances, as would indicate his intention to stay outside India for an uncertain period.
# Person resident in India (Non Resident Indian)
If you are in India for 182 days or less during the preceding financial year, then you will be treated as NRI as per FEMA Act. However, there are certain exception to this.
If you come to India or stays in India for any purpose other than:-
i. for employment in India, or
ii. for carrying business or vocation in India, or
iii. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
In such a situation, you will be considered Resident in India even if you have stayed in India for less than 182 days during the preceding financial year.
If you are settled abroad and visited India for a purpose other than those mentioned above, then you will still be considered as Resident Outside India (NRI) irrespective of your duration of stay in India.
Few points to note with respect to FEMA Regulations:-
a) If you go abroad for employment, business or vocation, you are NRI as per FEMA from 1st day of your departure. The period of stay in India does not matter in this case. If you left India on October 1st, 2020, then from 2nd October 2020, you will be an NRI as per FEMA rules.
b) Similarly, persons returning to India permanently are considered residents from day 1 of return.
c) If you are a student leaving India to study abroad, you are NRI from day 1 of your departure from India.
d) There is no requirement for continuous stay in India. Your stay in India can be staggered over multiple trips/visits.
e) The financial year is not defined in FEMA. However, it is assumed to refer April 1-March 31 periods.
Who is NRI as per IT (Income Tax) Act?
As per the Income Tax Act (Section 6), there are three categories of residnetial status.
a) Resident and Ordinary Resident (ROR)
b) Resident and Not Ordinary Resident (RNOR)
c) Non Resident Indian (NRI)
As per section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India. You are considered as resident Indian if you satisfy any of the following conditions:
1. If he is in India for a period of 182 days or more during the previous year; or
2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. A similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.
The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).
However, such an individual shall be deemed to be an Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.
Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.
A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grandparents, was born in undivided India.
Who is RNOR (Resident and Not Ordinary Resident)?
This is applicable to Non-residents who are returning to India. If you are not a Resident and Ordinarily resident (ROR), you can still be RNOR. You are an RNOR if you satisfy ANY of the following conditions :-
a) You have been an NRI in 9 out of 10 years preceding the financial year under consideration.
b) You have been in India for no more than 729 days during 7 previous years preceding the financial year under consideration. OR
c) If you are an Indian Citizen AND are not a tax-resident in any other country AND your Indian Income (income other than income from a foreign source) exceeds Rs 15 lacs. This is a new condition and has been added through the Finance Bill, 2020. This is mainly changed to bring in the HNIs who plan to stay outside to avoid paying the tax. You can see this condition has no linkage to the number of days of stay in India. OR
d) You are a citizen of India or Person of Indian Origin (PIO) AND your Indian Income exceeds Rs 15 lacs in the previous year AND your period of stay in India in the previous year ranges from 120 days to 181 days.
If you qualify as RNOR, your foreign income won’t be taxed in India (barring a few exceptions). Therefore, the tax treatment on foreign income for RNOR is similar to that of an NRI.
Conclusion:-Considering the complications of defining who is NRI under the FEMA and IT act, I suggest you to contact an expert or competant CAs before deciding your residential status.
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