It is common knowledge that in the Indian legal system, there are a different set of rules for NRIs. Then, there are different laws that apply to NRIs and each law defines NRI differently.
A big confusion then, is what exactly the definition of NRI is, do I qualify as NRI in the first place and if yes, what compliances I should do so that I do not fall on the wrong side of law and invite penalties.
There are basically two regulations that cause maximum implications for an NRI: Foreign Exchange Management Act (FEMA), and Income Tax Act (ITA).
Now, the definition of non-resident is different in both these Acts, due to which you may be a resident as per FEMA and qualified as a non-resident as per ITA, or even vice versa.
In this situation, challenge before honest people is how to comply at the same time with both the laws & not leave open any risk of non-compliance with any of these.
In this post, I will try my best to iron out the creases on this issue. My only sincere hope is that given the complexity of laws, my post does not end up leaving you more confused than you were before reading this post!
Notes:
- For convenience purpose, across the post, I have used RI for “Resident In India” and ROI for “Resident Outside India”
- The post represents my interpretation of the law. I am not trying to prove that this is the only correct interpretation and there can be many. Please read the post in that spirit.
ROI definition as per FEMA Act, 1999
The definition of resident and non-resident are contained in Section 2 (v) and (w) of the FEMA Act. The same is given below:
Section 2.
……..
(v) “person resident in India” means-
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include-
(A) a person who has gone out of India or who stays outside India, in either case-
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than-
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
……..
(w) “person resident outside India” means a person who is not resident in India;
Analysis of FEMA definition
- For checking whether a person is resident of India (RI)/ resident outside India (ROI), we have to check and ensure that he does not fall within the contours of definition of “person resident in India”
- Citizenship DOES NOT play any role in deciding on residential status under FEMA.
- The “purpose” of stay is relevant in deciding on residential status under FEMA.. The duration of stay is irrelevant. And that is why the criteria of “182 days in preceding year” as given in the definition is practically redundant.
- Person going for employment/business out of India becomes a ROI from the day he leaves in India, irrespective of the fact that his employment may be a short term assignment also.
- For persons leaving India otherwise than for business/ employment, the “intention” of stay outside India for an uncertain period is needed to qualify as ROI. For example, families going on overseas vacation or going for overseas medical treatment have a fixed return date, they continue to remain a RI as per FEMA for the overseas stay period. Similarly, foreigners coming on a visit to India remain an ROI as per FEMA.
- As regards students, though their course completion date overseas is certain, RBI has given then an exemption whereby a student going out of India becomes an ROI from day one.
- For employees of Indian companies seconded to overseas locations, they will fall into the definition of “) a person who has gone out of India or who stays outside India” and hence make them ROI as FEMA. Duration of assignment (be it one month or one year) does not matter. (Also see a Q&A at the end of this post)
- The residential status under FEMA needs to be determined on a per-day basis, unlike ITA, where a person retains ONE status for an entire year.
- Like ITA has a concept of “Resident and Not Ordinarily Resident (RNOR)”, FEMA also has such a concept “Not Permanently Resident in India” – however, its usage is restricted and it is not relevant for the purpose of this topic – I would take it up in a separate post.
ROI Definition as per ITA
Residence in India.
6. For the purposes of this Act,—
(1) An individual is said to be resident in India in any previous year, if he—
(a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or
(b) [***]
(c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty-five days or more, is in India for a period or periods amounting in all to sixty days or more in that year.
Explanation 1.—In the case of an individual,—
(a) being a citizen of India, who leaves India in any previous year as a member of the crew of an Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;
(b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted and in case of such person having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year, for the words “sixty days” occurring therein, the words “one hundred and twenty days” had been substituted.
Explanation 2.—For the purposes of this clause, in the case of an individual, being a citizen of India and a member of the crew of a foreign bound ship leaving India, the period or periods of stay in India shall, in respect of such voyage, be determined in the manner and subject to such conditions as may be prescribed.26
(1A) Notwithstanding anything contained in clause (1), an individual, being a citizen of India, having total income, other than the income from foreign sources, exceeding fifteen lakh rupees during the previous year shall be deemed to be resident in India in that previous year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature.
Explanation.—For the removal of doubts, it is hereby declared that this clause shall not apply in case of an individual who is said to be resident in India in the previous year under clause (1).
(Source – Income Tax India website – https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx)
Analysis of ITA definition
I have discussed this topic in detail in my earlier post: How NRI/PIOs can decode the Indian tax residency rules & save tax hence not reproducing it here for the sake of brevity.
However, in the context of the discussion, following points become relevant:
- As compared to FEMA where the “purpose” of stay is relevant, in case of ITA it is the “number of days of physical stay in India” that matters, irrespective of the purpose.
- Unlike FEMA where you can be a RI today and ROI tomorrow, in the ITA, there is ONE residential status for the entire year, & the rules of taxability of your whole year’s income from all sources will apply according to that residential status.
- Though there are conflicting judgements on this, on a conservative note, both the day of arrival and day of departure should be considered for counting the number of days stay in India. (Favour – AAR No. 7 of 1995 223 ITR 462 Against – ITO vs Dr. RK Sharma No. 1230 of 1985)
End purposes of FEMA and ITA are totally different!
The question in your mind will be, why these different definitions? Could not the draftsmen have kept things simple and kept the same definition across?
I share your frustration. It would have been much simpler that way.
However, I wish to share a perspective here which hopefully shall resolve the root of the confusion in your mind.
FEMA is a law that regulations foreign exchange dealings between persons, prescribes what is allowed and what is not, and there are obviously different rules for RI and ROI. Hence, focal point of FEMA is to establish the rules on residential status of a person as at the point of conducting the transaction to see whether it is allowed or not.
For example, a person is a RI as per FEMA all along. However, one day he decides to purchase agricultural land in India. On the day where the signs the purchase agreement, if he is an RI, no issues. But if on that day, he is an ROI (for e.g. by that time, he goes out of India on secondment), the transaction becomes illegal as per FEMA (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 as a ROI cannot purchase agricultural land in India.
Now let us come to ITA. Purpose of ITA is not to prescribe the legality or otherwise of transactions, because FEMA is there for that. Sole purpose of ITA is to lay down rules for taxation of your income. And in doing that, if you have a separate residential status for each source of income, you can imagine the complexity it can cause. So, ITA prescribes ONE residential status of a person for a financial year as a whole, and taxation rules flow accordingly.
This is the precise reason why (especially for those who moved from India/returned to India during the year) you can have a situation where you can be a resident as per FEMA and a non-resident as per ITA.
How NRI can stay on the right side of both FEMA and ITA
You might be thinking: if I have separate residential status under FEMA and ITA, there is no chance that I can comply with BOTH laws at a given point in time.
Or wait a minute, is there a way?
My response: YES, there is. And we’re going to discuss that now.
FEMA (Deposits and Accounts) Regulations, 2016 require you to re-designate all your accounts and investments etc. as “non-resident” on becoming ROI, and do the same as “resident” on becoming a RI.
So, whenever your status changes from RI to ROI or vice versa, you are required under FEMA to update your status across everywhere. If you don’t do so, principally speaking, you are violating FEMA rules.
Also read:
Before you ahead and change your status in the accounts, you may want to stop, look back and poke a question (which I can guess): But my residential status under ITA is still resident – will it not be a contravention of ITA?
My answer: NO.
Re-designating the account is a requirement under FEMA, not under ITA: ITA does not care what account you have updated in your account, as long as you’re paying the correct tax on your income for the year as per residential status rules prescribed in ITA.
Now that you go ahead and re-designate the accounts, when it is the end of the financial year and you’re planning to file your tax return, you have to compute your taxable income as per residential status under ITA.
Some examples to understand better
Let us understand the above with the help of some examples.
Note: For convenience sake, I am not getting into the debate of ROR/RNOR under ITA – this can be checked by applying the additional two conditions under Section 6.
Example #1:
Ram, an Indian citizen, leaves India for the first time on January 05, 2023 for employment in USA. He returns to India for a two-year work assignment in India on Feb 15, 2025 & plan to move back again outside India.
Residential status as per FEMA
Till Jan 04, 2023: RI
Jan 05, 2023 – Feb 14, 2025: ROI
Feb 15, 2025 onwards: RI
Residential status as per ITA
FY 2022-23: ROI (stay in India for less than 182 days & going out of India for employment)
FY 2023-24: ROI
FY 2024-25: ROI (since stay in India is < 60 days, hence the condition in Section 6(1)(c) will not be triggered)
Date-wise Action points:
- Re-designate all resident accounts as NRO on Jan 05, 2023 or after a reasonable time & do not engage any non-permitted transactions in India as per FEMA after that date
- File tax return for FY 2022-23 as ROI by July 31, 2023
- File tax return for FY 2023-24 as ROI by July 31, 2024
- Re-designate all accounts as RI on Feb 15, 2025 or after a reasonable time – do not engage in any non-permitted transactions outside India as per FEMA after this date
- File tax return for FY 2024-25 as ROI by July 31, 2025
Example #2:
Krishnan, an Indian citizen, leaves India for the first time on November 05, 2023 for meeting his children in USA with no certain return date. He returns to India on May 15, 2025.
Residential status as per FEMA
Till Nov 04, 2023: RI
Nov 05, 2023 – May 14, 2025: ROI
May 15, 2025 onwards: RI
Residential status as per ITA
FY 2023-24: RI (though he does not meet the first condition of > 182 days stay, the second condition of > 60 days in FY 2023-24 & > 365 days for previous 4 financial years will still apply as he is not going out for employment etc.)
FY 2024-25: ROI
FY 2025-26: RI (as he satisfies condition > 182 days in FY 2025-26)
Date-wise Action points:
- Re-designate all accounts as ROI on November 05, 2023 or after a reasonable time & do not engage any non-permitted transactions in India as per FEMA after this date
- File tax return for FY 2023-24 as RI by July 31, 2024
- Re-designate all accounts as RI on May 15, 2025 or after a reasonable time & do not engage any non-permitted transactions outside India as per FEMA after this date
- File tax return for FY 2024-25 as ROI by July 31, 2025
- File tax return for FY 2025-26 as RI by July 31, 2026
Example #3:
Manu, an Indian citizen, is living in UK for past 10 years and has come to India for a visit between September 1, 2023 and November 30, 2023 where he completes sale of his Indian property during this period. He also sells his UK property on April 30, 2024.
Residential status as per FEMA
Manu will qualify as ROI as per FEMA. The 3-month long visit in FY 2023-24 will not qualify him to be an RI under FEMA as he did not have an intention to stay in India for an uncertain period.
Residential status as per ITA
Years before FY 2023-24: ROI
FY 2023-24: ROI (Refer Expl. 1(b) to Sec. 6(1) of ITA – since he qualifies as an Indian citizen and comes on a visit to India, condition in Section 6(1)(c) becomes redundant for him –he stays < 182 days in India & hence qualifies as ROI)
Action points:
No action point on FEMA. He can continue to retain his non-resident accounts in India and there is no need to re-designate. Depending upon the income, he may be required to file a tax return in India for the respective financial years
Implications of property sale in India:
As per FEMA, an ROI can sell property in India, and repatriate the money only to the extent the acquisition was funded in foreign currency. If not, he will have to take the proceeds in NRO account & from there, he can transfer upto USD 1 mn out of India, basis a CA certificate in Form 15CB. As regards ITA, Manu will have to calculate the capital gain/loss on property – in case of gain, advance tax implication may also arise. For the sake of brevity, those implications are not elaborated in detail in this post. For that, you can check this post – NRI Tax Implication w.r.t. Immovable Property Transaction in India
Implications of property sale in UK:
As per FEMA, an ROI can sell property in UK, and need not repatriate the proceeds to India, as long as it was purchased while he was an ROI and from funds outside India. As regards ITA, since Manu’s residential status for FY 2024-25 is ROI, he will not have to offer capital gain/loss on UK property in his Indian tax return for FY 2024-25.
________________
Query: For seconded employees going for short term duration say 6 months with no certainty on whether the assignment will be extended (which sometimes it depends on visa availability etc.), it is a practical challenge to re-designate accounts or not given the time and other considerations. What to do in such cases?
Principally speaking, you need to re-designate your accounts whether assignment is 1 month or 1 year duration. This is what the law mandates. So, not doing it is a violation of FEMA rules.
As long as you are blissfully ignorant of this, no issues (though the cardinal principle is that ignorance of law is no excuse). If you know the rules (and you do if you’re reading this post till now), see if you can peacefully sleep at night knowing about this. no issues again.
If no, better to re-designate your accounts NOW. I can understand the suffering but FEMA does not offer any exemptions or short cuts here.
____________________
As you can understand from each of the above examples, with some careful understanding and study of the legal provisions, even if a person is RI as FEMA and ROI as per ITA or vice versa, he can still comply with his obligations with BOTH regulations at the same time.
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