Moving abroad for employment or planning to shift back to India permanently? How will your income be taxed? Can you continue holding NRE deposit and continue to get tax-free interest? Well, everything begins with finding out whether you qualify as an NRI or a resident.
And this may not always be easy. To add to the confusion, the definition of Non-resident is different under the Income Tax Act and Foreign Exchange Management Act (FEMA).
Why do we need to worry about the definitions as per the Income Tax Act and FEMA?
FEMA decides where you can invest. For instance, you can open NRE or NRO accounts if you qualify as NRI (person resident outside India) as per FEMA. Your resident status as per the Income Tax Act does not matter when it comes to deciding whether you can make a particular investment in India.
Income Tax Act decides how the income from various investments will be taxed. For instance, the provisions of the Income Tax Act will decide how income from NRE and NRO deposits will be taxed.
Another example: Your residential status as per FEMA will decide if you must make your investments in mutual funds as Resident or as an NRI. On the other hand, your residential status as per the Income Tax Act will determine if your MF investments get taxed as Resident or as an NRI.
To make matters complicated, your residential status per FEMA and Income Tax Act can be different. And this leads to a good bit of confusion.
While the Income Tax Act looks at the matter mathematically to decide whether you qualify as a resident or non-resident, FEMA looks at the intent too.
In this post, let’s understand the difference between definitions of a non-resident under FEMA and the Income Tax Act.
Definition of Non-resident as per Income Tax Act
As per Section 6 of the Income Tax Act, there are 3 residential statuses.
- Resident and Ordinarily Resident (ROR)
- Resident and Not Ordinarily Resident (RNOR)
- Non-Resident Indian (NRI)
You are a Resident if you satisfy ANY of the following
two three conditions:
- You are in India for 182 days in the financial year; OR
- You are in India for 365 days in 4 preceding financial years AND 60 days in the financial year OR
- 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 foreign source) exceeds Rs 15 lacs. This is a new condition and has been added through the Finance Bill, 2020. You can see this condition has no linkage to number of days of stay in India. As I understand, this is to bring High Networth individuals who are planning their stays to avoid paying taxes anywhere under the tax bracket. However, even in this case, your global income will not be taxed. Only Indian income will be taxed. You will be considered RNOR (Resident and Not Ordinarily Resident). RNOR status is discussed later.
Condition 2 will ensure that most of those who are going abroad for the first time will not be eligible for NRI status.
There are a few exceptions though:
- Condition 2 is not applicable if you are leaving India for employment or as a member of crew of Indian merchant ship. For such cases, 60 days in condition 2 is replaced by 182 days. Hence, condition 2 automatically becomes ineffective.
- For Indian Citizens or persons of Indian Origin (PIO) who stay abroad but are on a visit to India. the period of 60 days in Condition 2 is replaced by 182 days. Finance Bill 2020 has added a caveat to this sub-clause. If the Indian income (income other than income from foreign sources) of such tax payers is greater than Rs 15 lacs, the period of 60 days in Condition 2 shall be substituted by 120 days (and not 182 days).
As per Income Tax Act (Section 115, Clause e), a person is of Indian Origin if he or either of his parents or any of his grandparents were born in undivided India.
An NRI is a citizen of India or PIO who is not a resident.
As per Finance Bill, 2020, “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).
Who is RNOR (Resident and Not Ordinarily Resident)?
This is applicable to Non-residents who are returning to India. Even if you are a resident (as per above definition), you can be either ROR or RNOR.
You are an RNOR if you satisfy ANY of the following conditions:
- You have been an NRI in 9 out of 10 years preceding the financial year under consideration.
From FY2021 (from April 1, 2020), this condition will be relaxed. From FY2021, for you to qualify for RNOE status, you must be NRI in 7 (and not 9) out of 10 previous years. This was introduced in Budget 2020. The condition has been relaxed. As we would see later, RNOR status has a few tax benefits. With this change, you will be able to retain RNOR status for more number of years.OR
- You have been in India for no more than 729 days during 7 previous years preceding the financial year under consideration. OR
- You satisfy Condition 3 in the previous section. OR
- 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.
Conditions (3) and (4) for RNOR status have been added in the Finance Bill, 2020.
You can see RNOR status may come into picture when you have been an NRI for many years.
I have discussed RNOR status with illustrations in my post on Returning NRIs.
If you qualify as RNOR, your foreign income won’t be taxed in India (barring a few exceptions). Therefore, tax treatment on foreign income for RNOR is similar to that of an NRI.
So, if you are planning to return to India, time your return in a way that you can enjoy RNOR status for a few years.
Points to Note (Income Tax Definition)
- For those who are returning permanently to India (and are not on a visit to India), 60 days is not replaced by 182 days (under Condition 2 for Resident status). So, if you have been outside India for 365 days in 4 preceding financial years and return to India permanently before February, you will be considered Resident for the financial year as per Income Tax Act. You may be RNOR if you meet the remaining conditions)
- Preceding financial year means the financial year that precedes the financial year under consideration. So, if you are trying to determine residential status for FY2017, four preceding financial years will be FY2013-FY2016 i.e. April 1, 2012 to March 31, 2016.
Definition of Non-resident as per FEMA
The definition for non-resident is provided under Section 2 of Foreign Exchange Management Act.
FEMA uses the term Resident Outside India (for Non-residents).
FEMA has two classifications for residential status.
- Resident in India
- Resident outside India (NRI)
Non-resident Indian (NRI) means a person resident outside India who is a citizen of India or person of Indian origin (PIO).
When are you a resident as per FEMA?
You are a Resident in India if you have been in India for a period of more than 182 days during the preceding financial year.
There are a few exceptions. The above definition does not apply:
- If you have gone out of India (or stay outside India) for taking up employment
- If you have gone abroad (or stay abroad) for carrying out a business.
- If you have gone abroad (or stay abroad) for any purpose that indicates your intention to stay abroad for an uncertain period.
In such exceptional cases, you can be considered Resident Outside India even if you have been in India for a period of more than 182 days.
When are you a Non-resident as per FEMA?
Continuing with the definition in the previous section, you are a Resident Outside India (NRI) if you are in India for 182 days or less during the preceding financial year.
There are a few exceptions. The above definition does not apply:
- If you come to (or stay in) India for taking up employment.
- If you come to (or stay in) India to carry on a business or vocation
- If you come to (or stay in) India for any purpose that indicates your intention to stay in India for an uncertain period.
In such cases, 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 have come to India for a purpose other than employment or business and have no intention to stay in India permanently, you will continue to be considered Resident Outside India (NRI) irrespective of your duration of stay in India.
Points to Note (FEMA Definition)
- If you go abroad for employment, business or vocation, you are NRI as per FEMA from day 1 of your departure. The period of stay in India does not matter in this case. You may have left on Feb 15. You will still be NRI from Feb 16 as per FEMA.
- Similarly, persons returning to India permanently are considered residents from day 1 of return. By the way, only you know if you have returned permanently. Hence, there can be an element of subjectivity in this case.
- If you are a student leaving India to study abroad, you are NRI from day 1 of your departure from India. RBI clarified this in Circular no. 45 dated December 8, 2003.
- There is no requirement of continuous stay in India. Your stay in India can be staggered over multiple trips/visits.
- Financial year is not defined in FEMA. However, it is assumed to refer April 1-March 31 period.
Differences between definition under FEMA and Income Tax Act
- For you to be resident in India, Income Tax Act requires stay of 182 days in India while FEMA requires a stay of more than 182 days.
- Income Tax Act considers Current Financial year for determination of residential status. FEMA considers preceding financial year.
- Income Tax Act DOES NOT consider the reason of stay in India or visit abroad for determination of residential status. FEMA does. Income Tax Act merely considers number of days of stay in India.
- When it comes to Income Tax Act, you are either resident or non-resident for the entire financial year i.e. you cannot be resident for part of the year and non-resident for rest of the year.
- The aforesaid limitation does not apply to FEMA. For instance, in the above example (leaving India for employment abroad), you are resident till Feb 15 and non-resident after Feb 15.
How does it matter?
Your investments are governed by definition as per FEMA.
For instance, you have to be NRI as per FEMA in order to own NRE/NRO/FCNR(B) accounts.
Whether you can open a PPF or purchase agricultural land depends on your residential status as per FEMA.
On the other hand, taxation of your income is governed by Income Tax Act.
It is quite possible that you are an NRI as per FEMA and a Resident as per Income Tax Act. The opposite is also possible.
You leave India on November 15, 2015 to visit your brother in the US. You return to India on August 20, 2017.
Income Tax Act
- FY2016: You are Resident since you have stayed in India for more than 182 days during FY2016.
- FY2017: You are NRI as you have been outside India for the entire year.
- FY2018: Resident since your stay in India will be more than 182 days.
- FY2016: You are Resident since you were in India for 365 days during FY2015 (preceding financial year)
- FY2017: You are Resident since you were in India for more than 182 days during FY2016 (preceding financial year)
- FY2018: You are Resident since you have returned to India permanently (even though your stay abroad was more than 182 days during FY2017)
You leave India for employment on November 15, 2015.
Income Tax Act: Since you are in India for more than 182 days, you will be considered Resident in FY2016. Your foreign income will also be taxed in India.
FEMA: Since you are going abroad for employment, you will be considered NRI from day 1 of your departure. You will be Resident until November 14, 2015 and non-resident thereafter.
You have been abroad for many years. You return permanently to India on Feb 15, 2016.
Income Tax Act: You are NRI for FY2016 since you were abroad for over 300 days in FY2016. Your foreign income won’t be taxed in India. For FY2017, you will still be resident. However, the decision between RNOR and ROR status will be based upon the period of stay abroad.
FEMA: You are NRI till Feb 15, 2016. Since you have returned permanently, you are resident after Feb 15, 2016. For FY2017 too, you will be considered resident.
- RBI and Income Tax Department websites
- In the Wonderland of Investment for NRIs (A N Shanbhag, Sandeep Shanbhag)
Disclaimer: My understanding of Income Tax law and FEMA regulations is limited. You are advised not to make decisions on the basis of this post alone. A decision taken solely on the basis of contents of this post can land you in financial and legal trouble. You are advised to consult an expert or seek professional advice before making a decision.