So, as we can see this is a very large community. However, the definitions of who qualifies as an NRI, Resident & Not Ordinary Resident (RNOR) and Resident Indian are at times not very clear and can be confusing. This blog attempts provide all these definitions together and why it is important to understand them both from investment and tax perspective. Once this is done, sometime in future, we will discuss investments – why should NRIs invest in India, what are the different types of accounts and different avenues available for investments, taxation aspects and a lot more.
Who is an NRI?
An Indian staying abroad is popularly and very loosely termed as a Non-Resident Indian (NRI). NRI is legally defined under Foreign Exchange Management Act, 1999 (FEMA) (for investments purpose) and the Income Tax Act, 1961 (for taxation purpose).
A person is a Resident of India if he stays for 183 days or more in India during the preceding financial year starting from 1st April to 31st March. Else, he shall be considered as a Non-Resident.
There are a few exceptions. Wherein he will be considered as resident outside India, even though the above number of days condition is not met. Whether days are more or less in India, it does not matter.
Left India for taking up employment or for carrying out a business
Left India for any purpose that indicates intention to stay abroad for an uncertain period.
Similarly, a person is considered as an Indian Resident if in India for employment or business even though the duration may be less than 182 days in that financial year.
Income Tax Act 1961:
A Person is considered as Indian Resident if ANY of the following two conditions are satisfied:
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
Condition 2 ensures that most people going abroad for the first time will not be eligible for NRI status. However, there is an exception that if the person is leaving Indiafor employment or as a member of crew of Indian merchant ship. For such cases, 60 days in condition 2 is replaced by 182 days. If one or none of the above conditions are satisfied, then the person is considered as an NRI.
There is another exception that 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).
Difference between Resident definition under Income Tax and FEMA
Financial Year is not defined under FEMA, but is assumed as from 1st April to 31st March
Income-tax Act requires physical presence of 182 days or more in the current financial year
FEMA requires physical presence of 183 days or more in the preceding financial year
As per Income Tax, you are either resident or non-resident for the entire financial year but from FEMA you can be an NRI as well as a resident Indian for different parts of the year.
NRI permanently settled and residing outside India will continue to be treated as an NRI under FEMA irrespective of the number of days of his stay in India or otherwise, but that can make an impact from Income Tax perspective
Types of Indian Residents
However, a Resident could be either of these two types:
Resident and Not Ordinarily Resident (RNOR)
Resident and Ordinarily Resident (ROR)
If you are not a Resident and Ordinarily resident (ROR), you can still be RNOR if ANY of the following conditions are satisfied:
NRI in 9 out of 10 years preceding the financial year under consideration. OR
In India for no more than 729 days during 7 previous years preceding the financial year under consideration. OR
Indian Citizen AND not a tax-resident in any other country AND Indian Income (income other than income from foreign source) exceeds Rs 15 lacs. So, High Networth individuals who plan their stays to avoid paying taxes do get included in the tax ambit. OR
Citizen of India or Person of Indian Origin (PIO) AND Indian Income exceeds Rs 15 lacs in the previous year AND period of stay in India in the previous year ranges from 120 days to 181 days.
Who are PIOs & OCIs?
Person of Indian Origin (PIO):
Citizen of any country other than Pakistan and Bangladesh with:
An Indian Passport at any time, (including the spouse of person) OR
Self or either of parents or any of grand-parents were citizens of India (including the spouse), OR
Spouse of an Indian citizen.
Overseas Citizenship of India (OCI):
The Indian Constitution does not permit full dual citizenship. The OCI card is effectively a long-term visa, with restrictions on voting rights and government jobs. The card is available to certain PIOs, and while it affords holders residency and other rights, it does have restrictions, and is not considered to be any type of Indian citizenship from a constitutional perspective.
Why are these definitions important?
Simply put, FEMA decides where you can invest and from which bank account (Savings bank or Nor Resident accounts (more on that later in the future blogs). Your resident status as per the Income Tax Act is not important when it needs to be decided whether you can make a particular investment in India. FEMA looks at your intent. If you are moving to abroad, if the intention of settling down there, then the fact that you have moved out of India, you are an NRI.
Income Tax Act decides how the income from various investments will be taxed. It does not care whether you are an NRI from FEMA perspective or not. The provisions of the Income Tax Act would decide how the income from various types of bank accounts will be taxed. Income Tax Act looks at it mathematically to determine whether the person in an RNO or not. 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. But from FEMA perspective, you can be an NRI as well as a resident Indian for different parts of the year. Also, you could be an NRI from Income tax perspective but not from FEMA, or vice versa or from both.
An NRI permanently settled and residing outside India will continue to be treated as an NRI under FEMA irrespective of the number of days of his stay in India or otherwise.
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. More on that in future.
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.
Hope, this blog has been useful for you to know the basic definitions for each of the categories if you are an NRI or are planning to become one. Here is a disclaimer that I am not an expert on this topic and my knowledge is limited. Therefore, you are advised not to make any investment decisions on this basis and are advised to consult an expert or seek professional advice.