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NON RESIDENT INDIAN (NRI) TAXATION IN INDIA

AS PER FEMA

Who is a Non-Resident Indian?

An Indian abroad is popularly known as Non-Resident Indian (NRI). NRI is legally defined under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA) for applicability of respective laws.

Difference between Resident definition under Income Tax and FEMA

  • "Financial Year" is not defined under FEMA, but by convention it is assumed to refer to 1st April to 31st March
  • Income-tax Act requires physical presence of 182 days or more, whereas, FEMA requires 183 days or more
  • Income-tax Act considers the physical presence of a person in the Current Financial Year, whereas FEMA considers physical presence of a person in the Preceding Financial Year

NRI as per FEMA

NRI is defined under FEMA as a person resident outside India who is either a citizen of India or is a Person of Indian Origin (PIO).

PIO means a citizen of any country other than Bangladesh or Pakistan,

  • who at any time held Indian Passport, or
  • who or either of whose parents or any of the grandparents was a citizen of India under Constitution of India or under Indian Citizenship Act, 1955, or
  • who is spouse of an Indian citizen or spouse of person referred to in 1 and 2 above

"Person resident outside India" is defined indirectly to mean a person who is not resident in India. "Person resident in India" is a person residing in India for more than 182 days in the Preceding Financial Year. Preceding Financial Year means the financial year, which ended on the last 31st of March. Thus for example, as on 11th June 2007, the Preceding Financial Year would be "2006-07". FEMA also excludes person moving out of India for employment or business from category of Resident. Similarly it also excludes a person coming as tourist / visitor from the category of Resident. Let’s see the detailed definition below:

"Person resident in India" means:

1. Person Resident in India for more than 182 days during the course of Preceding Financial Year but excludes:

  1. A person who has gone out of India or who stays outside India:
    1. for employment outside India; or
    2. for carrying on a business or vocation outside India; or
    3. for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.
  2. A person who has come to India or stays in India for any purpose other than :
    1. for employment in India, or
    2. for carrying a business or vocation in India, or
    3. for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

2. Any person or body corporate registered or incorporated in India;
3. An Office, Branch or Agency in India owned or controlled by a person resident outside India;
4. An Office, Branch or Agency in India owned or controlled by a person resident in India.

The definition under FEMA is explained in simple terms for individuals hereunder.

1. The residential status of a person leaving India shall be determined as follows:
If a person leaves India for the purpose of employment, business or for any other purpose that indicates his intention to stay outside India for an uncertain period, then he becomes a non-resident from the day he leaves India for such purpose.

2. The residential status of a person returning to India will be determined us follows:
If a person comes to India for the purpose of employment, business or for any other purpose that indicates his intention to stay in India for an uncertain period; then he becomes a resident from the day he comes to India for such purpose.

As per the definition there is also a requirement of physical stay for more than 182 days in India in the Preceding Financial Year. But there is some confusion whether this requirement is necessary condition for being classified as Resident. Important to see extract of FAQ given on RBI website:

What is meant by a person resident in India?

From FEMA angle, a person resident in India means a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year (April- March) and who has come to or stays in India either for taking up employment, carrying on business or vocation in India or for any other purpose, that would indicate his intention to stay in India for an uncertain period. In other words, to be treated as 'a person resident in India', under FEMA a person has not only to satisfy the condition of the period of stay (being more than 182 days during the course of the preceding financial year) but has also to comply with the condition of the purpose/intention of stay.

If we take the interpretation of above (although FAQ cannot be regarded as rule of law), it would appear that a resident is a person who:

1. Spends more than 182 days in India during the Preceding Financial Year AND

2. Does not fall in either (a) or (b) in the definition above.

Point (a) excludes from the definition of FEMA resident those who meet (1) and then go abroad for an indefinite period, say for employment. Point (b) excludes from the definition of FEMA resident those who meet (1), but have come to India as visitors/ tourists to India with a definite plan to return abroad.

However the above interpretation doesn't seem to logically gel with the intent of the legislation and also the definition of "Person Resident in India" as given under erstwhile FERA. Let us consider a person who returns to India on 1st Nov 2008 to retire and live in India for an indefinite period. In the Preceding Financial Year, i.e. period from 1st April 2007 to 31st March 2008, he was not present in India for 183 days. Hence he would be classified as Non-Resident even though he should be classified as Resident as per clause (b) in the definition, since he has returned toIndia to stay for an uncertain period. Going by the earlier interpretation, he would be classified as Resident only from 1st April 2010, since on that day he would satisfy the condition of 183 day stay in India in the Preceding Financial Year, i.e. period from 1st April 2008 to 31st March 2009. This definitely is not the intent of the clause since a person should actually be classified as Resident from the day he returns toIndia to stay for an uncertain period.

Thus in order to make a definition of a person resident in India workable one has to look first at the exceptions given in clauses (a) and (b) and if the person is not falling under either of them, then look at his physical presence in India during the preceding financial year. The flowchart provides a good basis to determine Residency status of a person under FEMA.

Posted in: Income Tax,Non Resident Indian

AS PER INCOME TAX ACT 1961

Who is a Non-Resident Indian?

An Indian abroad is popularly known as Non-Resident Indian (NRI). NRI is legally defined under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA) for applicability of respective laws.

Difference between Resident definition under Income Tax and FEMA

  • "Financial Year" is not defined under FEMA, but by convention it is assumed to refer to 1st April to 31st March
  • Income-tax Act requires physical presence of 182 days or more, whereas, FEMA requires 183 days or more Income-tax Act considers the physical presence of a person in the Current Financial Year, whereas FEMA considers physical presence of a person in the Preceding Financial Year

NRI as per Income Tax Act

Income Tax Act has not directly defined NRI. Section 6 contains detailed criteria of who is considered as Resident in India and provides that anyone who doesn’t meet these criteria is Non-Resident.

The status of a person as a resident or non-resident depends on his period of stay inIndia. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act).

Resident

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

1. Atleast 182 days in that year, OR
2. Atleast 365 days during 4 years preceding that year AND atleast 60 days in that year.

An individual who does not satisfy both the conditions as mentioned above will be treated as "non-resident" in that previous year.

Definition of Resident is relaxed by dropping Condition 2 given above (i.e. only Condition 1 is applicable), for the following cases:

1. An Indian citizen who leaves India in any year for the purpose of employment outside India or as a crew member of an Indian ship,
2. An Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India. Note that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.

Following examples will make the rules more clear:

1. Ajay leaves India for the first time on 1st August, 2006 and remains out of India in the remaining part of the financial year. His period of stay in India in the previous year 2006-07, being less than 182 days, he is not a resident for that year.

2. Divya leaves India in December 2006 and continues to remain abroad in the remaining part of the financial year. Her period of stay in India being more than 182 days, she will be a 'resident' in the previous year 2006-07.

3. Rohit leaves India in 2003. In the financial year 2003-04 to 2006-07 he visited India several times and the total period of stay during these 4 years was 400 days. During the financial year 2007-08, he came to India for total period of 180 days. Although his stay in India in the financial year 2007-08 is less than 182 days, he becomes a ‘resident’ by virtue of the fact that his stay in the preceding 4 years was more than 365 days and he was in India for more than 60 days in the year under consideration.

4. In the above examples, if Rohit was a member of the crew of an Indian ship or a citizen of India or a person of Indian origin, he would not have become a 'resident' for the year 2007-08 since his period of stay in India in that year was less than 182 days.

"Resident and Ordinarily Resident" & "Resident but not Ordinarily Resident"

A person Resident in India is further classified as "Resident and Ordinarily Resident" if BOTH the following conditions are satisfied:

1. Resident in India for 9 out of 10 years preceding that year, AND
2. In India for atleast 730 days during 7 years preceding that year If any one of the above conditions is not satisfied, the person is classified as "Resident but not Ordinarily Resident"

Points to Note

  • A Hindu Undivided Family (HUF), firm or other association of persons is Non-Resident if control and management of its affairs is situated wholly outside India
  • A company is said to be resident in India in any previous year, if it is an Indian company; or the control and management of its affairs is situated wholly in India
  • Every other person is said to be Non-resident in India if control and management of his affairs is situated wholly outside India

If a person is resident in India in respect of any source of income, he shall be deemed to be resident in India in respect of each of his other sources of income

Residency and Taxable Income

Based on the residential status of a tax payer and the place where the income is earned, the income that is included in the total income is as under:-

Residential status Nature of Income taxable
Resident and Ordinarily Resident All Income whether earned in India or outside India All incomes :-
1. which is received or is deemed to be received in India
2. which accrues or arises or is deemed to accrue or arise in India, and
3. which accrues and arises outside India which means the world income is taxable in case of a resident
Resident but not Ordinarily Resident All income earned in India and all income earned outside India if the same is derived from a business which is controlled in India or from a profession which is set up in India
Non Resident All income earned in India. Income outside india is not liable to tax
   

A person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if:

1. It is directly or indirectly received in India; or
2. It accrues in India or the law construes it as having accrued in India.

The following are some of the instances when the law construes the income to have accrued in India:-

  • Income from business arising through any business connection in India;
  • income from property if such property is situated in India;
  • Income from any asset or source if such asset or source is in India;
  • Income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract. income from salaries payable by the Government to a citizen of India even though the services are rendered outside India;
  • income from dividend paid by an Indian company even if the same is paid outside India;
  • income by way of interest payable by Government or by any other person in certain circumstances ;
  • income by way of Royalty if payable by the Government or by any other person in certain circumstances;
  • income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances.

The following income even though appearing to be arising in India are construed as not arising in India:

1. If a non-resident running a news agency or publishing newspapers, magazines etc. earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India.

2. In the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations which are confined to the shooting of any cinematography film. This applies to the following types of non-residents:-

  • Individual who is not a citizen of India; or
  • firm which does not have any partner who is a citizen of India or who is resident in India; or
  • company which does not have any shareholder who is resident in India.

DIFFERENT TYPE OF BANK ACCOUNTS

NRIs / PIOs / OCBs are permitted to open bank accounts in India out of funds remitted from abroad, foreign exchange brought in from abroad or out of funds legitimately due to them in India, with an authorised dealer. Such accounts can be opened with banks specially authorised by the Reserve Bank in this behalf. NRIs can open and operate the following five types of Bank accounts.

1. Ordinary Non-Resident Rupee Accounts (NRO Accounts)
These are Rupee denominated non-repatriable accounts and can be in the form of savings, current recurring or fixed deposits. These accounts can be opened jointly with residents in India. When an Indian National / PIO resident in India leaves for taking up employment, etc. outside the country, his bank account in India gets designated as NRO account.

The deposits can be used to make all legitimate payments in rupees. Interest income, from NRO accounts is taxable. Interest income, net of taxes is reportable. NRO account can be funded through any of the following sources:

By proceeds of foreign exchange remittance from abroad through banking channels in an approved manner

  • By proceeds of foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India
  • By transfer from an existing non-resident account in the name of the same person
  • By funds from a local source representing bonafide transactions in rupees Conditions regarding repatriation of balances in NRO accounts:
  • Repatriation is allowed up to US dollars 1 million per calendar year for any purpose from the balances in NRO accounts subject to payment of applicable taxes
  • Limit of US dollars 1 million includes sale proceeds of immovable properties held by NRIs / PIOs for a period of 10 years
  • In case a property is sold after being held for less than 10 years, remittance can be made if the sale proceeds have been held by the NRI/PIO for the balance period

2. Non-Resident (External) Rupee Accounts (NRE Accounts)

NRIs, PIOs, OCBs are eligible to open NRE Accounts. These are rupee denominated accounts and can be in the form of savings, current, recurring or fixed deposit accounts. Accounts can be opened by remittance of funds in free foreign exchange. Foreign exchange brought in legally, repatriable incomes of the account holder, etc. can be credited to the account. Joint operation with other NRIs/PIOs is permitted. Power of attorney can be granted to residents for operation of accounts.

The deposits can be used for all legitimate purposes. The balance in the account is freely repatriable. Interest lying to the credit of NRE accounts is exempt from tax in the hands of the NRI. Funds held in NRE accounts may be freely transferred to FCNR accounts of the same account holder. Likewise, funds held in FCNR accounts may be transferred to NRE accounts of the same account holders.

Immediately upon return of the account holder to India and on his becoming a resident in India, NRE Account will be re-designated as Resident Rupee Account or converted to RFC account as per the option of the account holder. However, if the account holder is only on a short visit to India, the account will continue to be treated as NRE account.

The initial deposit in NRE account can be made in any of the following manners:

  • By proceeds of foreign exchange remittances from abroad through banking channels in an approved manner
  • By proceeds of foreign currency notes and traveler cheques brought into India by the non-resident while on a temporary visit to India
  • By transfer from an existing NRE Account of the same person

3. Foreign Currency (Non –Resident) Accounts (Banks) (FCNR (B) Accounts)

NRIs / PIOs / OCBs are permitted to open such accounts in US Dollars, Sterling Pounds, Australian Dollars, Canadian Dollars, Japanese Yen and Euro. The account may be opened only in the form of term deposit for any of the following maturity periods; (a) one year and above but less than two years, (ii) two years and above but less than three years, (iii) three years and above but less than four years, (iv) four years and above but less than five years, and (v) five years.

Interest income is tax free in the hands of NRI until he maintains a non-resident status or a resident but not ordinarily resident status under the Indian tax laws. Money lying in FCNR (B) accounts can also be utilised for local disbursements including payment for exports from India, repatriation of funds abroad and for making investments in India, as per foreign investment guidelines.

4. Non-Resident (Non-Repatriable) Rupee Deposit Accounts (NRNR Accounts)

NRIs / PIOs / OCBs, other non-resident Individuals/entities are permitted to open these accounts by transfer of freely convertible foreign currency funds from abroad, or from NRE / FCNR accounts. Non-residents can open joint accounts with other Non-Residents (except Pakistan and Bangladeshi nationals) or resident close relatives in India. Deposits can be held jointly with a resident. Deposits can be for a period from 6 months to 3 years, and can be renewed further. Accounts may also be opened by transfer of funds from the existing NRE/FCNR accounts of the non-resident accounts holders.

The principal is non-repatriable; interest can be repatriated. There is no income tax on the interest. Accounts under the Non-Resident (Non-Repatriable) Rupee Deposit Scheme may be opened in Indian rupees out of the funds in freely convertible foreign exchange transferred for the purpose to India in an approved manner from the country of residence of the prospective non-resident account holder or from any other country. Transfer of funds from the existing NRE / FCNR Accounts of the non-resident account holder may also open accounts.

5. Non-Resident (Special) Rupee Accounts with banks in India

NRIs/PIOs presently have the facility of maintaining bank accounts and undertaking financial transactions in India subject to certain exchange control regulations.

In order to simplify the procedures and to provide greater freedom to NRIs/PIOs for putting through financial transactions in India, NRIs and PIOs are now permitted to open bank accounts in India, which will be at par with rupee accounts, maintained by residents. They can now open Non-Resident (Special) Rupee Accounts with banks in India which will have the same facilities and restrictions as are applicable to rupee accounts maintained in India by residents relating to repatriation of funds held in these accounts and/or income/interest earned on them. The procedure for opening such accounts is the same as that of domestic accounts of resident individuals. The existing facilities for NRIs / PIOs to maintain and operate NRO, NRE and FCNR accounts also continues. The repatriation facilities available under these accounts will continue as before.

Given below is comparison between NRO, NRE and FCNR (B) accounts:

Accounts and features NRO NRE FCNR(B)
Purpose of Account To park Indian earnings like rent, Indian salary, dividend etc. To park overseas savings remitted toIndia after converting to INR To park overseas savings without converting into INR
Who can open an account Any person resident outsideIndia (other than a person resident in Nepal andBhutan). Individuals / entities ofBangladesh/Pakistannat ionality / ownership as well as erstwhile OCBs require prior approval of RBI) NRIs(individuals / entities ofBangladesh/Pakistan nati onality/ ownership require prior approval of RBI) NRIs (individuals /entities ofBangladesh/Pakistan nati onality/ ownership require prior approval of RBI)
Nominatio n Permitted Permitted Permitted
Currency in which account is denominat ed Indian Rupees Indian Rupees Pound Sterling, USDollar, Japanese Yen, Euro, Canadian Dollar and Australian Dollar
Account Types Savings Bank Account Fixed Deposit Current Account Savings Bank Account Fixed Deposit Current Account Fixed Deposit
Joint Holding Both with resident / nonresident Only with NRIs Only with NRIs
Tax deducted at source Subject to tax deducted at source Exempt from tax deducted at source Exempt from tax deducted at source
Repatriation of Principal The principal amount is not repatriable and can be used only for local payments. Funds up to USD 1 million (or equivalent) per financial year can be repatriated out of the balance held in NRO accounts for theeducation of your children, for medical expenses for your family and you, etc. Freely Repatriable Freely Repatriable
Repatriation of Interest Freely Repatriable Freely Repatriable Freely Repatriable
Period for fixed deposits As applicable to resident accounts. At the discretion of the bank For terms not less than 1 year and not more than 5 years.
Rate of Interest Banks are free to determine their interest rates on savings deposits under NRO Accounts. However, interest rates offered by banks on NRO deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Banks are free to determine the interest rates of saving’s and term deposits of maturity of one year and above. Interest rates offered by banks on NRE deposits cannot be higher than those offered by them on comparable domestic rupee deposits. Subject to cap: LIBOR / SWAP rates + 200 basis points for tenor of 1 year to less than 3 years & LIBOR / SWAP rates+ 300 basis points for tenor of 3 years to 5 years (w.e.f. May 4, 2012) for the respective currency / corresponding maturities.
Operations by Power of Attorney in favour of a resident by the nonresident account Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the accountholder himself through normal banking channels. Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the account holder himself through normal banking channels. Operations on the account in terms of Power of Attorney is restricted to withdrawals for permissible local payments or remittance to the accountholder himself through normal banking channels.
Loans a. In India i) to the Account holder ii) to Third Parties Permitted Permitted up to Rs.100 lakhs
Permitted up to Rs.100 lakhs
Permitted up to Rs.100 lakhs
Permitted up to Rs.100 lakhs
b.Abroad i) to the Accounthol der ii) to Third Parties Not Permitted
Not Permitted
Permitted (Provided no funds are remitted back to India and are used abroad only)
Permitted (Provided no funds are remitted back to India and are used abroad only)
Permitted (Provided no funds are remitted back to India and are used abroad only)
Permitted (Provided no funds are remitted back to India and are used abroad only)
c.Foreign Currency Loans in India i) to the Account holder ii) to Third Parties Not Permitted
Not Permitted
Not Permitted
Not Permitted
Permitted up to Rs.100 lakhs
Not Permitted
Purpose of Loan a.In India i) to the Account holder Personal requirement and / or business purpose * i) Personal purposes or for carrying on business activities. * ii) Direct investment in India on nonrepatriation basis by way of contribution to the capital ofIndian firms / companies iii) Acquisition of flat / house in India for his own residential use. (Please refer to para 6(a) of Sch.1 toFEMA 5) i)Personal purposes or for carrying on business activities. * ii)Direct investment in India on nonrepatriation basis by way of contribution to the capital ofIndian firms / companies iii)Acquisition of flat / house in India for his own residential use. (Please refer to para 9 of Sch. 2 to FEMA5)
ii) to Third Party Personal requirement and / or business purpose * Fund based and / or nonfund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 6(b) of Sch. 1to FEMA 5) Fund based and / or nonfund based facilities for personal purposes or for carrying on business activities *. (Please refer to para 9 of Sch. 2 toFEMA 5).
b. Abroad To the account holder and Third Party Not permitted. Fund based and / or nonfund based facilities for bonafide purposes. Fund based and / or nonfund based facilities for bonafide purposes.
 
     
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