11 Rules to know – Am I an NRI under FEMA and the Income Tax Act? | My Money Sage

Your residential status determines which investments you can make and how much tax you will have to pay.  Many of our clients ask us about whether they are Non-Resident Indians (NRIs) or residents.NRI Income Tax

They are not able to make sense of the rules under the Foreign Exchange Management Act (FEMA) and the Income Tax Act. These rules often contradict each other, adding to the confusion.

Here we will look at how to determine whether you are an NRI or a resident under FEMA and the Income Tax Act:

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Why are the FEMA and the Income Tax Act rules so important?

If you are an NRI as per FEMA, you can open a Non-Resident External (NRE) account or a Non-Resident Ordinary (NRO) account. Your residential status according to FEMA determines whether you can invest in mutual funds as an NRI or as a resident.

Your residential status according to the Income Tax Act determines how much tax you will have to pay. The Income Tax rules also cover the income you earn from your NRE or NRO account.

Your residential status may differ as per FEMA and the Income Tax Act. The Income Tax Act determines whether you are an NRI or a resident based on the number of days you spend in India. FEMA also considers the intent to determine your status.

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What’s a Non-Resident External (NRE) account?

An NRI can transfer overseas earnings to an NRE account in India. Interest earned on an NRE account is tax-free, and you can repatriate it. You can deposit funds in foreign currency and withdraw them in Indian Rupees.

What’s a Non-Resident Ordinary (NRO) account?

An NRI can use an NRO account to manage income earned in India. The interest earned on this account is taxable, and you can repatriate it. You can also repatriate the principal amount subject to set limits. You can make deposits in both foreign and Indian currency and withdraw funds in Indian Rupees.

What does FEMA say about residential status?

According to FEMA, there are two types of residential status:

1.A person resident outside India, who is a citizen of India is an NRI

2. Resident in India

Also Read: Should NRIs invest in Indian Real Estate?

Who is an NRI according to FEMA?

A person who has been in India for 182 days or less in the previous financial year is resident outside India or an NRI under FEMA. However, this rule does not apply in the following conditions:

1. If a person visits or stays in India for any purpose that shows the intention to live in India for an uncertain period.

2. If a person comes to India for business or vocation

3. If a person visits or stays in India to take up employment

In such cases, the person is a resident even if the period of stay in India is less than 182 days in the previous financial year.

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Who is resident in India according to FEMA?

A person who has lived in India for more than 182 days in the previous financial year is resident in India according to FEMA. However, this rule does not apply in the following conditions:

  1. If a person goes abroad or stays there for any purpose that shows the intent to remain overseas for an uncertain period.
  2. If a person goes to a foreign country or stays there for business purposes
  3. If a person goes abroad or stays there for employment

In such cases, the person is resident outside India or an NRI even if the period of stay in India is more than 182 days.

What does the Income Tax Act say about residential status?

According to the Income Tax Act, there are three types of residential status:

  1. Resident and Not Ordinarily Resident (RNOR)
  2. Resident and Ordinarily Resident (ROR)
  3. Non-Resident Indian (NRI)

Also Read: 11 points checklist before you gain an NRI status

Who is a resident according to the Income Tax Act?

As per the Income Tax Act, a person who fulfills one of these two conditions is a resident:

1.A person who has been in India for 182 days in the financial year, or

2. A person who has been in India for 365 days in the four preceding fiscal years and 60 days in the relevant fiscal year.

The second condition ensures that most people who go abroad for the first time will not qualify for NRI status. This condition does not apply to crew members of Indian ships who are leaving India for employment. It also does not pertain to PIOs who reside abroad but are visiting India.

Who is an RNOR according to the Income Tax Act?

The term RNOR applies to NRIs who are returning to India. Even if a person is a resident, he/she can be either an RNOR or a ROR.

A person who fulfills any the following conditions is an RNOR:

1.A person who has been in India for a maximum of 729 days in the seven years before the financial year in consideration.

2.A person who has been an NRI for nine out of the ten years before the financial year under review.

Your RNOR status is also taken into account after you have been an NRI for several years. The overseas income of an RNOR person is not taxable in India, with a few exceptions.

Also Read: RNOR Tax Status – A boon for returning NRIs

Who is an NRI according to the Income Tax Act?

A person who does not fulfill any of the conditions mentioned above is an NRI. As per the Income Tax Act, an NRI is a citizen of India or a person of Indian origin (PIO) who is not a resident. You would be a PIO if either of your parents or any of your grandparents were born in undivided India.

How does my residential status affect my investments?

FEMA governs your investments. You have to be an NRI according to FEMA to have an NRE, NRO, or FCNR(B) account. Your eligibility to buy agricultural land or open a PPF account depends on your residential status according to FEMA.

FEMA rules govern investments by NRIs in Indian mutual funds. An NRI can invest in an Indian mutual fund from an NRE or NRO account on a repatriable or non-repatriable basis.

The Income Tax Act governs the taxation of your income. It’s possible that you are an NRI as per FEMA and a resident as per the Income Tax Act. The opposite can also happen.

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Conclusion

Your residential status determines which investments you can make and how much tax you will have to pay. Your residential status according to FEMA and the Income Tax Act can differ. While the Income Tax Act determines residential status based on the number of days you stay in India, FEMA also considers the intent. It’s essential to decide on your residential status before making investments.

About the author

KishorKumar Balpalli, believes that financial literacy and discipline is the key to one’s financial freedom. KishorKumar is a Certified Financial Planner, Personal Finance Blogger & the Founder of myMoneySage.in an award-winning Wealth Management platform. myMoneySage simplifies investing for individuals and amplifies business growth for Registered Investment Advisers by leveraging Artificial intelligence and machine learning. The AI of the machine plus the intellect of the human advisor enables comprehensive & client-centric advice at a fraction of the cost of a conventional adviser.

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