Just by earning abroad or staying outside India, you’re not an NRI.Then who is an NRI? What is NRI Definition? How Income Tax and FEMA defines NRI?
Do you know that there are more than 29 million Indians residing outside India. They bring in lot of foreign inflow into India every year. Especially with growth of IT and business in India , there are lot of Indians who travel abroad. Even when we go abroad, there are certain things to keep in mind as long as we are Indian citizens.
The idea for the post ‘Who is an NRI – Definition per FEMA & Income Tax Act‘ was derived from an email written by Mr. Harsh from Pune. Below is the question written by him.
I’m working in Australia from Feb’15. I’ll return to Pune by Sep’15. I know foreign income is not taxed in India but my friend said I might need to pay tax.Can you tell me if i need to pay tax for my income earned in Australia. The salary was credited to my ICICI salary account in India.
Now this a very common dilemma faced by many Indians abroad. I also faced this confusion when I first moved out of India.They might go outside India to work, study, official Government work etc.,
Actually I want to thank Harsh for giving the idea for the post and I will be writing a series of articles over next 2-3 moths for the benefit of NRI readers of our blog. Nearly 7% of regular readers of our blog are NRIs.
The series will primarily focus on Income Tax rules for NRIs, investing rules and few other related. if you’re an NRI or just want to be aware, then subscribe below to receive update when we publish the posts..
NRI definition per Income Tax and FEMA
The first time I heard and tried to learn about NRI definitions, I came across many words. ROR, RNOR, PIO etc., All this was entirely confusing for me the first time. I have tried to give you the simple version of my understanding. Hope you can understand the definition of NRI better than I did the first time.
Who is an NRI or Non-Resident Indian
Resident and Ordinary Resident(ROR) and Non-Resident (NRI)
More than Non-resident status, the laws define who is a resident more clearly. If you understand whether you’re a resident or not, then you can make out clearly who is an NRI or non-resident.
Usually there are two ways to determine if you’re an NRI. One is the Foreign Exchange Management Act, 1999 and other is the Income Tax Act,1961.
Who is resident per FEMA definition?
As per this Foreign Exchange Management Act 1999, a person is considered to be resident if he stays for equal to or more than 183 days in India during the preceding financial year.
FEMA considers financial year to be 1st April to 31st March though there is no explicit definition of the same. FEMA definition of NRI is primarily for foreign exchange control purposes.
Who is resident per Income Tax Act definition?
The Income Tax Act of 1961 defines a resident as follows..
A person is a resident who has stayed equal to more than 182 days of current financial year in India or if he stayed in India for 60 days or more in previous financial year and 365 days or more in four years before that financial year under consideration.
If you satisfy either of above definition, then you’re an Ordinary resident of India for that financial year and must pay taxes in India. As per Section 6 of the Income Tax Act, If you don’t satisfy above conditions for a resident, then you’re an NRI-non resident Indian.
Are you an NRI-Non Resident Indian?
FAQ 1: Mr Anil has stayed in India from 01 April 2014 to 31 October 2014. He leaves India to work in US on 01st Novemeber 2014. Is he an NRI for FY 2014-15. Is he an NRI?
Ans: No. Since he has stayed for more than 182 days in previous financial year in India. So his global income for 01 November 2014-31st March 2015 is taxable in India including what he earned from April-October. However, he can use DTAA and avoid double taxation if he paid taxes in US.
FAQ 2: Mr. Anil leaves to work in US on 15 August 2015. He stays there for remaining period of that year. Is he an NRI?
Ans: Yes. In this case , his period of stay is less than 182 days in India and for major part of year he was abroad. So he will be deemed as NRI for FY 2014-2015.
FAQ 3: Mr. Anil who left on 15 June 2015 visits India frequently(more than 100 days each year) between 2015-2018. His total period of stay is more than 365 in last 4 years. In October 2018, he visits India and stays another 100 days. Is he an NRI for FY 2018-2019?
Ans: In this case, he is not considered an NRI for FY 2018-19. Because his stay exceeds 365 days in preceding 4 financial years and more than 60 days in current financial year. Though he will be considered NRI for FY 2014-15, 2015-16,2016-17, 2017-18 he will be considered as resident for 2018-19 and taxed accordingly.
Note: In this example, if the person is crew member of ship or holds a valid PIO(Person Of Indian Origin), then this 60 days restriction is again extended 182 days for that financial year.
There are certain relaxation and exemptions in determining if you’re NRI for shipping crew members.
Resident but Not-Ordinary Resident (RNOR)
There is one more class that is slightly different from Resident and NRI. They’re called ‘Resident and Not Ordinary Resident'(RNOR). You classify as an RNOR citizen if you satisfy below requirements.
- The person has been an NRI for last 9 out of 10 years OR
- The person has lived in India for less than 730 days in preceding 7years.
But what is the use of this RNOR category?
RNOR citizen has to pay tax only on income generated in India. The foreign income earned by that person is exempt from tax. It is primarily used by returning NRIs.
A person can be classified as an RNOR for usually 2 years after their permanent relocation to India. In some cases, if they travel intermittently abroad and based on the date of relocation, it may be for 3 financial years.
Returning NRIs must use this RNOR status to set things in order and get ready to be taxed as Indian citizens in future.
FAQ 4: Mr.Pradeep returns to India from US or UK after 10 years in 01st Novemeber 2015 with an idea to settle in India. He again leaves to be in US for 3-4 months in 2016 due to work. So he will be classified as an RNOR for FY2015, 2016,2017 considering he was less than 730 days in India in last 7 years.
In case he did not do the abroad trip, he will have RNOR status for two years. He need not pay tax on his US/UK income for those two years alone. After two years, he will be taxed as per Indian tax laws even on what he earns in US/UK.
However, he can again use DTAA between India and UK/US to avoid paying tax at both US/UK and India.
Related post: Difference between NRE and NRO account
NRI definition for companies and HUF
Any HUF, company, association will be treated as ‘non-resident’ when the control & management of the concerned entity is situated outside India for the whole financial year.
This means any company registered and managed outside India will be considered non-resident.
Contradictions between FEMA and Income Tax Act on NRI definition
- While Income Tax Act considers only the number of days in or outside India for defining resident,you should keep in mind that FEMA considers ‘the intention’ to stay outside India as well to determine if you’re a resident.
- For example, a student going abroad to study does not have intention to stay outside India for uncertain period. FEMA considers them as residents.
- Again, if you go to US or UK for medical treatment for more than 6 months in a financial year – Income Tax Act considers you as NRI but FEMA definition considers you as resident since you don’t have intention to stay abroad.
What happens to foreigners coming to work in India
Well, if you come with an intention of working and staying in India then you’ll be considered a resident of India even if you’re not a citizen of India. You’ll be taxed as per Indian tax laws.
Note: If you fall under the definition as resident per Income Tax Act, then you need to pay tax for that financial year.
Harsh, though I replied on email hope this detailed explanation on Who is NRI – Definition per FEMA & Income Tax helped you better and others as well. Ask any doubts you might have below. I will try to answer them if I know