DIY Income Tax Planning

NRI Status under Income Tax Act & FEMA

Residential Status under FEMA | Tax Things Every NRI Must Know

Introduction

How does the NRI Status under Income Tax Act and FEMA (Foreign Exchange Management Act) differ? How does FEMA affect you if you are leaving India for Employment or Business or Vocation? In this article, we will discuss what care should be taken if an Individual is leaving India for the purpose of employment / Business / Vocation.

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NRI Status under Income Tax Act & FEMA

Laws Governing the Residential Status of an Individual in India
  • There are two Acts which govern the residential status of an individual
    1. Income Tax Act, 1961
    2. Foreign Exchange Management Act (FEMA), 1999

Deciding Residential Status under Income Tax Act, 1961

  • An Individual is said to Resident in India if he fulfills any of the following conditions :
    1. He is in India in that year, for a period of 182 days or more OR
    2. He is in India for 60 days or more in that year and 365 days or more in last 4 financial years immediately preceding the current financial year.
  • The condition of 60 days is replaced with 182 days in the following cases:
    • Where an individual is a Citizen of India OR person of Indian Origin AND
    • If he is leaving India for the purpose of –
      • Employment / Business / Profession
      • As a member of Crew of Indian Ship.
  • In the above exceptional cases, if an individual resides in India for 182 days in the current financial year, and 365 days in the 4 financial years immediately preceding the current financial year, then he shall be treated as Resident in India.
  • Example
    • Mr. Yogesh is leaving India for the purpose of employment on 5th October 2019.
    • Now his stay in India is of 187 days (i.e. more than 182 days). Therefore, for FY 2019-20 he is resident in India.

Deciding Residential Status under FEMA, 1999

  • The Foreign Exchange Management Act (FEMA) is a law enacted by the Government of India in 1999 to control this flow of foreign currency across Indian borders.
    • FEMA aims to facilitate external trade and their payments in India, a systematic improvement and continuation of foreign exchange in the Indian market.
    • It outlines the procedures, formalities, businesses of all foreign exchange transactions in India.
  • Under the Section 2(v)(i) of the FEMA, an Individual is said to Resident in India if he is residing in India for more than 182 days in the previous financial year.
  • Example
    • Mr. Yogesh leaves India on 1st April 2019. He was in India for the period from 1st April 2018 to 31st March 2019.
    • Here, as Mr. Yogesh stayed in India for 365 days in the previous financial year. He will be considered as Resident in India in the Current Financial Year i.e. FY 2019-20.
  • However, the condition of more than 182 days under FEMA, 1999 also has some Exceptions
    • If an Individual is leaving India for the purpose of :
      1. Employment OR
      2. Business / Vocation OR
      3. For any other purpose for an uncertain period
    • Then, his stay in India for the previous financial year is irrelevant. He can be treated as a Non-Resident. In such a case, he shall have dual residential status under FEMA, 1999.
ExampleException under FEMA, 1999
  • Mr. Yogesh leaves India on 1st November 2019 for the purpose of employment. He was in India for the period from 1st April 2018 to 31st March 2019.
  • Now, the criteria of 183 days will be applicable only up to 31st October 2019, As he was in India from 1st April 2018 to 31st March 2019, Mr. Yogesh is Resident India up to 1st October 2019.
  • He has left India for the purpose of employment on 1st November. Therefore, for deciding the residential status from 1st November, 2019, the stay of India in FY 2018-19 is not relevant. Mr. Yogesh will become Non-Resident from 1st November 2019.
  • In this case, Mr. Yogesh is having dual residential status under FEMA, 1999.

Comparison of Residential Status under Income Tax Act, 1961 and FEMA, 1999

Residential Status under Income Tax Act vs FEMA
Residential Status under Income Tax Act and FEMA

Difference between Income Tax Act, 1961 and FEMA, 1999

Lets see the key differences between Income Tax Act and FEMA.

Difference between Income Tax Act, 1961 and FEMA, 1999
Difference between Income Tax Act, 1961 and FEMA, 1999

Impact of NRI Status under FEMA, 1999.

  • Once your Residential Status is changed under FEMA, individual must visit all the banks, his brokers and wealth managers to change your Residential status from Resident to Non-Resident.
  • Once an Individual becomes NRI, FEMA rules do not allow him holding a savings bank account. NRIs need to set up an NRO Account (Non-Resident Ordinary Rupee Account) as stipulated by the Reserve Bank of India (RBI).
    • NRO Account can be held jointly by two or more NRIs.
    • Only inward remittances from outside India are possible through this account.
    • Funds remitted, therefore, are non-repatriable to another country.
  • NRI individual can also open NRE Account (Non-Resident (External) Rupee account).
    • NRE Account permits for money transfer services from outside India.
    • And the entire amount in the account is also repatriable back to the country where the NRI stays currently.
    • Income earned in this account is exempt from taxation.
  • NRI is permitted to enter into the financial transactions post-approval from RBI.

Summary

  • Both Income Tax Act, 1961 and FEMA, 1999 are important in deciding the Residential Status.
  • Therefore, you should check your residential status for every transaction and obtain necessary approvals from RBI wherever required.

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