Being a non-resident Indian is not only about living outside the country. The confusion also arises as the definition of NRI is mentioned both in FEMA and the Income-tax Act, 1961. Know how NRIs are determined under FEMA guidelines
The Foreign Exchange Management Act, 1999 or FEMA was introduced by the central government in 1999 to facilitate cross-border payment and external trade. FEMA replaced the erstwhile Foreign Exchange Regulation Act, 1973or FERA in a bid to eradicate the drawbacks and loopholes in the existing Act.
Other than expediting external trade and cross-border payments, maintaining the Indian forex market was also one of the objectives of FEMA. For this purpose, FEMA released several guidelines to specify the criteria for non-residents who are eligible to invest in India or carry out banking transactions.
Let’s look at those criteria in a detailed manner.
1. Under FEMA, one becomes a non-resident Indian (NRI) as soon as one leaves India or takes any employment outside the country. They must be a citizen of India or a Person of Indian Origin (PIO).
2. PIO refers to a citizen of any country other than Pakistan or Bangladesh, who at some point held an Indian Passport, or has an Indian spouse,or they or either of their parents or grandparents were Indian citizens.
3. One becomes an NRI upon leaving India with the intention of not coming back for an indefinite period.
4. A person ‘Resident’ in India refers to someone who has stayed in the country for more than 182 days during the preceding financial year, but it excludes any person who has gone out of India or stays outside India, even for a definite period.
To simplify, you will be considered an NRI as soon as you step out of India, even for a holiday, treatment, study, or business, even if you stayed in India for at least 182 days or more in the preceding financial year. Likewise, when you come back to India, maybe to carry out any business or profession, for a holiday or to spend the rest of your life, you will be considered a resident under FEMA guidelines immediately upon stepping in.
The definition of NRI was primarily explained in FEMA guidelines, but it is also mentioned in the Income-tax Act, 1961. According to this Act, being considered an NRI depends on the person being physically present in India. One is considered an NRI if he/she has lived in the country for less than 182 days in the preceding financial year, or less than 60 days during the previous year, and less than 365 days in the last four years.
Let’s say that you have lived in Japan for seven months in the financial year 2023-24. In such a case, you would be considered an NRI under the Income-tax Act, 1961. In this case, you would be taxed only for the income earned or accrued in India if you have received any rent from any properties that you own in India. Only that amount would be taxed.
There is a very thin line between the definition of NRI in FEMA and in the Income-tax Act, 1961. In the latter, the NRI status depends upon the number of days a person spends in India, whereas, in FEMA, the intent to stay outside India for employment, or studies, or holidays, for a long term period, is given importance while giving someone the NRI status.