money matters for NRIs
When Do You Become an NRI

The Foreign Exchange Management Act 1999 (FEMA) has the followings definitions for residents of India and others.

Persons resident in India

  1. A person residing in India for more than one hundred and eighty two (182) days, during the course of the preceding financial year, but does not include:

(A) A person who has gone out of India or stays outside India, in either case –

  1. For or on taking up 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.

(B) A person who has come to India or stays in India in either case other than

  1. For or on taking up employment in India, or
  2. For carrying on 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;
  • Any person or corporate body registered or incorporated in India.
  • An office, branch or agency in India or owned or controlled by a person resident in India.
  • An office, branch or agency in India outside or India owned or controlled by a person resident in India.

A person resident outside India

A person who is not resident in India i.e., a person who stays outside India or has otherwise gone out of India.

  1. For or on taking up 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 certain period.

An Indian student who goes abroad to study will be a Non-Resident.

The IT Act of India also provides definition of NRI for the purpose of determining tax liability. Tax liability in India is determined by the residential status of an individual. There are three categories:

  1. Non-Resident
  2. Not Ordinarily Resident
  3. Resident

Non-resident

Under section 115C (e) of the Income Tax Act 1961, a Non-Resident Indian means an individual, who being a citizen of India, is not a 'resident'. Thus, every Indian citizen who is a Non-Resident in India in any previous year is a Non-Resident Indian.

A person is considered Non-Resident under the Income Tax Act if his stay in India does not exceed the limits specified below in the financial year. In the context, a financial year is considered to be from April 1 to March 31.

If the stay does not exceed:

  1. General Rule 59 days
  2. Person whose total stay in India during the preceding 4 years has not exceeded 364 days 181 days
  3. Year of leaving India for employment outside India (Indian citizens only) 181 days
  4. Year of leaving India as a member of the crew of an Indian ship (Indian citizens only) 181 days
  5. Visits to India (for Indian citizens and persons of Indian origin only) 181 days

A person is considered to be of Indian origin if he or either of his parents or any of his grandparents were born in undivided India. This is does not include those in Pakistan or Bangladesh. An individual of Indian origin, though not a citizen of India, is also considered a Non-Resident Indian.

Not ordinarily resident

A resident individual is treated as Not Ordinarily Resident (NOR) if he satisfies either of the following requirements:

  1. He has not been a resident in India for nine of the ten preceding years, or
  2. If he has not been in India for a period of 730 days or more during the preceding seven years.

It was widely held that if a person qualifies as a Non-Resident (under the Income Tax Act) for 2 successive years, he will be eligible to be considered as NOR for nine subsequent years (been in India for 729 days or less).

The advantage of being NOR is that any foreign income earned in the next subsequent years will be exempted from income tax, even if the person is in India for all or most of the time or has returned to India. The foreign income should not have been deprived from a business controlled in India or a profession set-up in India.

The Finance Act 2003 finally put the issue to rest. It amended Section 6 of the Income Tax Act 1961, stating that with effect from April 1, 2004, "A person is said to be 'Not Ordinarily Resident' in India in any previous year if such a person is –

(a) An individual who has been a Non-Resident in India in nine out of the 10 previous years preceding that year, or has during the seven years preceding that year been in India for a period of, or periods amounting in all to seven hundred and twenty nine (729) days or less; or

(b) A Hindu undivided family whose manager has been a Non-Resident in India in nine out of ten previous years preceding that year, or has during the seven years preceding that year, or has during the seven years preceding that year been in India for a period of, or amounting it all to 729 days or less".

Resident in India

It is also important to be aware of what a resident is. Section 6 (i) of the Income Tax Act 1961, defines a resident as a person who has:

  1. In that year been in India for a period or periods amounting in all to 182 days or more, or
  2. Within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more and has been in India for 60 days or more in that year.

The period of 60 days is changed to 182 days in the case of an Indian citizen who leaves India as a member of a crew of an Indian ship or for the purpose of employment outside India. 60 days is changed to 182 days in case of an Indian citizen who comes to India for business or pleasure or any other purpose.

A Hindu Undivided Family (HUF) firm or an association of persons or a body of individuals is resident in India in any previous year, except when during that year, the control and management of its affairs are situated wholly outside India. Even if a part of the control and management of the affairs of the HUF or partnership firm or of an association of persons is situated in India, it would be considered to be resident in India (Section 6 (2) of the Income Tax Act 1961). A HUF will be treated as a 'Not Ordinarily Resident', if the manager has not been resident in India in nine out of ten previous years preceding that year and has not during the seven previous years preceding that year in India for a period or periods amounting in all 730 days (i.e. 2 years) or more (Section 6 (6) (b)).

A company is said to be a resident in India in any previous year, according to section 6(3) of the Income Tax Act, if it satisfies any of the following two conditions:

  1. It is an Indian company, or
  2. During the year, the control and management of its affairs is situated wholly in India.

Calculations of date

When a person is in India for only a part of day, the calculation of physical presence in India has to be made on an hourly basis. It was stated in Walkie vs. IRC (1982) that a total of 24 hours spread over a number of days is to be counted as being equivalent to stay of one day.

In 223 ITR 462 (AAR) New Delhi ruled that the date of arrival, as well as the date of departure has to be taken into account for calculating the period of stay in India, even if for some hours, on these dates, the person of stay in India on these dates, however short the period may be.

Students

Students are non-resident Indians.

The United States regards a student as a non-resident alien who is temporarily in the country if he is there on an 'F', 'J', 'M' or 'Q' visa and is not engaged in any activities that are prohibited by US immigration laws. If a non-resident alien receives a grant from outside sources, then it is not taxable in United States.

Grants for fellowships or scholarships received often, specify the amount relating to tuition, enrollment fees, books, equipments, stationary and supplies. This is not taxable. The amount received as payment for teaching, research or any other service rendered is taxable in United States. It may taxable in India if the student is, under Indian Tax, resident in India.

Students are, under FEMA, entitled to all the benefits of a non-resident. The can open and maintain NRE, FCNR and NRO accounts.

For income tax purposes, a student in the first year would be a resident even if his stay in India is less than 182 days as he would have been in India is less than 182 days as he would have been in India for 365 days out of the preceding four financial years. He became an NRI only if his stay in India for that financial year was less than 60 days. Until he becomes an NRI for income tax purposes, his global income will be taxable in India.

Insurance for students

Several foreign universities insist that students should take medical insurance and risk cover for injuries, mental disorders and the like. The premium for these is around US $ 900. As opposed to buying these in United States of America Indian students can purchase these from Indian insurers as they are much cheaper. There are apart from regular insurance, insurance such as compassionate visit insurance that comprises of round trip economy class air ticket and accommodation expenses for an immediate family member, if a student is hospitalized for seven consecutive days. Similarly the student can visit his/her parent if either is critically ill.

Employees on deputation

Employees of Indian companies sent on deputation abroad are, unlike students, are not considered non-resident Indian under FEMA. This is because they have not gone abroad for an uncertain period or for taking up employment abroad (as he/she is already employed in India).

British Gas regularly deputed employees to its group companies, including its head office in the United Kingdom. The employees were resident in the United Kingdom and non-resident in India. Their income was taxable in United Kingdom. They were however on the payroll of the Indian company and paid salary in India. The Indian company recovered their salary by raising a debt note on U.K company. The employees were also given certain allowances in the UK to meet the additional cost of living. The salary earned in India and the UK was offered for tax in the UK. It was held in ITR 218 AAR 2006 British Gas (I) (P) Ltd. vs. CIT that as per the double tax agreement since the employees were drawing their salary for work being done in the UK, the salary was taxable only in the UK and the Indian company was not required to deduct tax at source.

As decisions in AAR cases cannot be universally applied it is better to have companies incorporated abroad. An employee on deputation should resign from the Indian company and take employment in the one abroad. In such circumstances the employees become as NRI as:

  1. His services are transferred to another company
  2. The other company hires the individual and pays him a salary for the work he does.
  3. The Indian company ceases to pay the individual a salary.

Allowances given wholly, necessarily and exclusively in the performance of his duties are not taxable in the hands of an employee. Any savings from these allowances are taxable, as it is not spent. Per Diem allowance is exempt from tax (section 10 (14) of Income Tax Act). However, it would be subject to fringe benefit tax.

If an individual resident in India receives money from abroad from his parent company and associate company abroad, over and above his salary in India, the income will be taxable.

Trusts

The Reserve Bank of India is yet to take a stance regarding the residential status of a trust. There are some guidelines:

  1. Appointment of non-resident as a trustee in a trust in India does not require any approval under FEMA.
  2. Revenue income of a trust for non-resident beneficiaries can be remitted outside India after the payment of tax and compliance with the stipulations of FEMA.
  3. Any trust in which an NRI is beneficiary or trustee, cannot enter into prohibited activities.

It is possible for a person to be resident of two different countries at the same time.

Leaving India for the first time

A person is a resident in India in any previous year if he fulfills both the condition laid down in Section 6(1) of the Income Tax Act. When leaving India, he can avoid being a resident by timing his departure. An individual who leaves India for the purpose of employment outside India is not considered to be a resident in India if his total stay in India during the relevant previous year is only 181 days or less in that year. It is important that a person leaving India for employment leaves India on a date that ensures that his stay in India is less than 182 days. This is available only for people who go for employment outside India and not otherwise. If a person leaves India for business or professional purposes, he will be resident in India if his stay is 60 days or more during the financial year (if he has been in India for a period amounting to 365 days or more during the four years preceding to relevant financial year).

These procedures must be taken when a person leaves India for the 1st time and also on subsequent employments.

Visits to India

When visiting India, a Non-resident must ensure that he does not stay in India for more than 181 days in a year. In calculating the period of stay, both the day of arrival and the day of departure will be considered. This is applicable only for those whose physical stay in India has been for a period of 365 days or more during the four years preceding the relevant previous year. If the stay of the person has been for 364 days or less during the last four financial years preceding the relevant financial year, he must stay in India for 182 days or more to be a resident.

Return to India

When returning India, one must try as far as possible to return fulfilling the conditions of not being 'Ordinarily Resident in India' as laid down in Section 6 (6) of the Income Tax Act 1961. This would ensure that he would not be liable to tax on his foreign income.


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