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Non-Resident Indian (NRI) - Definition under Income Tax Act and Tax Implication of Residency

“To be, or not to be, that is the question” – thus pondered Shakespeare in Hamlet. Well there isn’t really a choice we have “To be, or not to be” Resident or Non-Resident, but for a person moving outside India or traveling frequently to India, residency is of paramount importance, since that is what determines what Income is taxable and also what sort of bank accounts he can open and operate.

Who is a Non-Resident Indian?

An Indian abroad is popularly known as Non-Resident Indian (NRI). NRI is legally defined under the Income Tax Act, 1961 and the Foreign Exchange Management Act, 1999 (FEMA) for applicability of respective laws.

Difference between Resident definition under Income Tax and FEMA
  • "Financial Year" is not defined under FEMA, but by convention it is assumed to refer to 1st April to 31st March 
  • Income-tax Act requires physical presence of 182 days or more, whereas, FEMA requires 183 days or more 
  • Income-tax Act considers the physical presence of a person in the Current Financial Year, whereas FEMA considers physical presence of a person in the Preceding Financial Year 
NRI as per Income Tax Act

Income Tax Act has not directly defined NRI. Section 6 contains detailed criteria of who is considered as Resident in India and provides that anyone who doesn’t meet these criteria is Non-Resident.

The status of a person as a resident or non-resident depends on his period of stay in India. The period of stay is counted in number of days for each financial year beginning from 1st April to 31st March (known as previous year under the Income-tax Act).

Resident

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

  1. Atleast 182 days in that year, OR
  2. Atleast 365 days during 4 years preceding that year AND atleast 60 days in that year.
An individual who does not satisfy both the conditions as mentioned above will be treated as "non-resident" in that previous year.

Definition of Resident is relaxed by dropping Condition 2 given above (i.e. only Condition 1 is applicable), for the following cases:
  1. An Indian citizen who leaves India in any year for the purpose of employment outside India or as a crew member of an Indian ship, 
  2. An Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India. Note that a person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.
Following examples will make the rules more clear:
  1. Ajay leaves India for the first time on 1st August, 2006 and remains out of India in the remaining part of the financial year. His period of stay in India in the previous year 2006-07, being less than 182 days, he is not a resident for that year. 
  2. Divya leaves India in December 2006 and continues to remain abroad in the remaining part of the financial year. Her period of stay in India being more than 182 days, she will be a 'resident' in the previous year 2006-07. 
  3. Rohit leaves India in 2003. In the financial year 2003-04 to 2006-07 he visited India several times and the total period of stay during these 4 years was 400 days. During the financial year 2007-08, he came to India for total period of 180 days. Although his stay in India in the financial year 2007-08 is less than 182 days, he becomes a ‘resident’ by virtue of the fact that his stay in the preceding 4 years was more than 365 days and he was in India for more than 60 days in the year under consideration. 
  4. In the above examples, if Rohit was a member of the crew of an Indian ship or a citizen of India or a person of Indian origin, he would not have become a 'resident' for the year 2007-08 since his period of stay in India in that year was less than 182 days. 
“Resident and Ordinarily Resident” & “Resident but not Ordinarily Resident”

A person Resident in India is further classified as “Resident and Ordinarily Resident” if BOTH the following conditions are satisfied:

  1. Resident in India for 9 out of 10 years preceding that year, AND
  2. In India for atleast 730 days during 7 years preceding that year
If any one of the above conditions is not satisfied, the person is classified as “Resident but not Ordinarily Resident”

Points to Note
  • A Hindu Undivided Family (HUF), firm or other association of persons is Non-Resident if control and management of its affairs is situated wholly outside India 
  • A company is said to be resident in India in any previous year, if it is an Indian company; or the control and management of its affairs is situated wholly in India 
  • Every other person is said to be Non-resident in India if control and management of his affairs is situated wholly outside India 
  • If a person is resident in India in respect of any source of income, he shall be deemed to be resident in India in respect of each of his other sources of income 
Residency and Taxable Income

Based on the residential status of a tax payer and the place where the income is earned, the income that is included in the total income is as under:-

Residential status 
Nature of Income taxable
Resident and Ordinarily Resident
All Income whether earned in India or outside India
All incomes :-
  1. which is received or is deemed to be received in India
  2. which accrues or arises or is deemed to accrue or arise in India, and
  3. which accrues and arises outside India which means the world income is taxable in case of a resident
Resident but not Ordinarily Resident
All income earned in India and all income earned outside India if the same is derived  from a business which is controlled in India or from a profession which is set up in India
Non Resident
All income earned in India. Income outside india is not liable to tax

A person who is non-resident is liable to tax on that income only which is earned by him in India. Income is earned in India if -
  1. It is directly or indirectly received in India; or 
  2. It accrues in India or the law construes it as having accrued in India. 
The following are some of the instances when the law construes the income to have accrued in India:-
  1. income from business arising through any business connection in India; 
  2. income from property if such property is situated in India; 
  3. income from any asset or source if such asset or source is in India; 
  4. income from salaries if the services are rendered in India. In such cases salary for rest period or leave period will be regarded as earned in India if it forms part of service contract,. 
  5. income from salaries payable by the Government to a citizen of India even though the services are rendered outside India; 
  6. income from dividend paid by an Indian company even if the same is paid outside India; 
  7. income by way of interest payable by Government or by any other person in certain circumstances ; 
  8. income by way of Royalty if payable by the Govern­ment or by any other person in certain circumstances; 
  9. income by way of fees for technical services if such fees is payable by the Government or by any other person in certain circumstances.
The following income even though appearing to be arising in India are construed as not arising in India:-
  1. If a non-resident running a news agency or publishing newspapers, magazines etc. earns income from activities confined to the collection of news and views in India for transmission outside India, such income is not considered to have arisen in India. 
  2. In the case of a non-resident, no income shall be considered to have arisen in India if it arises from operations which are confined to the shooting of any cinematography film. This applies to the following types of non-residents:- 
  • individual who is not a citizen of India; or 
  • firm which does not have any partner who is a citizen of India or who is resident in India; or 
  • company which does not have any shareholder who is resident in India. 

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