Who is an NRI (Non Resident Indian) – As per Income tax and FEMA?

definition of NRI - non resident indian

Your Residential status is important to understand as it determines your taxability in the country. Many think that once they move out of India they become NRI, and also when they come back they will be treated as Indian Residents. But that is not true.

There are a specific definition and calculation, depending on the number of days of stay in India which determines your residential status.

Definition of NRI is different as per the Income tax act and FEMA (Foreign Exchange Management Act) perspective.

Where IT act is meant to figure out the taxation, FEMA takes care of the transactions and Investments. The opening of bank accounts (NRE/NRO), Buying shares, mutual funds, agricultural land etc. is under FEMA Purview. So, understanding of Both the definition is important.

Let’s try to understand the different residential status and what makes NRI an NRI.

Who is an NRI (Non Resident Indian) – As per Income tax act

Tax liability in India is directly determined by the residential status of the assessee under Income tax act. There are 3 statuses:

  1. Resident and Ordinarily Resident (ROR)
  2. Resident and Not Ordinarily Resident (RNOR) and
  3. Non-Resident Indian (NRI)

RNOR is generally applicable to the Returning Indians. The tax liability of NRI and RNOR remains the same as far as the foreign income is concerned.

NRI is the person, who should not be in India for at least a period or periods amounting in all to –

  1. 182 days in the FY and
  2. 365 days out of Preceding 4 FYs and 60 days in the Previous FY (Year for which we are checking the status)

Both the above conditions need to be satisfied for one to be called as NRI

If the person satisfies any of the 2 conditions above then he will be treated as either ROR or RNOR as the case may be.

In other words, a person will be called as ROR (Resident and Ordinary Resident) is he/she satisfies any of the above/below mentioned conditions:

If a person stays in India for at least a period or periods amounting in all to –

  1. 182 days in the FY or
  2. 365 days out of Preceding 4 FYs and 60 days in the Previous FY (Year for which we are checking the status)

Where an Indian citizen leaves India in any year for the purpose of employment, or as a member of a crew of an India Merchant ship, the period of 60 days is to be replaced by 182 days.

Also, when an Indian citizen residing abroad comes to visit India, then also the 60 days condition will be replaced by 182 days.

However, for those who return to India permanently (not on a Visit), the Condition of 60 days is not replaced by 182 days.

Let’s understand these with some examples

  1. Rahul a software engineer has been assigned to a project in the US and he has left for the US on 1 September 2017 for an uncertain time. Now for FY 2017-18 what would be his Residential Status? NRI or Resident India?
  2. Suresh Kumar a retired bank officer, every year pays a visit to his daughter who lives in US and Son who is in Australia. He stays with both of them for 3 months each? In FY 2017-18 also he went on both the trips. Will that make him an NRI?

Solution 1 Rahul left India on 1st September 2017, means his stay in India for FY 2017-18 was 153 days. So, he does not satisfy the first condition of being a Resident. (Or satisfies the first condition of being a Non-Resident)

Since he went for employment purpose, so the second condition has to be seen by replacing 60 days with 182 days. And in this case, though Rahul was in India for more than 365 days in last 4 preceding years but was not in India for 182 days in the FY for which we are finding his residential status. Thus, he is not satisfying the second condition of being a Resident.

This means that Rahul Residential Status would be an NRI for FY 2017-18

Solution 2 – Suresh Kumar was out of India for 6 months’ time. Means he must have crossed the 182 days limit. This means that he is an NRI looking at the first condition.

But in this arrangement, he was in India for more than 365 days in the preceding 4 Financial Years, and also was in India for more than 60 days in the year for which we are finding the residential status. This means he does not satisfy the condition 2.

To count as NRI you have to satisfy both the conditions and for ROR any of the 2 conditions. Thus, Suresh will be treated as Resident and Ordinarily Resident

(Also Read: TDS on NRI investments)

What is RNOR – Resident but not ordinarily resident?

RNOR is the third status which is considered to find out tax liability of the person. This status generally applies to the returning NRIs who are coming back to India after living abroad for a considerable time.

To mitigate the shock of an NRI suddenly becoming Resident, after returning to India permanently RNOR is a transitional status.

An RNOR is an Individual who –

  1. Has been an NRI in 9 out of the 10 previous years preceding to that year, OR
  2. Has, during the 7 previous years preceding that year, been in India for a period of, or periods amounting in all to 729 days or less.

One of the above 2 conditions needs to be satisfied to be eligible to be construed as RNOR. Please do note that one condition is of your tax status and other is on your stay in India.

It would be confusing to calculate but this all taxation is about ?

This means that :

-Those returning India after being NRIs for 5 continuous years or less, immediately become Residents as they won’t be able to satisfy any of the 2 conditions.

– Those returning India after being NRIs for 6 continuous years may become RNOR for one year, provided he/she had not visited India in all those years

– Even those who after being NRI for a considerable time say 15-20 years, may become RNOR but for 2 years at the most. In rare cases, a person can become RNOR for 3 years.

Who is an NRI (Non Resident Indian) – As per FEMA (Foreign exchange management Act)?

FEMA governs the money transactions. Investments, borrowings, Forex transfers etc. You may become NRI after completing a specific number of days in India/abroad as per IT act, but FEMA goes on the Intention of the person or entity to call it as Resident or Resident Outside India. It does not use the term NRI

As per Section 2(v) of FEMA resident mean –

A person residing in India for more than 182 days during the course of the preceding financial year but does not include,

  1. A Person who has gone out of India or Who stays outside India in either case for the following 3 purposes –

a)For or on taking up employment outside India or

b) For carrying on a business or vocation outside India

c) For any other purpose, in such circumstances, as would indicate his intention to stay outside India for an uncertain period

2. A person who has come to or stay in India, in either case, otherwise than the following 3 purposes:

a) For or on taking up employment in India or

b) For carrying on a business or vocation in India

c) For any other purpose, in such circumstances, as would indicate his intention to stay in India for an uncertain period

If you look at both IT and FEMA definitions, you will find that in IT act person will be Resident or Non-resident for the complete Financial Year, whereas in FEMA one can be resident for the part of the year and Resident outside India for another part.

Take for Instance of a person who goes abroad for the first time on 15.1.2017. For ITA he is the resident for the FY 2017-18, but if he has gone for any of the 3-purpose mentioned above then he becomes ROI the day he Leaves India.

(Also Read: Financial planning for Non Resident Indian)

Conclusion:

Well, frankly there is nothing to conclude as this is law and we cannot do anything about it ? It may be confusing to those who keep on travelling between countries and also have businesses in multiple countries. But those people generally have a team of experts to take care of this.

Sometimes I wonder, even if someone becoming a Non Resident Indian means he may not have to pay tax in India on his foreign Income but he is still paying taxes in his tax resident country, thus there is no tax saving as such unless one goes to some gulf country where there are no Direct taxes as of now.

Even in case of Investments like FD. NRE FD interest is tax-free in India, but it may be taxable in the country of tax residency.

But still, this is what the law says which we have to be aware of and follow as such.

One who is going abroad for employment may not fall into IT act rules for NRIs immediately, but he/she has to follow the FEMA guidelines and Open the NRE/NRO accounts, Inform the Depository participants, Mutual fund houses etc. about the changed status to be on the right side of law always.

Disclaimer: I am not a tax expert. The above article is as per my limited knowledge and understanding after reading different books and articles on this subject. So, it is advisable not to make any decision based on the above content. Do consult some tax expert

Still, if there are questions. I would try to answer.

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6 COMMENTS

  1. Good article, thank you.

    But again this article leaves the RNOR concept unexplained as does so many other blogs.

    Can you highlight under what conditions does a returning NRI stay as RNOR for a period of 3 years? From the Income Tax rules, it’s just not possible to have 3 year RNOR status, unless you go abroad for a few months. Thanks

    • Hi Sachin

      RNOR status is essentially a transition phase from being non-resident to being a resident (ROR).

      As per Section 6 of the Income Tax Act, there can be two types of residents.

      Resident and Ordinarily Resident (ROR)
      Resident but not Ordinarily Resident (RNOR)

      You are RNOR if you satisfy any of the following two conditions:

      You have been a non-resident (NRI) in 9 out of 10 previous years preceding that year.
      You have, during the previous 7 years preceding that year, been in India for a period of 729 days or less.
      So, essentially, you first determine whether you are a resident or non-resident. If you are a resident, you must determine whether you are ROR or RNOR.

      FEMA has only two classifications: Resident and Non-Resident (Resident outside India).

      Income Tax Act has three classifications: ROR, RNOR and NRI.

      Does RNOR status affect taxation?
      Very much. RNOR are almost treated like NRIs when it comes to taxation.

      As per Section 10(15)(iv)(fa) of the Income Tax Act, the interest on foreign currency deposits in Indian Banks is exempt for non-residents and RNOR.

      Hence, interest on FCNR deposits will continue to be exempt from tax as long as you remain RNOR. Similarly, interest earned on RFC account will be exempt from income tax as long as you are RNOR.

      Since RNOR get favourable tax treatment (as compared to ROR), you can time your return in a way that you stay RNOR for as long as possible.

      Illustration: RNOR Status
      If you are returning after being NRI for 5 continuous years or less, you become a resident (ROR) immediately (as per Income Tax Act).

      If you are returning to India after being NRI for 6 continuous years, you can become RNOR for one year. Subsequently, you become ROR.

      If you are returning to India after being NRI for say 20 continuous years, you can become RNOR for two years. Subsequently, you become ROR.

      In extreme cases, if you are returning after being NRI for 5 years or more (and didn’t visit India during those years) and return to India after April 2, you can be RNOR for maximum three years.

      Please understand there are specific numbers involved in determining residential status.

      This is best understood with the help of an example.

      You have been staying abroad for 20 years and didn’t come to visit India even once during those 20 years. You return to India on June 1, 2015. You would obviously qualify as NRI for the last 10 years from FY2006 to FY2015.

      FY2016 (ending March 31, 2016): Since you have been in India for more than 182 days (305 days), you qualify as a Resident for FY2016. But which type of resident? You were non-resident for all 10 previous years (FY2006 to FY2015) preceding that year (FY2016). Hence, you are RNOR.

      FY2017 (ending March 31, 2017): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2017. You were non-resident for 9 out of 10 previous years (FY2007 to FY2016) preceding that year (FY2017). Hence, you are RNOR.

      FY2018 (ending March 31, 2018): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2018. But which type of resident? You were non-resident for 8 out of 10 previous years (FY2008 to FY2017) preceding that year (FY2018). The condition is not met. However, there is an additional condition. During 7 previous years (FY2011 to FY2017), you were in India for 670 days (305 in FY2016 + 365 in FY2017), which is less than 729 days. Hence, you are RNOR.

      FY2019 (ending March 31, 2019): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2019. But which type of resident? You were non-resident for 7 out of 10 previous years (FY2009 to FY2018) preceding that year (FY2019). The condition is not met. However, there is an additional condition. During 7 previous years (FY2012 to FY2018), you were in India for 1,035 days (305 in FY2016 + 365 in FY2017 + 365 in FY2018), which is more than 729 days. Hence, you are ROR.

      You can be RNOR for a maximum of three years.

  2. Hi Sir,
    Thanks for your article.
    I left India on 10th September 2009 to Singapore and till 27th March 2018 continuously stayed outside India except 30 days(average) of my vacation in India every year. I am still continuing my abroad employment even now but I stay in India most of the time and from April 2018 to till today(1st November 2018) stayed in India for 142 days. Most likely I can not stay more than 183 days outside India in this financial year(2018-2019). In such case what will be my resident status as per Income tax and FEMA considering I am still continuing my abroad employment but only my stay in India is more than 183 days. What is to be done with my NRE and NRO accounts? Should I change them to RFC account. Should I file income tax returns for financial year 2018-2019? If I will be considered as RNOR for income tax purpose? Since I am contnuing my abroad employment I will stay in India less than 183 days during next financial year(2019-2020) to avoid income tax in India.

    • Hi Mohan. See, when you are continuing your abroad employment, and being paid from Singapore only, and also you intend to stay outside India from next year onwards, so it is very much clear from FEMA perspective you are an NRI and from Income Tax for this year you would be RNOR. I do not think you need to convert your NRE/NRO account as those are governed by FEMA only.
      Yes, you should file ITR in India for FY 2018-19. And be in touch with a Good CA if he advises you to do some more formalities (If any)

      Thanks

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