A Brief Note on Residential Status Of A Person Based On Provisions Of The Income Tax Act and Foreign Exchange Management Act And Banking Accounts for Non-Resident Indians
In a layman’s language, a Non-resident means a person who does not reside in India, or who is a foreigner.
The residential status of a person under the Indian tax laws is governed by section 6 of the Income Tax Act, 1961. For purposes of taxability of a person’s income, a person can be a Resident (R), Resident but Not-ordinarily Resident (RNOR) and Non-Resident (NR). Once a person’s residential status is determined, his incidence of tax is easy to be calculated. The note below attempts to explain how a person can identify his tax liability under the Income Tax Act vis-à-vis his residential status for any financial year. Person here means an INDIVIDUAL. The method of determining residential status in case of a HUF, Firm and Company is not covered.
FORMULA TO CALCULATE A PERSON’S RESIDENTIAL STATUS
A person is RESIDENT in India if:
a. He has stayed in India in that year for a period OF ATLEAST one hundred eighty two days. For example, in the Financial Year 2012-13, he has stayed in India for a minimum of 182 days, either at a stretch or in parts;OR
b. He has stayed in India in that year for a period of sixty days AND three hundred sixty five days over a period of four years prior to that year. For examples, if a person has stayed in India for 60 days in FY 2012-13, he should have also stayed in India for a total of 365 days during the period FY 2008-09, FY 2009-10, FY 2010-11 and FY 2011-12. In such a situation, the person will be a RESIDENT. The period of stay of 365 days will be counted in totality over 4 years and the person could have stayed in India in intervals as per his convenience. Both the requirements, that of being in India for 60 days in theyear (say for ex. FY 2012-13) and 365 days (for the 4 year period from FY 2008-09 to FY 2011-12) are to be fulfilled together.
b. He has been in India during the seven years prior to the year, for a total period of less than seven hundred twenty nine days, for ex. for FY 2012-13, he should have been in India during the period FY 2004-05 to FY 2011-12 for not more than 729 days.
If a person does fit in the conditions mentioned above to be treated a RESIDENT or NOT-ORDINARILY RESIDENT then he is automatically deemed to be a NON-RESIDENT.
The formula is explained herein below by way of a flow chart.
A. In case of a Resident & Ordinarily Resident, his income earned anywhere around the globe is taxable in India, subject to provisions of Double Taxation Avoidance Agreement if applicable to the countries in which such income is earned.
INCOME FROM INVESTMENTS IN CASE OF A NON-RESIDENT:
Interest received by a non-resident from any person in India or from the government is taxable in India.
Following are some of the incomes from investments in India which are exempt from tax in case of a non-resident:
1. Interest credited to an NRE Account of non-resident Indians
NON-RESIDENT INDIAN (NRI)
The definition of a Non-resident Indian is significant for any person, who is either a citizen of India, or a person of Indian origin (PIO) and who is not resident in India. It is important in terms of its implications under Income Tax Act, FEMA and laws governing investments in India.
The Income Tax Act under section 115C (e) defines a Non-resident Indian as an individual, being a citizen of India or a person of Indian origin who is not a ‘resident’. Thus, a person, who is either an Indian citizen or a PIO but who does not fit in the formula for being called a RESIDENT in India, is a NON-RESIDENT INDIAN. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.Foreign Exchange Management Act defines a NRI as ‘an individual who stays in India for more than one hundred and eighty two days during the course of the preceding financial year will be treated as a person resident in India.’ The exceptions to this definition state that:
- If a person goes/stays outside India for (a) taking up a job, (b) carrying on any business or any vocation, or (c) for any other purpose, for an uncertain period, he will be treated as a person resident outside India, that is a Non-Resident Indian; AND
- If a person who is residing abroad, comes/stays in India for (a) taking up a job, (b) carrying on any business or any vocation, or (c) for any other purpose, for an uncertain period, he will be treated as person Resident in India.
Thus, it can be seen that the term NRI has different definitions under various laws in India. FEMA and various rules and regulations under FEMA, have different definitions of the term NRI.
NON-RESIDENT INDIANS AND BANKING ACCOUNTS
As per the guidelines issued by the Reserve Bank of India from time to time, NRIs are allowed to open and operate certain type of banking accounts. The guidelines are in the form of Master Circulars and various Master Circulars are issued by the RBI on various matters. The latest Master Circular relating to interest rates on Rupee Deposits held in Domestic, Ordinary Non-Resident (NRO) and Non-Resident (External) (NRE) Accounts was issued on July 1, 2013. The salient features of the Master Circular are explained in the following paragraphs.
Ordinary Non-Resident (NRO) Accounts
NRIs can open NRO Deposit Accounts for collecting their funds from local bonafide transactions. Since NRO is a Rupee deposit account, the exchange rate fluctuation risk is borne by the account holder himself. NRO Accounts can be maintained as savings, current, recurring or term deposits. The principal of NRO deposits is non-repatriable, but current income and interest earning can be repatriated. A NRI/PIO can remit an amount, not exceeding USD 1 million per financial year, out of balances held in NRO account/sale proceeds of assets/assets acquired in India by him, by way of inheritance or legacy, subject however to, providing evidence of such acquisition, inheritance or legacy as the case may be. There are further additional compliances that need to be met in order to repatriate the proceeds up to the limit stated hereinbefore.
Non Resident (External) (NRE) Accounts
The Non-Resident (External) NRE Account, also known as the NRE Scheme, was introduced in 1970. Any NRI can open an NRE Account with funds remitted to India through a bank abroad. This is a repatriable account and transfer from another NRE Account is also permitted. An NRE Account may be opened as a savings, current or term deposit account. A NRI can use his NRE Account to make local payments also. Since an NRE account is a Rupee deposit account, the depositor is exposed to exchange risk. NRIs and PIOs have the option to credit their current income to NRE Rupee accounts, provided the Authorised Dealer (AD) is satisfied that the credit represents current incomes of the non-resident account holder and such income is credited after giving due effect to tax at source thereon.
( Author is working with Haindaday & Co., Mumbai and can be reached at [email protected])