Residential Status under The Income Tax Act 1961, is an important basis which determines whether an income earned abroad is taxable or not. Foreign Exchange Management Act 1999 also defines Residential Status to regulate the flow of foreign currency in the country. But the Residential Status determined under these two Acts are different most of the times in case of individuals. This causes a lot of confusion for the people going abroad. The following example illustrates this difference for an Indian citizen going abroad on employment for the first time.
An Indian Citizen is going abroad for employment on 01-11-2024.
His Residential Status under the Income Tax Act (ITA)
For the Assessment Year (AY) 2025-26, the residential status of an individual is determined based on their stay in India during the Previous Year (PY) 2024-25.
As per Section 6(1) of the Income-tax Act, an individual is considered a resident in India if they satisfy either of the following conditions:
1. Stay in India for at least 182 days during the relevant previous year (PY 2024-25).
2. Stay in India for at least 365 days in the four years immediately preceding the relevant previous year and at least 60 days in the relevant previous year.
Special Exception for Individuals Leaving India for Employment:
For an Indian citizen who leaves India for employment abroad, the second condition is modified. Such individuals are treated as residents only if they stay in India for 182 days or more in the relevant previous year.
In the instant case as this Indian citizen is leaving for employment abroad for the first time, he had stayed in India for 215 days in PY 2024-25 (which is more than 182 days). Therefore, he is a Resident for AY 2025-26.
Ordinary Resident vs Not Ordinarily Resident (ROR vs RNOR):
To determine whether the person is “Resident and Ordinarily Resident (ROR)” or “Resident but Not Ordinarily Resident (RNOR)”, following additional conditions are to be satisfied :
1. The individual should be a resident in at least 2 out of the 10 preceding years and
2. The individual should have been in India for at least 730 days in the 7 preceding years.
Since this person is leaving for employment for the first time, he would have been in India in the previous years and likely fulfil these conditions, making him a Resident and Ordinarily Resident (ROR). This means the salary earned by him from employment abroad from 01-11-2024 to 31-03-2025 will also be taxable in India for AY 2025-26.
His Residential Status under Foreign Exchange Management Act (FEMA )
Under Foreign Exchange Management Act, 1999, the residential status of an individual is determined based on Section 2(v) of FEMA, which defines a “person resident in India” as:
1. A person residing in India for more than 182 days during the preceding financial year (FY 2023-24),
2. Except when they leave India for:
a) Employment outside India,
b) Business or vocation outside India, or
c) Any other purpose indicating their intention to stay outside India for an indefinite period.
In the instant case, even though the person has stayed in India throughout the Financial Year 2023-24, on 01-11-2024 he has left India for employment abroad. Hence, he is a resident till 31-10-2024 and a non-resident from 01-11-2024. So, from this date FEMA Regulation stipulate that he must convert his bank accounts from “Resident” status to “Non-Resident” status.
It will be evident from the above that the person is classified as Resident for the whole financial year 2024-25 under The Income Tax Act but he is classified as a Non-Resident from 01-11-2024 under the Foreign Exchange Management Act. He is expected to follow the FEMA regulations and change the status of his bank accounts to “Non -Resident” status, but his salary earned abroad from 01-11-2024 is taxable in India.
There might be an argument that foreign taxes paid can be claimed as tax credit and set off against the Indian income tax payable, but generally no tax is levied on salary by countries to which most of the Indians go for work. (Middle East Countries)
India earns invaluable foreign exchange through the Indians who go for employment abroad and send their hard-earned money back home. Taking this into consideration, the new Income Tax Bill 2025 should try to incorporate the provisions found in FEMA for Residential Status determination for the benefit of those Indians going for work abroad for the first time. Such amendments will go a long way in achieving the true objective of the new bill of simplifying and rationalizing the existing provisions.
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