Determining the residential status is the starting point to understand the:
– The extent to which a person is regulated for cross border transactions;
–The extent of the Income-tax liability.
Two laws were residential status is most relevant are Income-tax Act, 1961 (ITA) and Foreign Exchange and Management Act, 1999 (FEMA). We often mix the definition under these two laws which creates a confusion. Determining the residential status under both the laws will help to understand the issues better. But most important is to understand the purpose of determining the residential status under these laws because FEMA and ITA have different purposes.
FEMA is a regulatory law. There are regulations under the FEMA law for undertaking transactions with Non-residents or any cross border transaction i.e inbound or outbound investments, capital account or current account transaction etc. There are certain restrictions and approval procedure covered in the regulation which a Non-resident has to comply with at the time of undertaking any such transaction. Hence it is necessary to know the residential status as per FEMA on any particular day.
Please note: Citizenship is not a relevant criteria for determining the residential status under FEMA law.
FEMA law is regulated by RBI and Central government, enforced by the Directorate of Enforcement (ED) and executed by Authorised person/dealers. So, In order to decide which bank accounts can be opened in India if you are a Non-resident, you need to determine the residential status as per FEMA law.
Residence under FEMA is defined as
– “Person resident in India” under section 2(v)
– “Person resident outside India” under section 2(w)
A person is resident in India if his numbers of days stay in India in the preceding financial year for more than 182 days.
However, there are two exceptions in clause: (A) and (B). Exception means, even if a person is resident due to the fact that he was in India for more than 182 days in the preceding year, he will be a non-resident if he satisfies conditions in any of the exceptions in clause (A) or clause (B).
Person leaving India clause (A)
If a person leaves India for any of the following purposes, he will not be a resident. He will be a non-resident. The purposes are:
– for or on taking up employment outside India; or
– for carrying on any business outside India or vocation outside India; or
– for any purpose which indicates his intention to stay outside India for an uncertain period.
Clause (B) provides that if a person comes to India for employment, or carrying on business, or for an uncertain period, he will be an Indian resident.
Section 2(v)(i) with reference to clause (B) is reproduced below
“(v) “person resident in India” means—
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
(A) …
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;”
The first part states that person resident in India does not include (1st exception). Hence even if a person has been in India for 182 days or more in the preceding year, he will not be considered as a resident if the person is covered by clause (B). i.e He will be a non-resident.
Which person is covered by Clause (B)? “That person who comes and stays in India otherwise than …” (2nd exception).
– for taking up employment in India; or
– for carrying on any business in India; or
– for any purpose which indicates his intention to stay in India for an uncertain period.
Which means if a person comes for any of the above purposes, he will be considered as an Indian resident And if a person comes to India and gets stuck here due to any reason except mentioned above he will be Non-resident.
Let us understand it through some practical examples below
1. Mr. A went outside India for employment on 20 April 2019. His stay/visit during the previous year 2019-20 is 19 days. He is a Non-resident as per the Income-tax act as his number of days of stay in India is less than 182 days as per sub-clause (c) of section 6. Will he be non-resident as per FEMA law also?
For the previous year 2018-19 Mr. A was a resident as per Income-Tax Act. His stay in India is more than 182 days.
Answer: Residence under FEMA has been defined u/s 2(v)(i) and 2(w). A person being an Individual is considered as an Indian resident if he has been in India in the preceding financial year for more than 182 days. Residential status as per FEMA law is not determined for the financial year but on every transaction. In order to determine the residential status as on 20 April 2019, we need to check if in the preceding year i.e 2018-19 his stay in India was more than 182 days.As, in preceding year Mr.A was in India for more than 182 days he is resident on 19 April 2020 as per FEMA Law.
However, there are two exceptions in clauses as discussed above: (A) and (B).
In the present scenario, Mr. A goes outside India on taking up employment outside India. He satisfies the condition of clause “A” hence, he is a Non-resident from 20 April 2020.
2. In continuation of earlier question. What will be his residential status in Financial Year 2020-21 under FEMA law.
Answer: FEMA is a regulatory law and there are regulations for undertaking transactions between residents and Non-residents. It is necessary to know the residential status at the time of undertaking a transaction. If I have to determine the residential status today, then as per FEMA law, for the financial year 2020-21, we need to check if in the preceding year i.e 2019-20 his stay in India was more than 182 days.
As, in preceding year Mr.A was in India for less than 182 days he is Non-resident as per FEMA Law. No need to check the exceptions in this case, as in order to be covered by the exception clauses he needs to satisfy primary condition of being in India for more than 182.
3. If Mr.A Plans to come to India by end of July 2020 for employment, what would be his residential status under FEMA law for FY 2020-21?
Answer: A person being an Individual is considered as an Indian resident if he has been in India in the preceding financial year for more than 182 days.
In order to determine the residential status as per FEMA law for the financial year 2020-21, we need to check if in the preceding year i.e 2019-20 his stay in India was more than 182 days.
As, in preceding year Mr.A was in India for less than 182 days he is Non-resident as per FEMA Law till March 2021. No need to check the exceptions in this case.
Clause (B) provides that if a person comes to India for employment, or carrying on business, or for an uncertain period, he will be an Indian resident.
Section 2(v)(i) with reference to clause (B) is reproduced below
“(v) “person resident in India” means—
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
(A) …
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;”
The first part states that person resident in India does not include (1st exception). Hence even if a person has been in India for 182 days or more in the preceding year, he will not be considered as a resident if the person is covered by clause (B). i.e He will be a non-resident.
Which person is covered by Clause (B)? “That person who comes and stays in India otherwise than …” (2nd exception).
– for taking up employment in India; or
– for carrying on any business in India; or
– for any purpose which indicates his intention to stay in India for an uncertain period.
Which means if a person comes for any of the above purposes, he will be considered as an Indian resident.
Mr. A comes India on taking up employment in India. Assuming that his stay in India in preceding year is more than 182 days, he satisfies the exception clause B hence, he will be a resident for the Financial Year 2020-21.
Note: In order to be covered by the exception clauses (A) and (B). He needs to satisfy the primary condition of being 182 days in India.
Author Bio
Madam, with ref. to the below point the previous year should be 2018-2019 or otherwise please elaborate PREVIOUS YEAR?
“1. Mr. A went outside India for employment on 20 April 2019.
His stay/visit during the previous year 2019-20 is 19 days.”