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Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts

NRIs need to follow FEMA rules once their tax residency status changes from resident Indian to NRI. This article shows how to calculate the residency status based on the amount of time spent inside and outside India.

Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts


Posted on 20 Sep 2023
Author: Sayan Sircar
8 mins read
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NRIs need to follow FEMA rules once their tax residency status changes from resident Indian to NRI. This article shows how to calculate the residency status based on the amount of time spent inside and outside India.

Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts

📚 Topics covered:

Who is an NRI?

The income tax website defines an NRI like this:

'Non-resident Indian' is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India. Thus, in order to determine whether an Individual is a non-resident Indian or not, his residential status is required to be determined under Section 6. As per section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India and an individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:

 1.  If he is in India for a period of 182 days or more during the previous year; or

 2.  If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for the purpose of employment outside India.

The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction by reason of his domicile or residence or any other criteria of similar nature.

Thus, from Assessment Year 2021-22, an Indian Citizen earning total income in excess of Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

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.



We will now break this down further. In each of these cases, the definition of “year” is the financial year which runs from 1st April to 31st March. This definition is especially helpful since tax-filing has to be done differently for NRIs vs resident Indians and one of the first questions in the ITR forms is regarding the tax-residency status. In all of these cases, both the departure and arrival dates are included to count as the period spent inside India.

Case 1: In India for a period of 182 days or more during the previous year

If you are in India for more than 182 days in the previous year then you are a resident Indian.

Case 2: Based on previous multiple years residency period

If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year

Assume that today is 1st July 2023. Let’s consider the cases:

  • 1st April 2022 to 31st March 2023: were you in India for 182 days or more AND travelled back to India in this period OR
  • 1st April 2022 to 31st March 2023: were you in India for 60 days or more AND did not back to India in this period AND between 1st April 2018 to 31st March 2022, you were in India for 365 days or more

If any of the two cases above are true then you are a resident Indian.

Case 3: Based on total income

an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year

As per Finance Act, 2020, and the new section 6(1A) added to the Income-tax Act 1961, anyone with a total income exceeding ₹15 lakhs, except income from foreign sources, when they are not paying tax outside India is an Indian resident.

The rule is therefore, as per Case 1, Case 2 or Case 3 above:

Any one who is not a Resident Indian is an NRI.

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Bank accounts - NRE and NRO

To comply with Foreign Exchange Management Act (FEMA) rules, an NRI cannot have a regular savings accounts in India. Therefore, you must convert existing accounts to NRE or NRO accounts. Excess accounts must be closed. This step is important once your status changes from resident Indian to NRI and can be done either online or on your next visit to India.

Non Resident External (NRE) account

An NRE account can be opened only once you are an NRI as a fresh account. Old accounts, which existed when you were a resident Indian, will become NRO and not NRE. You can do the NRI check here: Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts.

This account is used to send money to India. The features and uses are:

  • this is a fresh account that can only be opened by an NRI
  • money deposited in this account must originate outside India
  • interest earned is tax free in India but may be taxable in the country where the NRI is residing
  • you can send both interest and principal out of India without limits
  • deposits can only be made in foreign currency, and withdrawals is in INR
  • joint accounts are allowed only with another NRI
  • you can transfer funds to other NRE or NRO accounts
  • may be used for stock investing but not recommended
  • best option for MF investing
  • cannot be used for investing in RBI/Gilt bonds

Non Resident Ordinary (NRO) account

This account is used for any income and investments in India. The features and uses are: The features and uses are:

  • existing savings accounts are converted to NRO accounts
  • interest earned is taxable in India at current slab rates. The benefit of the Double Taxation Avoidance Agreement (DTAA) is available with most countries so that you do not pay tax twice
  • you can send both interest and principal out of India, but the principal must be within $1 million. A CA must certify that you have paid taxes on this income
  • you can make deposits in foreign currency and INR, and withdrawals is in INR
  • joint accounts are allowed with another NRI or a resident
  • funds can be transferred to only another NRO account and not to an NRE account
  • this account is used to receive income from interest, FD, rent, stock and MF dividend, and proceeds from selling real estate, stocks and mutual funds
  • can be used for both stock and MF investing
  • only NRO account can be used for investing in and for receiving interest from RBI/Gilt bonds from the RBI Retail direct portal

It is the NRI’s responsibility to update their non-resident status in Banks, mutual funds, demat account and PAN.

Related:
What should NRIs do if your PAN has become inoperative?

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This post titled Who is an NRI and who is not? Understanding FEMA and NRE/NRO bank accounts first appeared on 20 Sep 2023 at https://arthgyaan.com


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