Residential status can be different under Income Tax, FEMA laws

An Indian citizen can be considered a non-resident under both Income Tax (I-T) Laws as well as under Foreign Exchange laws or FEMA. But the connotation is different as the purpose of both the laws is different.

The definition under I-T laws is important for determining how much tax you pay on your assets/ investments, while the residential status under FEMA is important to determine as to what type of investments you can make in India or how you can remit money outside India. Residential status under I-T law affects past transaction, while FEMA affect future transactions. Let us understand this in detail.

Definition of non-resident under tax laws

Tax laws only consider physical presence. Your residential status can normally be determined after the end of financial year based on your aggregate stay in India. You would be an Indian resident for the financial year 2017-2018 if either you were present in India for 182 days or more between April 1, 2017 and March 31, 2018, or if you were in India for 60 days or more during the previous year ended March 31, 2018 and were also present in India for 365 days or more during the four years, that is, April 1, 2013 to March 31, 2017.

There is relaxation in respect of the second condition of stay requirement. It is 182 days instead of 60 days for Indian citizen who leaves India during the previous year either as crew member of an Indian ship or for taking up employment outside, or an Indian citizen or a person of Indian origin who comes to India for visit. So in case you do not satisfy any of these two basic conditions, you straightway become a non-resident.

There is one more category of “Resident but not ordinary resident” (RNOR) under tax laws. Once you satisfy any of the above two basic conditions, you would still qualify as a RNOR if you were a non-resident for nine out of 10 ten years period ended on March 31, 2017 or were not in India for more than 729 days during seven years ending on March 31, 2017.

Implications of becoming a non-resident

For a resident, global income becomes taxable in India even if such foreign income might have been taxed in other country. This is, however, subject to availability of tax credit for taxes paid on such income and double tax avoidance agreement benefits.

In contrast, for a non-resident only the income which is received first in India or accrues from assets held in India or for services rendered in India become taxable here. So your salary will become taxable in India if it is directly credited in India, while you are working abroad, even if you are a non-resident. Moreover there are certain tax benefits which are available to a resident but not to a non-resident.

Non-resident under FEMA

Unlike under the tax law where stay in India is considered, the foreign exchange regulations go by intention of an individual in addition to your physical stay in India. Though under FEMA a person becomes a non-resident if he has been in India for less than 182 days during the year, he still becomes a non-resident immediately on leaving India under certain circumstances. So you become a non-resident as soon as you leave India to take up employment outside India or to start any business or profession outside India or leave the country with an intention to stay outside for an indefinite period.

In the circumstances given above you will become a non-resident as soon as your flight takes off or your ship sails on water irrespective of your stay in India and that too, without having to wait for the year to end. However if you leave India for medical treatment or on a business trip or on holidays, you would still not become a non-resident under FEMA as the intention to stay outside India is for a definite period and is not for an indefinite period, though you may become a non-resident under tax laws due to physical stay outside India.

Likewise, one will become a resident under FEMA if he comes to India for taking up an employment or for carrying on any business or profession or comes back to India to spend retirement years here in India. He will become resident under FEMA immediately on arrival in India under these circumstances.

Unlike tax laws where residential status is determined at the end of the year based on the physical stay in India, the status under FEMA changes instantly when a person either leaves the country with an intention to stay out of India for uncertain period of time or comes to India with an intention to stay here for indefinite period of time.

So you would become a non-resident immediately if you leave India today, to spend your retired life with your children, but you would still be a resident if you leave the country to take care of your daughter-in-law during her pregnancy in US. So you will be a resident under I-T laws for the year ended March 31, 2019 under both the above circumstances as your stay in India would in be more than 182 days for the financial year ended on 31st March 2019. Please note that residential status under FEMA as well as under tax law has nothing to do with your citizenship. You can be non-resident under FEMA and tax laws even if you are a citizen of India and vice versa.