NRI- Residential Status along with the Scope of Income

1. Residential Status of NRI & Scope
NRI - Residential Status
along with the Scope of
Income

2. Residential Status of NRI & Scope
Introduction
Residential Status of an individual plays an important role in determining
the liability of an individual. Not understanding the laws relating to the
residential status can create a high exposure to the tax liability.
The income chargeable to tax in the hands of an individual is dependent
upon the residential status. This article will give clarity on the provisions
with respect to Residential Status of a Non-Resident from the perspective
of Income Tax Act, 1999 (IT Act) and the Foreign Exchange Management
Act, 1999 (FEMA). The Chargeability of Income in the hands of Non-
Resident Indian is also explained briefly in the article.
Residential Status
A.Residential Status –Income Tax Act
For the purpose of Income-tax Act, 1961, an individual may have any one
of the following residential status:
(1) Resident and ordinarily resident in India
(2) Resident but not ordinarily resident in India
(3) Non-resident
The residential status needs to be determined every year and, hence, it
may so happen that in one year the individual would be a resident and
ordinarily resident and in the next year he may become non-resident or
resident but not ordinarily resident and again in the next year his status
may change or may remain same.
Step 1: To determine the residential status of an individual, the first step
is to ascertain whether he is resident or non-resident. If he turns to be a
resident, then the next step is to ascertain whether he is resident and
ordinarily resident or is a resident but not ordinarily resident.
Under the Income-tax Law, an individual will be treated as a resident in
India for a year if he satisfies any of the following conditions (i.e. may
satisfy any one or may satisfy both the conditions):
1) He is in India for a period of 182 days or more in that year; or
2) He is in India for a period of 60 days or more in the yearand fora period
of 365 days or more in immediately preceding 4 years.
If an individual does not satisfy any of the above conditions, then he will
be treated as non-resident in India.
Note: Condition given in (2) above will not apply to an Indian citizen
leaving India for the purpose of employment or to an Indian

3. Residential Status of NRI & Scope
citizen leaving India as a member of crew of Indian ship or to an Indian
citizen/person of Indian origin coming on a visit to India. A person is said
to be of Indian origin, ifhe orany of his parents or grand-parents (maternal
or paternal) were born in undivided India. In other words, these persons
will be resident in India only if they are in India for a period of 182 days or
more during the relevant year.
Step 2: A resident individual will be treated as resident and ordinarily
resident in India during the year if he satisfies both the following
conditions:
1) He is resident in India for at least 2 years out of 10 years immediately
preceding the relevant year.
2) His stay in India is for 730 days or more during 7 years immediately
preceding the relevant year.
A resident individual who does not satisfy any of the aforesaid conditions
or satisfies only one of the aforesaid conditions will be treated as resident
but not ordinarily resident.
In short, following test will determine the residential status of an
individual:
1. If the individual satisfies any one or both the conditions specified in
point 1 and satisfies both the conditions specified in point 2, then he will
become resident and ordinarily resident in India.
2. If the individual satisfies any one or both the conditions specified in
point 1 and satisfies none or one condition specified in point 2, then he
will become resident but not ordinarily resident in India.
3. If the individual satisfies none of the conditions specified at point 1,
then he will become non-resident.
Therefore, to sum up, the residential status from the perspective of IT Act
can be in the ways as depicted below:
Residential Status
Resident - Refer
Step 1
Ordinary
Resident - Refer
Step 2
Not Ordinary
Resident - Refer
Step 2
Not Resident -
Refer Step 1

4. Residential Status of NRI & Scope
B. Residential Status – Foreign Exchange Management Act, 1999
Residential Status as per FEMA, 1999
Section 2(v) of FEMA, 1999, defines the term "person resident in India" as:
(i) a person residing in India for more than 182 days during the course of
the preceding financial yearbut does not include-
(A) a person who has gone out of India or who stays outside India,
in either case-
(a) for or on taking up employment outside India, or
(b) for carrying on outside India a business or vocation
outside India, or
(c) for any other purpose, in such circumstances as would
indicate his intention to stayoutside India foran uncertain
period;
(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;
Determination of Residential status is most critical in FEMA, 1999. As the
applicability of provisions of the Act is dependant completely on the
residential status. As under Income Tax Act, 1961, the residential status
under FEMA also is dependant on the period of stay of individual in India.
The residential status of individuals is determined on the basis of the
period of their stay in India. A person residing in India for more than 182
days during the course of the preceding financial year shall be construed
as resident under FEMA; however, there are exceptions to this definition,
that is, if he is leaving India for or on taking up employment outside India,
for carrying on outside India a business or vocation outside India, or for
any other purpose, in such circumstances if it would indicate his intention
to stay outside India for an uncertain period, in that case he will be
regarded as the non-resident from the date of his leaving even if he has
stayed in India for more than 182 days in the preceding financial year.
Similarly, in case of person who has come to India or stays in India for or
on taking up employment in India, or for carrying on in India a business or
vocation in India, or for any other purpose, in such circumstances as would
indicate his intention to stay in India for an uncertain period, in that case
he becomes the resident in India from the day one.

5. Residential Status of NRI & Scope
Scope of Income to be taxed in
India
The Income Tax shall be chargeable in the hands of an NRI on the basis of
his residential status. The same is presented below:
The following chart highlights the tax incidence in case of different
persons:
Nature of income ROR
(*)
RNOR (*) NR (*)
Income which accrues or arises in
India
Taxed Taxed Taxed
Income which is deemed to accrue
or arise in India
Taxed Taxed Taxed
Income which is received in India Taxed Taxed Taxed
Income which is deemed to be
received in India
Taxed Taxed Taxed
Income accruing outside India from
a business controlled from India or
from a profession set up in India
Taxed Taxed Not taxed
Income other than above (i.e.
income which has no relation with
India)
Taxed Not taxed Not taxed
Therefore, it is very clear that in case of a Non-resident Indian, the utmost
step is determining the residential status in order to compute his income
and to understand the applicability of provisions of FEMA.

6. Residential Status of NRI & Scope
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About CA. Sudha G. Bhushan
Sudha is qualified Chartered Accountant and a
Company Secretary with more than a decade of
experience in the Foreign Exchange
Management Act, RBI, Transfer pricing and
International taxation matters. She is a noted
speaker and author.
Her articles are regularly published in the
Journals of several institutes and at various other forums and has
authored the following books:
Practical aspects of FDI in India published by Institute of Company
secretaries of India
Due Diligence under Foreign Exchange Management Act, 1999
published by CCH.
Comprehensive Guide to Foreign Exchange Management in two
volumes published by CCH.
PracticalGuide to Foreign ExchangeManagement published by CCH,
a Wolter Kluwer’s company.
Handbook on FEMA, Publication of Institute of Chartered
Accountants of India
A scholar throughout her life she has been awarded many awards
and recognitions including “Women Empowerment through CA
Profession” by Northern India Regional Council (NIRC) of Institute of
Chartered Accountants of India (ICAI). Backed by experience in
International firms she has extensive experience of handling
international transactions. She advises corporate as well as
government authorities in lot of intricate transactions. Rendering
tax and regulatory advisory services, she has overseen and played a
crucial role in the execution of complex international transactions
involving issues revolving around tax, repatriation, minimization of
tax exposure, Foreign Investment (Inbound and outbound) etc.