Who is an NRI?
In simple terms, a Non-Resident Indian (NRI) is someone who lives in another country but is still legally considered an Indian citizen. NRIs are often called Overseas Indians because they live abroad. The Foreign Exchange Management Act 1999 (FEMA) and the Indian Tax Act have specific rules about who qualifies as an NRI for legal and tax purposes.
To elaborate, FEMA categorizes an individual as an NRI if they have gone out of India or are currently situated outside the country for reasons including employment, business engagements, vocational pursuits, or any other circumstance indicative of an extended stay abroad. This designation bears implications on their financial and tax liabilities within India, affecting their eligibility to open NRE, NRO, and FCNR accounts, as well as the taxation of domestic income.
The definition of an NRI under FEMA diverges from that defined in the Income Tax Act, which sets its bars based on the duration of an individual's physical presence in India during a fiscal year. This contrast underscores the necessity to distinguish between one's NRI status under FEMA and their residential classification as per the Income Tax Act, as it leads to disparate implications for investment and taxation.
Coming to the definition under the Income Tax Act of India, the status of a Non-Resident Indian (NRI) is defined by their physical residency within India during a financial year (April 1st to March 31st), along with the preceding years. Let’s discuss it further how it is gauged.
What is 182 Days Tax Rule in India?
The residential status of an NRI in India is determined on the basis of the amount of time spent by him/her in the country during the current FY and the previous 10 FYs. The residential status is determined every year. Given below are the rules and conditions that one needs to fulfill to be able to qualify as a Non-resident Indian -
- If an individual stays in India for 182 days or more during the current financial year. If the individuals are present in India for 60 days or more during the relevant FY and 365 days or more in the previous 4 years, they will be considered residents.
- There's a rule called deemed residency that affects individuals who are citizens of India earning over ₹15 lakh annually from sources within the country, excluding foreign income. If such a person isn't taxed in any other country because of their home or residency status, they'll be considered a tax resident.
- The 60-day requirement mentioned earlier is prolonged to 182 days when an Indian citizen travels abroad for work. Additionally, for an individual who is an Indian citizen or of Indian origin (PIO) residing outside India and visiting, if their total income, excluding foreign earnings, surpasses ₹15 lakh, the 60-day requirement extends to 120 days. However, if their income is up to ₹15 lakh, the 60-day condition extends to 182 days.
- The deemed residency rule and the 120-day rule were recently introduced later and have been in effect since FY 2020-21.
Benefits Provided to NRIs in India
- NRI Quota - Premier educational institutions keep a fixed NRI quota for NRIs, OCIs, and PIOs. There are NRI quota seats for different branches of engineering, law, management, and medicine.
- Government Reservations - The Indian government has seats reserved for NRIs in every important polity.
- Real Estate - NRIs can purchase their own property in India while complying with the guidelines of FEMA.
- Right to vote - NRIs have the right to vote in local, state, and national elections.
- Tax Benefits - NRIs are also allowed to claim deductions similar to the residents. This includes life insurance premiums, ULIP, tuition fees for kids, and investment in ELSS upto a limit of 1.5 lakh, and deductions under sections 80D, 80G, 80TTA, 54EC, and 54.
Why is it Important to Determine Residential Status?
An individual classified as a Non-Resident (NR) is subject to taxation on income earned in India. This includes income earned in India, those deemed to arise in India, and income received or deemed received in India. Different rules apply to the taxation of various income types for NRs, such as dividend income and the sale of unlisted securities.
Understanding one's residential status is extremely important for complying with the tax regulations in India. Residents are liable to pay taxes on their worldwide income, including earnings outside India, whereas NRs are taxed solely on income generated within India. Therefore, accurately determining residential status is crucial to avoid discrepancies and tax liabilities.
It's important to note that tax treaties between India and other countries may supersede provisions in the Income-tax law concerning residential status and income taxation. These treaties can provide relief to individuals facing potential double taxation. Thus, consulting tax professionals to grasp the implications of tax treaties and one's residential status is advisable.
Furthermore, the Income-tax law outlines provisions for determining the residential status of companies and firms. A company's residency hinges on its place of incorporation and where its management and control are exercised. For firms, residency aligns with the residential status of its partners.
An individual's residential status is determined by their physical presence in India during a financial year and the preceding ten fiscal years. Criteria for residency vary based on whether the individual is an Indian citizen or of Indian origin. Non Resident Indians are taxed on India-sourced income, with distinct rules for different income types. Understanding these criteria and rules is crucial for compliance with the Income-tax law in India.
How to Calculate 182 Days for NRI?
To calculate how many days you've been in India, you must count all the days you physically stayed in the country during the relevant financial year, including both your arrival and departure days.
For instance, if you arrived in India on July 1, 2023, and departed on December 31, 2023, you would have been in India for 184 days (from July 1 to December 31, inclusive). Therefore, you will be classified as a Resident Indian for tax purposes.
It's important to understand that determining NRI status can be a little complicated and depends on various factors. Do you also find determining your residential status intimidating for filing the Income Tax Returns? If yes, you can take help from a tax professional to make the process smoother.
ITR filing for FY 23-24 is ongoing. If you have not filed your ITR yet, make sure you do it ASAP to avoid missing out on the deadline. If you find taxes intimidating, get help from Tax2win’s experts, who can help you maximize your refund and ensure a smooth ITR filing journey. File ITR with Experts now!
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