Many of us are under the impression that once we move out of India, we become a Non-Resident Indian (NRI) and the moment we are back to our home country, we would automatically be treated as Residents of India. But that’s not the case.
NRI has a particular definition and only based on a specific calculation, it could be determined whether we are NRIs or not. The calculation per se depends on the number of days of stay in India. Number of days of stay in India by an individual and his/her residential status are intertwined. The definition of an NRI under Income Tax Act and under the Foreign Exchange Management Act (FEMA) are not the one and the same and it is crucial to understand both the definitions. However, treatment of NRIs under the FEMA guidelines are out of the purview of this article and let’s save this for some other time. The focus of this article is to know more about an NRI under the Income Tax Act, 1961. To find out your tax liability, calculation of your residential status in India is crucial.
Whether you are planning to return to India permanently or want to continue working abroad but invest in India, understanding your tax status is the first and foremost part of financial planning.
Types of statuses
In India, under the Income Tax Act, 1961, the tax liability of the assessee is directly determined by his/her residential status. There are three types of statuses in India:
1. Resident and Ordinarily Resident (ROR)
2. Resident but Not Ordinarily Resident (RNOR)
3. Non-Resident Indian (NRI)
Whether you are an NRI or a Resident Indian?
A Resident Indian is a person who should be in India for a period mentioned in either Rule 1 (OR) Rule 2 and not necessary to qualify both.
Rule 1 – Should be in India for a period of 182 days in the financial year (for which we are checking status)
(OR)
Rule 2 – Should be in India for a period of 365 days out of preceding four financial years and 60 days in the previous financial year
If an individual satisfies either one of the two Rules, then he/she is a Resident Indian. If an individual does not qualify both the above conditions, he will be called as an NRI.
However, there is an exception to these two Rules. If you are an Indian citizen or Person of Indian Origin (PIO) visiting India temporarily (not shifting back to settle in India), the Rule 2 does not apply. In this case, you must stay 182 days or more to be a Resident Indian. That is, even if you satisfy Rule 2, you are treated only as an NRI. Further, if you are an Indian citizen or PIO leaving for employment abroad, you must have stayed at least 182 days in India in the financial year concerned, to qualify as a Resident.
ROR or RNOR
Now that you know to find out whether you are a Resident Indian or an NRI. If you are a Resident Indian, the next step is to find out whether you are a Resident and Ordinarily Resident (ROR) or a Resident but Not Ordinarily Resident (RNOR). These are the two types of Resident Indians. Finding out the type, whether ROR or RNOR, is important to analyse whether your foreign income is taxable in India (only for ROR) or whether you get tax benefits as a returning NRI (RNOR), that is partial exemption. To find out the status, again there are two Rules.
Rule 3 – You were a Resident of India in at least 2 out of the last 10 years
Rule 4 – You stayed in India for 730 days or more in the last 7 years
If you qualify both, that is if both are true or if you say YES for both the Rules, then you are an ROR. If the answer is false or NO for any one of Rule 3 or Rule 4, then you are an RNOR.
Scenario 1
Gayathri, a software techie, left India on September 1, 2023, and went to the U.S. on deputation for employment purposes. Further, Gayathri was in India for more than 365 days in the last four preceding years. So, what is her residential status according to the Income Tax Act, 1961?
Let’s analyse Gayathri’s case and apply the Rules one by one.
Rule 1 – Should be in India for a period of 182 days in the financial year (for which we are checking status) (NO for Gayathri)
For FY 2023-24, Gayathri stayed in India from April 1, 2023, to August 31, 2023. So, she was there in India only for 153 days only and not 182 days. So, as per the first condition of the residential status, she does not qualify to be a Resident Indian. So, based on the first condition, she is an NRI.
Rule 2 – Should be in India for a period of 365 days out of preceding four financial years and 60 days in the previous financial year (NO for Gayathri, as she left for employment)
Gayathri stayed in India for more than 60 days in the previous financial year (she stayed for 153 days). Further, she was in India for more than 365 days in the last four preceding years. So, to be a Resident Indian, you must either qualify Rule 1 or Rule 2 and Gayathri qualifies Rule 2. So, you can say that she is a Resident Indian. But wait, there is more to the story. If you are leaving India for employment purposes, then the 60 days condition in Rule 2 will be replaced by 182 days.
For employment purposes, the modified Rule 2 will be - Should be in India for a period of 365 days out of preceding four financial years and 182 days in the previous financial year.
Verdict: As Gayathri went to the U.S. for employment, she should have stayed in India for 182 days in both Rule 1 and Rule 2. However, she stayed only for 153 days in India. So, Gayathri is an NRI.
Scenario 2
Like every year, in the FY 2023-24 also, Priya, a septuagenarian, left India to stay with her son in the U.S. for 110 days. Further, in the same year, she stayed with her daughter, who is in the United Kingdom, for another three months. Let’s analyse whether she is an NRI or not.
Rule 1 - Should be in India for a period of 182 days in the financial year (for which we are checking status) (NO for Priya)
For FY 2023-24, Priya stayed in the U.S. for 110 days and another 90 days in the U.K. so, which means, she was there in India only for 165 days.
Rule 1 – Should be in India for a period of 365 days out of preceding four financial years and 60 days in the previous financial year (YES for Priya)
Every year, Priya stays in India for 165 days and stays abroad, with her son and daughter, for 200 days. She leaves India not for employment purposes. So, for her, only 60 days is applicable in Rule 2. Thus, in the previous financial year, Priya crossed 60 days and stayed for 165 days. Further, in the preceding four financial years also, she crossed 365 days and stayed for 660 days (165*4).
Verdict: Priya qualified Rule 2, therefore, she is a Resident Indian and not an NRI.
For an individual, the first thing is to find out whether he/she is a Resident Indian or an NRI using Rule 1 and Rule 2. If he or she is an NRI, then there is no further classification or categorisation and you can leave it at that. However, if he/she is a Resident Indian, again you have to find out whether he/she is an ROR or RNOR, for which you have to use Rule 3 and Rule 4.
So, rest assured that not everyone leaving India and staying abroad is an NRI. Just because you toured the world for 180 days in a financial year, you are not an NRI. The four Rules are the mantra for identifying your residential status as per Income Tax Act, 1961. FEMA is a different story and I shall cover that too soon.
Cheers! Catch you later with another interesting and informative episode. Until then…