Residents and Nonresidents from FEMA perspective
The word resident has different meanings in different contexts. As per the dictionary, it means a person who lives somewhere permanently or on a long-term basis. As per The Aadhaar Act, 2016, resident means an individual who has resided in India for a period or periods amounting in all to 182 days or more in the 12 months immediately preceding the date of application for obtaining the Aadhaar number. As per common sense, others are not residents or nonresidents. But as per income tax law, the status of a person can be resident, nonresident or not ordinarily resident [in India]. As per section 6 of the Income-tax Act, an individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:
a) If he is in India for a period of 182 days or more during the previous year; or
b) 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, there are overriding conditions like not liable to tax in any country or jurisdiction, a floor-level of income, in cases of crew members and visits to India. An individual is a non-resident if he is not a resident.
The determination of the status of a person as resident or nonresident from a foreign exchange angle is important to decide eligibility to open certain types of bank accounts some of which will yield tax-free interest, eligibility to acquire certain classes of assets, application of taxation on global income etc. FEMA 1999 and the rules thereunder guide us in this and here we examine them in detail. FEMA tried to harmonize the definition of a resident with that in the IT Act by bringing in the concept of 182 days stay in the previous financial year. However, the attempt was clumsy because the requirement under the IT Act is ‘182 days or more’ whereas FEMA refers to ‘more than 182 days’. Moreover, the deciding criteria are different under the two Acts.
A person resident in India is defined in section 2(v) of FEMA. A resident is a person residing in India for more than 182 days during the course of the preceding financial year but this simple requirement has a number of exceptions viz.: A person who has gone out of India for employment, or business or vocation outside India, or for any other purpose indicating an intention to stay outside India for an uncertain period is not a resident, even if the person meets the 182 days condition. One who is employed in India or one has a business or vocation in India or is in India for any other purpose indicating an intention to stay in India for an uncertain period is a resident, irrespective of the number of days stayed abroad during the previous financial year. RBI decided in December 2003 to treat the Indian students studying abroad also as non-residents from the FEMA angle. Thus, we can broadly understand that from foreign exchange angle, irrespective of the number of days of stay in India in the previous financial year, anyone
- who is employed in India or has a business or vocation in India or is in India for any other purpose indicating an intention to stay in India for an uncertain period is a resident and
- who has gone out of India for employment, or business or vocation or studies outside India, or for any other purpose indicating an intention to stay outside India for an uncertain period is a nonresident.
Here business outside India does not mean travelling around abroad for developing the Indian business but actually having a business outside India.
For non-individuals, FEMA classifies the following as resident entities viz.:
- any person or body corporate registered or incorporated in India
- an office, branch or agency in India owned or controlled by a person resident outside India
- an office, branch or agency outside India owned or controlled by a person resident in India.
Thus, the Citibank Mumbai branch is a resident entity. SBI London branch is also a resident entity, though it is literally not resident in India. An American citizen working in Citibank Mumbai is a resident. An Indian banker working in SBI London is a nonresident Indian, though working in an entity that is classified as resident entity.
While these definitions and criteria are now well established and familiar to all, bankers, auditors and other finance professionals dealing with these accounts and transactions of these persons should be able to distinguish between resident status and nationality of a person and be able to ensure regulatory compliance even in special situations, a few examples of which are described here.
- There are a number of Indians settled in India who receive monthly inward remittance of pension from their overseas ex-employers. They are residents and accounts attract applicable TDS.
- A number of Indians who had opted for French citizenship have now settled in their native Puducherry [earlier called Pondicherry] and they receive monthly dole from the French Government. With their French passport and monthly inward remittance, they open nonresident accounts posing as PIOs and enjoy tax-free status on their interest income. But as residents, they are not eligible for such benefit of nonresident accounts and tax benefit. One giveaway in this case is the frequent cash withdrawal personally if any.
- Though difficult to visualize, a person may be employed both in India and abroad simultaneously e.g. A number of persons have shops and small business establishments both in the Southern part of our country and neighbouring Sri Lanka or Malaysia. They engage their trustworthy relatives as managers at both the shops, for accounting purpose, who travel between the two places frequently to oversee. FEMA defines a person working in India as a resident and hence such persons are residents from foreign exchange angles.
- To avoid higher TDS rates applicable to interest earned on domestic deposits, many NRIs do not declare their nonresident status to banks. They operate their nonresident account in a bank other than where their domestic deposits are maintained. The responsibility in such cases is that of the NRI and the banker or auditor cannot detect such instances. It may be better for the consultant to guide the person to repatriate the domestic funds abroad under the USD one million window and, if desired, bring it back as nonresident deposits so that it will start earning tax-free interest.
- Under The Foreign Contribution (Regulation) Act, 2010 [definition of resident in this Act is the same as that in FEMA], the contribution made by NRIs from his/her personal savings, through the normal banking channels, is not treated as a foreign contribution. If these conditions are adhered to, banks and auditors need not do anything further, even for large amounts, but they should ensure that while accepting any such donations from such NRI, his or her [Indian] passport details have been obtained and kept on record. Donations from PIOs or OCI cardholders do not enjoy this benefit.
A bank or a person cannot approach RBI seeking a resident or nonresident status certificate in any individual case. RBI has clarified that the onus is on the individual to prove his/ her residential status. Hence, finance professionals should be familiar with these guidelines to ensure compliance.
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