The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status). The definition of a NRI under the Income Tax Act is different from that under FEMA.

Under Section 115C (e) of the Income Tax Act, a NRI is defined as ‘An individual being a citizen of India or a person of India origin (PIO) who is not a resident’. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.

The term NRI is defined under FEMA rules and regulations as ‘A person resident outside India who is either a citizen of India or is a person of Indian origin (PIO).’ However the term PIO is defined differently in different regulations & therefore the term NRI will have different meaning under different regulations i.e. the terms NRI & PIO are contextual. Under the Foreign Exchange Management (Deposit) Regulations, 2000, which deal with banking accounts in India by NRIs, the term PIO is defined as below:

A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if

a) he at any time held an Indian passport or
b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or
c) he is spouse of an Indian citizen or a person referred to in ‘a’ or ‘b’.

This is the most common definition adopted under most regulations. Significantly, Foreign Exchange Management (Acquisition and Transfer of immoveable property in India) Regulations, 2000 exclude clause c) above and further restrict clause b) to paternal relationships i.e. father and grandfather only. In Foreign Exchange Management (Transfer or issue of security by a person resident in India) Regulations, 2000 that govern investments in companies, stock market and other instruments as also Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 the term excludes a citizen of Sri Lanka.

For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,

Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)

The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.

*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.

In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs Returning Indians for more).

In the case of a Non-resident, only the income earned or received in India is taxed in India. Accordingly, income earned outside India by ‘A’ would not be taxable in India.

India has contracted Double Tax Avoidance Agreements (DTAAs) with various countries. Taxability of A’s Indian income would be decided as per the provisions of these DTAAs. Most of these DTAAs contain provisions for lower rates of tax in case of incomes like dividend, royalties, fees for technical services etc. Provisions of some DTAAs provide interesting opportunities for efficient tax planning. For instance, the DTAA with Mauritius. Structuring of likely income in India therefore requires a ‘case to case’ study depending on facts of each case.

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the number of days of stay in India. Under FEMA, residential status is primarily determined based on the intention of the person.

‘A’ would be a non-resident under FEMA as soon as he goes out of India for employment/ business outside India irrespective of the duration of his stay in India. Accordingly, ‘A’ would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).

Apart from various types of investments in India, which ‘A’ can make, there are several other advantages of the NRI status, which are outlined below:

• ‘A’ can freely acquire immoveable properties abroad out of earnings abroad. He can invest anywhere in the world. He can start any business abroad. He can become trustee-beneficiary of a trust set up abroad. He can retain all these even on his return to India and need not even intimate RBI about his foreign assets.
• ‘A’ can set up family trusts abroad for education of his children/ maintenance of his family members. Such trusts can also be Asset Protection Trusts where the assets held by the trust are free from attachment by the creditors.
• ‘A’ can bring 10 kgs. of gold (on payment of duty of Rs. 250 per 10 gms.) & 100 kgs. of silver (on payment of duty of Rs. 500 per kg.) once in six months on his visit to India.
• A’s foreign income is not liable to tax in India.
• ‘A’ can enjoy several tax concessions in India on his assets in India.
• ‘A’ can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of transactions.
• ‘A’ can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimise double tax on the same income (i.e. if tax is payable in India by NRIs on their income in India, credit for tax payable is available against tax payable in foreign country on such income). Also tax on dividends, royalty, fees for technical services earned in India by NRIs are offered concessional tax treatment under most DTAAs. Further, in few cases, tax may not be payable at all on such income if the NRI is a tax resident of a treaty country.
• There are special reserve seats for children of NRIs for Engineering/Medical/MBA courses in certain institutions in India provided the fees are paid in foreign exchange.
• Even in case of Initial Public Offerings (IPO’s), there are special quotas for NRI.

In general, ‘A’ can freely invest in residential/ commercial property (subject to certain restrictions like investment in agricultural land, plantation and farm house). Besides the sale proceeds can be freely repatriated outside India to the extent of the amount originally brought in from abroad. Also sale proceeds of only two residential properties can be repatriated.

Besides, housing loan can be availed in India against the security of the immoveable property. Now loan for any bonafide purpose may be obtained against the security of immoveable property.

See Investment opportunities for more on investment in real estate.

Profit on sale of property acquired out of forex resources as above or even the sale proceeds of property acquired out of Rupee resources can be repatriated in certain cases. To know more about the same, read Investing in real estate in India

'A’ can make investments or operate his business in India in the following ways:

• Branch/ Liaison office with prior permission of RBI (profits of the branch can be freely repatriated).
• Indian company- 100% wholly owned subsidiary/ Joint Venture on repatriation and non-repatriation basis without permission of RBI in most of the sectors. For investments on repatriation basis, the prohibited sectors include retail trading, domestic wholesale trading and print media besides a few others.
• Partnership firm/ Proprietorship concern on non-repatriation basis (income freely repatriable) in any activity except agriculture, plantation and real estate (other than real estate development) without permission of RBI.

It is significant to note here that now even sale proceeds of investments held on non-repatriation basis can be repatriated up to USD 1 million per calendar year. See Investment opportunities for more on investment through Indian companies.

‘A’ can freely invest in the shares (equity and preference) and convertible debentures of listed Indian companies on repatriation (i.e. from NRE account/ remittance from abroad) and non-repatriation basis (i.e. from NRO account/ NRE account/ remittance from abroad) subject to the following conditions:

• One bank branch to be designated by the investor and all transactions to be routed through that branch.
• Transactions to be carried out through a registered broker on a recognised stock exchange. Online trading has made it easy for NRIs to transact on their own from anywhere in the world.
• All transactions must be delivery based i.e. speculative transactions are not allowed.
• Ceiling on investment in one company by one NRI and all NRIs taken together at 5% and 10% respectively
• Investment can be made in almost all sectors except companies engaged in print media, chit fund/ nidhi, agriculture, plantation, real estate (other than real estate development) and trading of Transferable Development Rights (TDRs).

• To close relatives on repatriation basis for their personal/ business purpose (agriculture and few other businesses prohibited) in foreign exchange up to USD 2,50,000 provided the loan is interest free and the minimum maturity period of loan is one year.
• By way of non-convertible debentures denominated in Rupees and issued by public companies in India on repatriation and non-repatriation basis with a minimum maturity of three years. The interest rate cap is Prime-lending rate of SBI plus 300 basis points.
• By way of loan/ deposits in Rupees on non-repatriation basis to residents with a maximum maturity of three years. The interest rate cap is Bank rate plus 200 basis points.

Loan given to another person against the collateral security of shares/ immoveable property of ‘A’ is permitted. ‘A’ can also provide a guarantee in relation to loan to a resident in general provided no direct or indirect outgo from India is involved by way of guarantee commission or otherwise.

A resident other than a bank can provide guarantee in favour of a NRI only with prior RBI permission.

There are no restrictions on repatriation of current income i.e. rent, dividend, interest etc. net of Indian taxes. Only an undertaking by the remitter and CA certificate as to the payment/ deduction of tax is required.

Repatriation of sale proceeds of investments acquired out of forex resources/ NRE funds has been discussed in Investment opportunities.

Now full capital account convertibility is available to NRIs to the extent of USD 1 million per calendar year for any bonafide purpose out of:

• Balances held in NRO account;
• Sale proceeds of assets like shares and securities, deposits, PF, immoveable property* etc. which are otherwise held on non-repatriation basis;
• Sale proceeds of assets acquired by way of inheritance or legacy.

*However in case of immoveable property acquired out of Rupee funds, the sale proceeds can be repatriated only if the 'property/ sale proceeds' were 'held/ retained in NRO account' cumulatively for a minimum period of 10 years.

‘A’ has to produce the requisite documentary evidence in support of the acquisition/ inheritance/ legacy of funds/ assets proposed to be remitted besides the undertaking and CA certificate for tax compliance to avail of this facility.

For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,

Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)

The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.

*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.

In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs Returning Indians for more). In the case of a Non-resident, only the income earned or received in India is taxed in India. In the given case, ‘A ‘would be Non-resident under Income Tax act if he does not stay in India for 182 days or more in the financial year in which he leaves India. For a non-resident, income earned and received outside India is not taxable in India while for a resident even income earned outside India is taxable in India. Accordingly, ‘A’ should try and ensure that he does not stay in India for more than 182 days during the relevant financial year. If his stay in India is likely to exceed 182 days, he could save some tax on his foreign income by planning in advance and availing of a deduction available under Section 80 RRA of the Income Tax Act to certain professionals working abroad. See FAQs Existing NRIs for more on taxation of Indian income as a non-resident.

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the no. of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person.

‘A’ would be a non-resident under FEMA as soon as he goes out of India for taking up employment outside India irrespective of the duration of his stay in India. Accordingly, ‘A’ would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).

Apart from various types of investments in India which ‘A’ can make, there are several other advantages of the NRI status, which are outlined below:

• ‘A’ can freely acquire immoveable properties abroad out of earnings abroad. He can invest anywhere in the world. He can start any business abroad. He can become trustee-beneficiary of a trust set up abroad. He can retain all these even on his return to India and need not even intimate RBI about his foreign assets.
• ‘A’ can set up family trusts abroad for education of his children/ maintenance of his family members. Such trusts can also be Asset Protection Trusts where the assets held by the trust are free from attachment by the creditors.
• ‘A’ can bring 10 kgs. of gold (on payment of duty of Rs. 250 per 10 gms.) & 100 kgs. of silver (on payment of duty of Rs. 500 per kg.) once in six months on his visit to India.
• A’s foreign income is not liable to tax in India.
• ‘A’ can enjoy several tax concessions in India on his assets in India.
• ‘A’ can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of transactions.
• ‘A’ can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimise double tax on the same income (i.e. if tax is payable in India by NRIs on their income in India, credit for tax payable is available against tax payable in foreign country on such income). Also tax on dividends, royalty, fees for technical services earned in India by NRIs are offered concessional tax treatment under most DTAAs. Further, in few cases, tax may not be payable at all on such income if the NRI is a tax resident of a treaty country.
• There are special reserve seats for children of NRIs for Engineering/Medical/MBA courses in certain institutions in India provided the fees are paid in foreign exchange.
• Even in case of Initial Public Offerings (IPO’s), there are special quotas for NRI.

In respect of loans given, no permission is required. However the resident borrower should be intimated, as he is required to repay the loan by making credit to the NRO A/c only. Interest on such loan can be freely repatriated outside India net of Indian taxes.

Loans obtained from Authorised Dealer / Banks can be continued if the dealers / banks are satisfied about their continuance on commercial grounds. However the period of loan or overdraft shall not exceed the period originally fixed at the time of granting the loan or overdraft. The repayment may be either by way of inward remittance or through funds held in NRO, NRE or FCNR account of the borrower. There is no clear guideline as yet as to loans obtained from persons other than authorised dealers /banks. We are of the view that the guidelines as applicable to loans from authorised dealer would apply here as well though to avoid litigation, ‘A” may apply to RBI.

There are no restrictions on repatriation of current income i.e. rent, dividend, interest etc. net of Indian taxes. Only an undertaking by the remitter and CA certificate as to the payment/ deduction of tax is required.
Repatriation of sale proceeds of investments acquired out of forex resources/ NRE funds has been discussed in Investment opportunities.
Now full capital account convertibility is available to NRIs to the extent of USD 1 million per calendar year for any bonafide purpose out of:

• Balances held in NRO account;
• Sale proceeds of assets like shares and securities, deposits, PF, immoveable property* etc. which are otherwise held on non-repatriation basis;
• Sale proceeds of assets acquired by way of inheritance or legacy.

*However in case of immoveable property acquired out of Rupee funds, the sale proceeds can be repatriated only if the 'property/ sale proceeds' were 'held/ retained in NRO account' cumulatively for a minimum period of 10 years.

‘A’ has to produce the requisite documentary evidence in support of the acquisition/ inheritance/ legacy of funds/ assets proposed to be remitted besides the undertaking and CA certificate for tax compliance to avail of this facility.

• Income Tax implications
• Basic concepts under FEMA
• Residential status under FEMA
• Overseas Assets
• Indian Assets
• RFC account
• Transfer of Residence

If you have any other query, do not hesitate to Ask Us.

For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,

Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)

The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.

*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.

In the case of a ROR, his global income is taxed in India while in case of a Non-resident; only the income earned or received in India is taxed in India. See FAQs Existing NRIs for more on taxation of Indian income of a NRI.

A returning NRI would generally be assessed as a R but NOR on his return to India. Up to financial year 2002-03, a returning NRI was assessed as a R but NOR on his return to India for nine years i.e. income earned on overseas assets or income accruing outside India (unless it is derived from a business controlled in or a profession set up in India) was not taxed in India for 9 years. However, with effect from financial year 2003-04, this benefit has been curtailed from nine years to two years i.e. income earned on overseas assets or income accruing outside India (unless it is derived from a business controlled in or a profession set up in India) would now be taxable in India from the third year itself. Accordingly, ‘A’ would now pay tax on his world income sooner than he would have hitherto done.

The impact of R but NOR status is that foreign passive incomes likes interest, dividend, royalty etc. would not be taxable in India in respect of a person who is R but NOR. Even share of profit of a partnership firm or any other business income would not be taxable in India, if the business in respect of which such income arises is not controlled from India. In other words, all foreign sourced income of a R but NOR is not normally taxable in India unless it is derived from a business controlled in or a profession set up in India.

Income accruing outside India would be taxed outside India as well in most cases in accordance with the tax laws of the foreign country and the Double Tax Avoidance Agreement (DTAA) signed between India and the foreign country. He would be entitled to seek relief under the relevant DTAA i.e. avail credit for foreign taxes paid against income tax paid in India. However there are certain practical difficulties associated with the availing credit for foreign taxes paid such as a possible difference in accounting year of the foreign country and India.

Immaculate planning of income tax implications in advance i.e. prior to return to India holds paramount significance for NRIs intending to return to India.

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the number of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person.

‘A’ would become a resident for FEMA with effect from the date of arrival in India.

Foreign currency, foreign security or immoveable property acquired, held or owned by an ‘A’ while he was abroad or inherited from a person who was resident outside India can be continued to be so held and owned even after the A's return to India for permanent settlement.

There is no specific provision on movable assets like jewellery, motorcar and personal household effects. Accordingly ‘A’ may continue to hold/ dispose such movable assets without permission of RBI though to avoid any possibility of litigation; he may inform RBI of the same.

If required, overseas assets can be repatriated to India. Proceeds of assets held outside India at the time of return, can be credited to RFC account. The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.

Reinvestment abroad of sale proceeds of overseas assets is not specifically permitted but the same can be done by means of a RFC account i.e. sale proceeds deposited in RFC account and the same reinvested abroad (in shares or any other asset). Again under FERA, reinvestment was expressly permitted and we are of the view that the beneficial provisions of FERA would continue and permission from RBI would not be required for reinvestment directly i.e. not routed through RFC account.

Under FERA, RBI had granted general permission to returning Indians to maintain and operate foreign currency accounts abroad. FEMA is silent on this issue. Thus, technically a returning NRI would require approval from RBI to maintain bank accounts abroad. However we are of the view that the beneficial provisions of FERA would continue though it is advisable to obtain the approval of RBI in this regard.

Income earned on overseas assets needs to be repatriated to India. Alternatively, it can be credited to RFC account that is free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India.

‘A’ is required to redesignate all his banking accounts as Resident Accounts by informing the banker of change in residential status. FCNR (B)/ NRE Fixed Deposit account may be continued till maturity at the agreed rate of interest till maturity. On maturity, the proceeds of NRE/ FCNR (B) deposits can be converted into RFC account. Interest earned on NRO account till date of return can also be credited to RFC account.

Similarly, one should inform of change in status to companies in which shares/ debentures are held as also to firms in which one is a partner.

A returning NRI can open a Resident Foreign Currency (RFC) account. Funds in this account are free from all restrictions regarding utilisation in India/ abroad including investment (e.g. immoveable property, shares) in any form outside India. The following funds are eligible for being held in RFC account:

• Transfer from NRE/ FCNR account
• Funds realised on conversion of overseas assets
• Income from overseas assets
• Pension and other benefits from employer abroad
• Foreign exchange brought in India at the time of return to India

‘Baggage rules’ notified under the Customs Act lay down the provisions relating to Transfer of Residence (TR). TR rules provide for exemption from/ concession in custom duty to persons returning to India who satisfy all the conditions as below:

• Stay abroad for more than two years (shortfall of upto 2 months condoned in special cases);
• Total stay in India during two preceding years on short visits does not exceed six months (short visits in excess of six months condoned in deserving cases);
• Non-availment of this i.e. TR concession in the preceding three years

TR rules have been liberalised to a great extent now. The following articles (one unit of each for a family) have been exempted from duty

• VCR/ VCD player