I am going abroad on a work assignment for six months. Does that make me a non-resident Indian?
I am going on an 18-month stint abroad. Does that make me an NRI?
These are the two most common questions -- pertaining to the NRI status -- that our readers send us.
We decided to clear their doubts.
How does one become an NRI?
The question is simple. Unfortunately, the answer is not.
The Foreign Exchange Management Act, 1999, and the Income Tax Act, 1961, have different definitions of the non-resident status.
While FEMA deals with the foreign exchange aspects, the IT Act deals with the taxation of your income.
FEMA defines a resident on the basis of the 'purpose of stay abroad'. The IT Act defines a resident on the basis of one's 'actual period of stay' in India.
Understand the lingo
Before we continue, here are some terms you must understand.
A Financial Year runs from April 1 to March 31. Income earned in, say, FY 2005-06 is assessed for tax in FY 2006-07.
FY 2005-06 is called Previous Year and FY 2006-07 is called Assessment Year.
Thus, a FY may be a PY or AY under the IT Act.
The AY always follows the PY.
Thus for PY 2005-06, the AY is 2006-07. This means the income you earn in 2005-06 will be assessed in 2006-07.
NRIs under FEMA
An Indian citizen becomes an NRI if he fulfills the conditions mentioned below.
1. He stays outside India for more than 182 days during the preceding financial year, between April 1 to March 31.
To make that clearer, here is an example:
Amit and his colleague Nita went abroad on work. They both left on May 1, 2004.
Amit returned to India on November 4, 2005. Since he spent more than 182 days abroad during FY 2004-05, FEMA will consider him an NRI during FY 2005-06.
However, Nita had a shorter work stint abroad. She returned to India on September 1, 2004. Since she did not spend the minimum of 182 days abroad, she would not be a NRI.
Amit's sister, Sangeeta, went abroad from January 2004 to July 2005. Though she too spent more than 182 days abroad, she would not be a NRI because her stay was spread over two financial years, 2004-05 and 2005-06. In each FY, she did not spend not more than 182 days abroad.
The stay abroad during a financial year need not be continuous.
Amit's boss, Rajeev, made a number of trips abroad in one year. The first trip was from April to June 2004. The next trips were made from August to November 2004 and from December 2004 to April 2005.
Rajeev would become a NRI during the FY 2005-06, because he stayed abroad for more than 182 days during the FY 2004-05.
2. An Indian citizen leaves India for the purpose of employment, business, education, stay with parents/ children, with the intention of staying abroad for an uncertain period. In such cases, he becomes a NRI the moment he leaves India, even if he has not stayed abroad for 182 days or more during the financial year.
Amit's parents went to visit their third child abroad. The father returned before the completion of 182 days and the mother returned after staying abroad for 182 days during the FY.
Both of them became NRIs the moment they left India. However, they will have to make clear the reason they are going abroad if they are not sure when they plan to return. The authorities will evaluate this on case-to-case basis.
NRIs under the IT Act
Under the IT Act, an individual is assessed for tax on the basis of his residential status. An individual's residential status can be any of the following:
1. Resident; also called as Resident and Ordinarily Resident
2. Resident; also called Resident but Not Ordinarily Resident
3. Non-resident; also called non-resident Indian
What makes you a resident?
If you stay in India for at least 182 days during a PY, you are a resident.
If you stay in India for at least 60 days in India during the current FY and have stayed in India for at least a total of 365 days during the four previous FYs, then you are a resident.
Let's say Sunita spent 182 days in India during FY 2005-06. This is sufficient to declare her a resident.
Ravi stayed in India for only for 60 days in 2005-06 and spent the rest of his time abroad. This does not mean he is not a resident. Since he spent at least 365 days during the previous four FYs -- April 1, 2001 to March 31, 2005 -- in India, he is still considered a resident.
However, the criteria of 60 days are extended to the first criteria of 182 days for any one of the following instances:
1. If you reside abroad for the purpose of employment.
2. If you reside abroad as the member of the crew of an Indian ship.
3. If you are an Indian citizen or a person of Indian origin who comes to India on a visit.
What makes you a ROR?
You are referred to as a ROR if both the following conditions are satisfied.
You are a resident for at least two out of the 10 PYs preceding the relevant PY.
If you have been in India for a period of 730 days or more during the seven years immediately preceding the relevant PY.
Let's say we want to determine Sanjay's status for the FY 2005-06.
We discover he was a resident for at least two PYs from 1995-96 to 2004-05. Moreover, he stayed in India for at least 730 days during the period April 1, 1998 to March 31, 2005. Hence, he is referred to as a ROR.
What makes you an RNOR or NRI?
If you are a resident, what needs to be determined is whether you are a ROR or a RNOR.
However, if you are not a resident, then you are an NRI.
Let's say we want to determine Arun's status for the FY 2005-06.
If he stayed in India for 182 days or more, he is a resident.
Let's say he stayed for less than 182 days but more than 60 days and also for more than 365 days during the FYs from 2001-02 to 2004-05. Under these circumstance, too, he is a resident.
If does not satisfy these two conditions, then he becomes a NRI.
If he is a resident for the PY 2005-06, we need to ascertain whether he was a resident in any two of the PYs 1995-96 to 2004-05.
If no, he is a RNOR.
If yes, we need to find out whether he stayed in India for 730 days or more during the PYs from 1998-99 to 2004-05. If no, he is RNOR. If yes, he is a ROR.
How does my residential status affect my tax liability?
If you are a ROR, your entire income from all your sources in the world becomes taxable.
If you are a RNOR, your income from India will become taxable and your income earned abroad will also be taxable, if such income is earned out of profession or business controlled from India.
If you are an NRI, only your income from India will be taxed. You don't have to pay taxes on income earned abroad, even if you remit this income to India.
You can plan your residential status. For instance, it is also possible to plan your status as RNOR for eight continuous years by ensuring that you are a NRI for two consecutive years