Applicability of provisions of FEMA are based on the residential status of a person, i.e., a person resident of India has more liberty under FEMA as compared to a NRI as per FEMA or person resident outside India. Therefore, to check the extent of applicability of FEMA provisions, it is important to first check the residential status as per FEMA for a person.
FEMA contains separate and distinct provisions to determine residential status as compared to Income Act, 1961. Therefore, a person may qualify as resident under FEMA and he may not qualify as resident under Income Tax Act, 1961.
FEMA has divided persons in following 2 parts:
- Person resident in India
- Person resident outside India, who is citizen of India is an NRI
Income tax divided residential status in following 3 parts
- Resident and ordinarily resident
- Resident and Not ordinarily resident
- Non-Resident Indian (NRI)
1. Person resident in India as per FEMA means
Different criterias are given to determine residential status of different persons such as Individual, Company, Hindu Undivided Family (“HUF”) etc.
1.1 Residential status of Individual as per FEMA
- As per Section 2(v) of FEMA, 1999, any individual shall be considered as resident under FEMA if he resides in India for more than 182 days during the course of the preceding Financial year.
- Cases where person stay in India more than 182 days during previous year, still shall not be considered resident in India as per FEMA.
- Where a person has gone outside India or stay outside India for the aim of employment outside India, or carrying out any business or vocation outside India, or where his intention to remain outside India for an uncertain period is indicated. He will not be treated as resident in India as per FEMA even if he stay in India for more than 182 days during the previous year.
- Where a person has come to India or stays in India for purpose other than for the aim of employment in India, or for the purpose other than the purpose of carrying out any business or vocation in India, or and for the purpose other than his intention to remain in India for an uncertain period is indicated. He will not be treated as resident in India as per FEMA even if he stay in India for more than 182 days during the previous year.
Therefore, it is clear that FEMA considers the purpose of staying in India or outside India as a major factor to determine the residential status of individuals under FEMA instead of the number of days of stay.
|Country to which person belongs||Stay in India during preceding financial year||Purpose of living in or outside India||Residential status under FEMA|
|A person of Indian Origin||250 days||Left India last year for the purpose of vacations for 200 days.||Person Resident in India- As person has stayed for more than 182 days during preceding year; and he has no intention of staying outside India for uncertain period.|
|Person of India Origin||365 Days||Left India during current year for the purpose of employment||Person resident outside India:Despite his stay for a complete year during preceding FY. He has left India for the purpose of employment. Therefore, from the date of his departure from India, he shall be considered as “Person resident outside India.”|
|Person of India Origin||30 days||Staying in India as on date.||Person resident outside India:As very first condition of staying in India for more than 182 during preceding year is not satisfied|
|Person from any other Country||200 Days||Staying in India for the purpose of tourism for 365 days||Person Resident outside India:First condition of stay in India for more than 182 days during the preceding year is satisfied.However, he has come to India neither for the purpose of employment nor business and he also has no intention of staying in India for an uncertain period.|
|Person from any other Country||200 Days||Staying in India for the purpose of employment||Person Resident in India as both the conditions are satisfied.|
|Person from any other Country||NIL||Came to India during current year for the purpose of employment||Person Resident outside India as first condition of staying in India for more than 182 days during the preceding year is not satisfied.|
|Person from any other Country||NIL||Came to India during current year for the purpose of tourism for 15 days.||Person Resident outside India as both the conditions are not satisfied.|
1.2. Residential status of Body Corporate as per FEMA
Any person or body corporate which is registered or incorporated in India shall be considered as “Person Resident in India”. E.g. A foreign company opens a subsidiary company in India which is duly incorporated as per Companies Act, 2013. Therefore, such subsidiary company shall be considered as “Person resident in India”.
1.3 Residential status of Office, Branch or Agency
- An office, branch or agency in India which is owned or controlled by a person resident outside India. E.g. various foreign company setups a project office in India for the specific purpose and limited period. Such project office shall be considered as “Person Resident in India”
- An office, branch or agency outside India owned or controlled by a person resident in India. Therefore, if an Indian company opens any branch outside India then such branch shall be considered as “Person resident in India”.
However, if an Indian Company setups a Subsidiary Company outside India then it shall not be considered as “Person Resident in India” as the same is Body Corporate and not the office, branch or agency.
1.4 Person Resident outside India or NRI as per FEMA
The full form of NRI is Non Resident Indian. Any person who is not resident in India shall be considered as person resident outside India. Therefore, if any person fails to satisfy either of the above mentioned condition then he shall be considered as “Person Resident Outside India”.
2. Difference between residential status under FEMA and Income Tax Act.
Residential status as per FEMA helps in determining what all investment such person can make in India or outside India. FEMA permits resident person to make various investments in India. If a person is Non-resident as per FEMA then he is permitted to open Non-resident External (NRE) Account and Non-resident Ordinary (NRO) Account.
Residential status under Income Tax Act determines taxability of Income under Income Tax Act. If a person is resident in India then his entire income, whether earned or accrued in India or outside India, is taxable in India. Whereas, a non-resident is liable to pay tax on income earned or accrued in India only.
3. Citizenship and Person of Indian Origin
Person resident outside India i.e. NRI can either be a citizen of India or is a Person of Indian Origin (PIO). Therefore, citizenship status or PIO Card shall not impact the residential status under FEMA.
Citizenship is granted to an individual by the government of the country, when the person complies with the legal formalities.
The constitution of India deals with the citizenship under the Citizenship Act, 1995. There are prescribes 5 way of acquiring citizenship i.e.
- Incorporation of the territory
Therefore, even if a person is a citizen of India and he is staying outside India for the purpose of employment then he shall be considered as “Person Resident Outside India”.
3.2 Person of Indian Origin (PIO)
PIO means a foreign citizen (except from Pakistan, Afghanistan, Bangladesh, China, Iran, Butan, Srilanka and Nepal), who satisfies either of the following conditions:
- Such person held Indian passport at any time; or
- Either of their parents/ grand parents/ great grand parents was born and permanently resident in India provided neither was at any time a citizen of any of the aforesaid countries ( as referred above) or
- Who is a spouse of a citizen of India or person of Indian Origin
4. Importance of checking residential status under FEMA
Under Income Tax Act, 1961, residential status of a person helps in determining the ambit of taxable incomes in India. E.g. All incomes of residents are taxable in India whether such incomes are earned in India or outside India.
Now the question arises what is the relevance of checking residential status under FEMA. As per provisions of FEMA, Person resident in India has more liberty to carry out transactions in India. Whereas person resident outside India is prohibited to carry out various transactions or requires prior approval for various transactions such as:
- Section 3 of FEMA provides that all dealing in foreign exchange is subject to general or specific permission of the Reserve Bank of India. However, there are certain transactions which are restricted only for person resident outside India. Such as, no payment is allowed to credit of any person who is resident outside India without general or specific permission of the Reserve Bank of India. However, no restriction is given for a person resident in India.
- Following capital accounts transactions are prohibited or regulated for person resident outside India such as
- Transfer or Issuance of security by a person resident outside India;
- Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India;
- any borrowing or lending in rupees between a person resident in India and a person resident outside India;
- Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India;
- Giving a guarantee or surety in respect of any debt, obligation or other liability
Person who is non-resident under FEMA is permitted to open Non-resident (External) Rupee Account (NRE), Foreign Currency (Non-Resident) Account (FCNR) and Non-resident (Ordinary) Account (NRO).
NRE Account– In NRE Account, inward remittance is permitted only from outside India or from another NRE Account. Therefore, NRE Account is used to transfer foreign income to India. Investments permitted to Non-residents can be made through NRE Account only. All income earned on such investment and maturity proceeds shall get deposited in NRE Account. Amount in this account can be deposited in Foreign currency only.
NRO Account- A person who is resident outside India is permitted to open a Non-resident Ordinary Account. NRO Account is used to manage income earned in India. Permitted deposits to this account are on account of remittance from outside India, income earned in India (such as rent, dividend etc.) and transfer from another NRO Account. Permitted withdrawal from NRO Account are for the purpose of local payments, transfer to another NRO Account and remittance of amount aboard.
Therefore, all transactions of Non-residents are managed through NRE and NRO Account.
5. Frequently Asked Question
Q1. When a Resident becomes an NRI, does he have to change his bank account?
Yes. He would have to close his regular saving bank account and open a Non-Resident Ordinary Rupee Account (NRO) / Non-Resident External Rupee Account (NRE).
Q2. Can NRI borrow money as a rupee loan from his resident relatives if he becomes person resident outside India?
Yes. He can borrow money in rupees from his resident relatives (as defined under Companies Act, 2013) within the limit financial year. Such borrowed funds must be deposited into the NRO account of such NRI and can be used only for his personal purposes and own permitted business and not for relending or investments.
Q3. Can NRI receive any gifts from his resident relatives in Indian Rupees or even in foreign currency after he becomes person resident outside India?
Yes. A resident individual can gift his NRI relatives in Indian rupees as well as foreign within the limit of per financial year.
Q4. Can a resident continue to hold bank account, investments and property acquired by him when he was a non-resident in the foreign country?
As per section 6(4) of the FEMA, any person who was once a Non-Resident, can continue to hold his foreign bank accounts, investments and properties abroad which he had acquired when he was a Non-resident even after he becomes a person resident in India
Q5.What are the penal consequences for non-compliance of any provisions under FEMA?
Any person contravening FEMA provisions may be liable to a penalty as under:
a) Penalty up to thrice the sum involved in such contravention where such amount is quantifiable; or
b) Penalty up to two lakh rupees where the amount is not quantifiable.
c) If such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day during which the contravention continues may also be levied.
Q6 Can persons resident in Nepal and Bhutan have accounts in India?
Persons resident in Nepal and Bhutan can open Indian rupee accounts with an authorized dealer in India.
Q7. How many types of accounts open by NRI?
NRIs can open following types of accounts
Non-resident External Rupee Account (NRE)
Non-resident Ordinary Rupee Account (NRO).
Foreign Currency Non-Resident Account /Banks Scheme
Note:- Post Offices in India may maintain savings bank accounts in the names of persons resident outside India and allow operations on these accounts subject to the same terms and conditions as are applicable.
Q8. What documents are required to convert a resident account to NRI account ?
Following Documents required for converting Resident Account to NRI Account
FATCA Declaration Form
FEMA declaration form
Declaration of P.O. Box (for NRI residing in UAE)
Copy of PAN card
Resident Bank account closure form
NRI Bank application form
2 passport size photographs
Foreign residence address
Copy of work permit or valid visa
Copy of passport
All the documents should be authorized by the competent authority.