Determining residential status is a fundamental aspect under both the Foreign Exchange Management Act (FEMA) and the Income Tax Act, 1961, as it defines an individual’s obligations regarding taxation, foreign exchange transactions, and investments. Below are practical case studies to illustrate how residential status is determined under these laws.
Case Study 1: Business Executive with Overseas Work Assignments
Scenario
Rohan, an Indian citizen, works for a multinational company and is deputed to its Singapore office. He:
- Spends 200 days in Singapore during the financial year.
- Spends the rest of the year in India with his family.
- Has Indian-sourced income (₹25 lakhs) and Singapore-sourced income (SGD 60,000).
Under FEMA
- Residential Status Test:
As per FEMA, an individual is considered a resident if they:- Reside in India for more than 182 days during the preceding financial year, and
- Intend to stay in India for an indefinite period or for carrying out employment, business, or vocation.
Result: Rohan is a Non-Resident under FEMA.
Under the Income Tax Act, 1961
- Basic Conditions:
To determine residential status under the Income Tax Act:- Rohan must reside in India for 182 days or more during the financial year, OR
- Reside for 60 days or more in the financial year and 365 days or more in the preceding four years.
Result: Rohan is a Non-Resident under the Income Tax Act. - Taxation Implications:
- India-sourced income (₹25 lakhs) is taxable in India.
- Singapore-sourced income is not taxable in India as he is a non-resident.
Case Study 2: NRI Visiting India Frequently
Scenario
Pooja, an NRI based in the USA, visits India frequently for family and business purposes. During the financial year:
- She spends 190 days in India (spread across multiple visits).
- She also holds investments in India and earns rental income of ₹10 lakhs from a property in Mumbai.
Under FEMA
- Residential Status Test:
Despite spending 190 days in India, Pooja must establish an intention to reside in India permanently to be classified as a resident under FEMA.
Since Pooja’s primary base is in the USA, and her visits to India are temporary, she does not meet this criterion.
Result: Pooja is a Non-Resident under FEMA.
Under the Income Tax Act, 1961
- Basic Conditions:
Pooja satisfies the first basic condition of staying in India for 182 days or more during the financial year.
Result: Pooja is classified as a Resident under the Income Tax Act. - Further Classification:
To determine if she is a Resident and Ordinarily Resident (ROR) or a Resident but Not Ordinarily Resident (RNOR):- Pooja must satisfy the condition of residing in India for 2 out of the preceding 10 years or staying in India for 730 days or more in the preceding 7 years.
- As Pooja fails these conditions, she qualifies as an RNOR.
- Taxation Implications:
- India-sourced income (₹10 lakhs) is taxable.
- Global income (e.g., income from the USA) is not taxable, as she is an RNOR.
Case Study 3: Student Moving Abroad for Education
Scenario
Arjun, an Indian student, moves to Canada in August for a master’s degree. During the financial year:
- He spends 120 days in India before relocating.
- He maintains a savings account and Fixed Deposits (FDs) in India, generating ₹5 lakhs in interest income.
Under FEMA
- Residential Status Test:
Arjun stayed in India for more than 182 days in the preceding financial year. However, he has moved abroad with the intention to stay for a long period (duration of study).
Result: Arjun qualifies as a Non-Resident under FEMA from the date of departure.
Under the Income Tax Act, 1961
- Basic Conditions:
Arjun spent only 120 days in India during the financial year, failing both basic conditions.
Result: Arjun is a Non-Resident under the Income Tax Act. - Taxation Implications:
- India-sourced income (₹5 lakhs) is taxable.
- Any income earned in Canada (e.g., part-time job earnings) is not taxable in India.
Case Study 4: Business Owner with Dual Residency
Scenario
Neha, an Indian citizen, runs a business in Dubai and spends time in both India and Dubai. During the financial year:
- She spends 185 days in India.
- She has a Dubai residence visa and earns significant income from her Dubai business.
Under FEMA
- Residential Status Test:
Neha resides in India for more than 182 days during the preceding financial year, but her business activities and base in Dubai suggest no intention to stay permanently in India.
Result: Neha is a Non-Resident under FEMA.
Under the Income Tax Act, 1961
- Basic Conditions:
Neha satisfies the first condition of residing in India for 182 days or more during the financial year.
Result: Neha is a Resident under the Income Tax Act. - Further Classification:
Since Neha has been a non-resident in the preceding 10 years and does not satisfy the 730-day rule, she qualifies as an RNOR. - Taxation Implications:
- India-sourced income (from her Indian business) is taxable in India.
- Dubai business income is not taxable as she is an RNOR.
Key Takeaways
| Criteria | FEMA | Income Tax Act, 1961 |
|---|---|---|
| Purpose | Defines ability to transact/invest in foreign assets. | Determines tax liability based on global or local income. |
| Primary Test | Stay of 182+ days in the preceding financial year and intention to stay indefinitely. | Stay of 182+ days or 60+ days with 365+ days in preceding 4 years. |
| Residential Categories | Resident or Non-Resident. | Resident (ROR/RNOR) or Non-Resident. |
| Global Taxation | Not applicable. | ROR: Global income taxed; RNOR/NR: Only India income taxed. |
Conclusion
The determination of residential status under FEMA and the Income Tax Act often leads to different outcomes due to their distinct purposes and criteria. Proper understanding of these laws is essential for accurate compliance, tax planning, and financial management. Let me know if you want detailed examples or guidance on any specific scenario!
