Resident Or Not A Resident?

The determination of residential status of NRIs, is a very complicated task. The confusion is confounded further by virtue of the status of a non-resident Indian (NRI) being defined in two different ways by two different Acts, the Income Tax Act (ITA) and the Foreign Exchanges Regulation Act (FERA).

The tax structure as well as the facilities available for an NRI under ITA and FERA are distinctively different. The entire confusion arises out of the word `NRI' being synonymously used for the status of `Resident Outside India' under FERA. The following query of one of my clients is testimony to this fact :

 

My son, Vijay, left India on June 5, 1992 for higher studies in computer software. During his spare time, he developed some programs as a consultant, and this was quite substantial amount. He finally managed to get a work permit on March 5, 1993 and thereafter, Vijay started earning pots of money. Vijay did not visit India even for short durations until he returned to India permanently on January 31, 1996.

What is his residential status for this period when he was away from India?

Status under ITA: U/s 6(1), an individual is considered as a resident in India if:

a) He is in India during the year for 182 days or more, or

b) He is in India for a period of 60 days or more during the year and 365 days or more during the 4 preceding previous years.

When a citizen of India goes abroad during any year, (or as a member of a crew on an Indian ship) for the purpose of employment, the period of 60 days as mentioned in `b' above will be replaced with 182 days.

Vijay did not leave India for the purpose of employment and therefore, it is the period of 60 days and not 182 days that is applicable to him. He was in India for 66 days in financial year (FY) 92-93 and therefore, he will be treated as a resident for that year. Bad luck!

Had he left on 28.5.93, he would have earned the status of an NRI. He has been an NRI for FYs 93-95 and 94-95.

The FY 95-96 is curious. Having come on 31.1.96, he was outside India for more than 182 days. So, he is not caught by the stipulation `a' above.

What about stipulation `b'? He was in India for 61 days (unfortunately, 1996 is a leap year) and he was definitely in India for more than 365 days during the four preceding previous years. Bad luck once again! He is a resident for FY 95-96.

Well, the situation is not that bad.

U/s 6(6), a person who loses his status of an NRI as per the above criteria becomes a ROR if he has been:

1. An ROR in at least 9 out of 10 preceding FYs and,

2. In India for at least 730 days during seven preceding FYs i.e., FYs 86-93.

An individual who is not an NRI or an ROR is an RNOR.

It is clear that anyone who enjoys the NRI status for two successive years is an RNOR for nine succeeding years after his return.

Note that the residential status is applicable for the entire FY. Vijay will enjoy the status of an RNOR from FY 95-96 to 2004-05 and will become an ROR from FY 2005-06 onwards. During this period, his foreign income earning is out of the purview of Indian tax. He does not have to pay any tax on his salary income earned during FY 95-96 when he returned.

Status under FERA: The status of a resident under FERA is on a very different basis.

A citizen of India who stays out of India for employment, business or any other purpose, with an intention to stay outside India for an uncertain period, will be considered as a `person resident outside India'. Vijay has earned this status on March 3, 1993 and he has lost it as soon as he returned to India on January 1, 1996.

During this period, he could have opened an NRI account or invested in US-64 scheme of UTI and earned much higher interest than what was available to him abroad. The income earned from these sources is repatriable.

The capital of NRNR is not repatriable, but the interest earned is. Since he was not very much interested in this aspect, he could have earned higher than the higher rates (sorry for double comparatives). I hope he did.

NRIs who have returned to India on or after 18.4.92 after being continuously resident outside India for a period of at least a year have, even after their return, been granted several permissions which do not need RBI approval.

Vijay has lost all these privileges through sheer ignorance.

Though he does not have to declare the details of his foreign assets along with his income-tax returns, it would be prudent to do so, at least during the first year, when he files his returns under his new status. Since, Vijay was holding a job for over one year, he has earned the above rights. This is not all.

Having stayed outside India for more than 6 months, he could have brought along with him 5 Kgs. of gold and 100 Kgs of silver. Even after paying the customs duty and octroi and sales tax, if any, he would have earned quite a chunk.

Next time Vijay plans to go abroad, I hope he comes to my table.

It is clear that anyone who enjoys NRI status for two successive years is a RNOR for nine succeeding years after his return. The residential

status is applicable for the entire financial year.

Vijay lost his status of person resident outside India and the attendant privileges like the right to repatriable income and, higher interest rates out of sheer ignorance