FAQ

Residential Status under FEMA and Income Tax Act

What is the difference between residential status under FEMA and the Income Tax Act?

FEMA (Foreign Exchange Management Act): Residential status under FEMA determines a person’s eligibility to hold and operate foreign exchange accounts (like NRE, NRO, or FCNR accounts) and deal with foreign assets or investments. It focuses on foreign exchange regulations and movement of funds across borders.
Income Tax Act: Residential status under the Income Tax Act determines a person’s tax liability in India. It focuses on whether an individual is liable to pay taxes on their global income or only income sourced within India.

How is residential status under FEMA determined?

Under FEMA, an individual is considered a Resident if they have stayed in India for more than 182 days during the preceding financial year. If they stay for less than 182 days, they are considered a Non-Resident.

How is residential status under the Income Tax Act determined?

The Income Tax Act determines a person as a Resident if:
They stay in India for 182 days or more in the previous year, or
They stay in India for 60 days or more in the current year and 365 days or more during the preceding four years.
An individual who does not meet these criteria is considered a Non-Resident (NR).

Can someone be a resident under FEMA but not under the Income Tax Act?

Yes, it’s possible. A person can be a Resident under FEMA but still be considered a Non-Resident under the Income Tax Act if they do not meet the income tax residency criteria. For example, a person may spend enough time in India to be considered a Resident under FEMA but does not meet the criteria for residency under the Income Tax Act based on their stay in India over the previous years.

How does being a Resident or Non-Resident under FEMA affect my income tax status?

     While FEMA defines residency for foreign exchange and financial transactions, Income Tax Act residency governs taxation.
      Resident under FEMA does not automatically mean the same under the Income Tax Act. A Resident under FEMA can be a Non-Resident for tax purposes, affecting whether or not they need to pay taxes on global income or only income earned in India.
      Similarly, being a Non-Resident under FEMA doesn’t automatically mean a person is a Non-Resident under the Income Tax Act.

What is the impact of my residential status on my foreign bank accounts?

FEMA governs whether you can open and operate different types of foreign currency accounts:
       NRE (Non-Resident External) account: For transferring income from abroad to India.
     NRO (Non-Resident Ordinary) account: For income generated within India.          FCNR (Foreign Currency Non-Resident) account: For holding foreign currency in India.
      The Income Tax Act will only affect your tax obligations on the income earned in these accounts. For example, interest earned on an NRE account is tax-free in India, but the global income of a Resident under the Income Tax Act will be taxed

How does my residential status affect my investment eligibility in India?

Under FEMA: As a Non-Resident, you are eligible to invest in India, including in real estate and securities. However, you can’t invest in agricultural land or plantation properties unless inherited.
‍Under the Income Tax Act: The taxation of any returns or capital gains from these investments will depend on your residential status. Non-Residents are taxed only on income earned in India, while Residents are taxed on their global income

Can I hold agricultural land in India as a Non-Resident under FEMA?

FEMA does not permit non-residents to purchase agricultural land in India. However, if the land is inherited from a resident relative, the non-resident can hold the land, provided they comply with FEMA guidelines.
Under the Income Tax Act, non-residents are subject to capital gains tax when selling agricultural land, but only if the land is held for more than two years (long-term capital gains).

Are there any special considerations for NRIs (Non-Resident Indians) in terms of financial transactions and taxes?

Under FEMA: NRIs are allowed to hold specific accounts (like NRE, NRO, and FCNR accounts) and are allowed to remit money to India under the Liberalized Remittance Scheme (LRS). They must comply with FEMA regulations when making such remittances or investments in India.
Under the Income Tax Act: NRIs are taxed on income earned in India, including rental income or capital gains from the sale of Indian property. Their global income is not taxable in India.

How do I report my foreign income if I am a Resident under the Income Tax Act?

If you are a Resident under the Income Tax Act, you are required to report all global income in your Indian tax return. This includes income from foreign investments, salary, and any other earnings from abroad.
FEMA residency does not affect this requirement, but foreign exchange transactions should be reported according to FEMA rules if you are remitting or investing funds.

Cana person be a Resident under the Income Tax Act and a Non-Resident under FEMA?

No, a person cannot be a Resident under the Income Tax Act and a Non-Resident under FEMA. The residential status in both acts is determined by the period of stay in India and is aligned with each other. If someone is a Resident for tax purposes, they will also be considered a Resident under FEMA.

FAQ – Interplay of Residential Status under FEMA and Income Tax Act

Residential Status under FEMA and Income Tax Act

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