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FAQs by Non Resident Indians (New NRIs) on Taxation, Investment and FEMA We have addressed Frequently Asked Questions by Non resident Indians (NRIs) on Taxation, Investment and FEMA. We hope this section would enable more informed decision-making by Non resident Indians (NRIs). It should not however be viewed as a substitute for professional advice based on the latest legal position and facts and circumstances of each case.
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New NRI/ Emigrating Indian

Mr. A is leaving India for taking up employment/ setting up business outside India. He has queries on the following issues:

For queries on new investments in India, inheritance, gift and other issues, see FAQs Existing NRIs. If you have any other query, do not hesitate to Ask Us.

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Meaning of NRI

The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status). The definition of a NRI under the Income Tax Act is different from that under FEMA.

Under Section 115C (e) of the Income Tax Act, a NRI is defined as ‘An individual being a citizen of India or a person of India origin (PIO) who is not a resident’. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.

The term NRI is defined under FEMA rules and regulations as ‘A person resident outside India who is either a citizen of India or is a person of Indian origin (PIO).’ However the term PIO is defined differently in different regulations & therefore the term NRI will have different meaning under different regulations i.e. the terms NRI & PIO are contextual. Under the Foreign Exchange Management (Deposit) Regulations, 2000, which deal with banking accounts in India by non-residents, the term PIO is defined as below:

A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if
 
a) he at any time held an Indian passport or
b)he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or
c)
he is spouse of an Indian citizen or a person referred to in ‘a’ or ‘b’.

This is the most common definition adopted under most regulations. Significantly, Foreign Exchange Management (Acquisition and Transfer of immoveable property in India) Regulations, 2000 exclude clause c) above and further restrict clause b) to paternal relationships i.e. father and grandfather only. In Foreign Exchange Management (Transfer or issue of security by a person resident in India) Regulations, 2000 that govern investments in companies, stock market and other instruments as also Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 the term excludes a citizen of Sri Lanka.

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Income Tax implications

For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,

Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)

The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.

FEMA

*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.

In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs Returning Indians for more). In the case of a Non-resident, only the income earned or received in India is taxed in India. In the given case, ‘A ‘would be Non-resident under Income Tax act if he does not stay in India for 182 days or more in the financial year in which he leaves India. For a non-resident, income earned and received outside India is not taxable in India while for a resident even income earned outside India is taxable in India. Accordingly, ‘A’ should try and ensure that he does not stay in India for more than 182 days during the relevant financial year. If his stay in India is likely to exceed 182 days, he could save some tax on his foreign income by planning in advance and availing of a deduction available under Section 80 RRA of the Income Tax Act to certain professionals working abroad. See FAQs Existing NRIs for more on taxation of Indian income as a non-resident.

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Basic concepts under FEMA
FEMA stands for Foreign Exchange Management Act. Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property) or current account transaction (e.g. remittance of income on shares, property) are the cornerstones of FEMA. The golden rule of FEMA is, “All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted”. Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/ Government or it is mandatory to inform RBI of the same. Although total capital account convertibility does not exist under FEMA, there is full convertibility to the extent of USD 1 million per calendar year for NRIs - See Repatriation for details.
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Residential status under FEMA

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the no. of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person.

‘A’ would be a non-resident under FEMA as soon as he goes out of India for taking up employment outside India irrespective of the duration of his stay in India. Accordingly, ‘A’ would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).

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Benefits associated with NRI status

Apart from various types of investments in India which ‘A’ can make, there are several other advantages of the NRI status, which are outlined below:

  • ‘A’ can freely acquire immoveable properties abroad out of earnings abroad. He can invest anywhere in the world. He can start any business abroad. He can become trustee-beneficiary of a trust set up abroad. He can retain all these even on his return to India and need not even intimate RBI about his foreign assets.
  • ‘A’ can set up family trusts abroad for education of his children/ maintenance of his family members. Such trusts can also be Asset Protection Trusts where the assets held by the trust are free from attachment by the creditors.
  • ‘A’ can bring 10 kgs. of gold (on payment of duty of Rs. 250 per 10 gms.) & 100 kgs. of silver (on payment of duty of Rs. 500 per kg.) once in six months on his visit to India.
  • A’s foreign income is not liable to tax in India.
  • ‘A’ can enjoy several tax concessions in India on his assets in India.
  • ‘A’ can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of transactions.
  • ‘A’ can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimise double tax on the same income (i.e. if tax is payable in India by NRIs on their income in India, credit for tax payable is available against tax payable in foreign country on such income). Also tax on dividends, royalty, fees for technical services earned in India by NRIs are offered concessional tax treatment under most DTAAs. Further, in few cases, tax may not be payable at all on such income if the NRI is a tax resident of a treaty country.
  • There are special reserve seats for children of NRIs for Engineering/Medical/MBA courses in certain institutions in India provided the fees are paid in foreign exchange.
  • Even in case of Initial Public Offerings (IPO’s), there are special quotas for NRI.
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Existing Bank account in India
The banker should be intimated about change of residential status. The bank will immediately designate resident bank account as “Non-resident ordinary” (NRO) account. The account could be in any form Saving, Current, Fixed Deposit or Recurring Deposit. The account holder is now permitted to repatriate upto USD 1 million per calendar year out of NRO account for any bonafide purpose- See Repatriation for details. See FAQs Existing NRIs for banking accounts by NRIs in India.
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Existing Residential/ Commercial property in India

‘A’ may continue to hold properties without any permission from RBI. The same can be freely let out and the rental income repatriated net of Indian taxes. The property can be sold to a resident or Non-resident Indian. See Repatriation for provisions and procedure for repatriation of sale proceeds. See FAQs Existing NRIs for acquisition and sale of immoveable property acquired as a NRI.

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Existing Investments in shares and other securities in India

Companies wherein ‘A” is holding investments in shares, debenture bonds or other securities must be informed about the change of residential status and new overseas address. Income on such investments can be freely repatriated outside India net of Indian taxes. See Repatriation for provisions and procedure for repatriation of sale proceeds. See FAQs Existing NRIs for investment in business, listed companies and mutual funds in India.

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Existing Jewellery and other movable assets in India

In our view, permission from or declaration to RBI is not required to continue to hold jewellery and other movable assets in India. Permission should be taken while taking jewellery abroad so that there is no duty while returning back. For repatriation of sale proceeds, see Repatriation.

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Existing Insurance policies in India

‘A' can continue to hold insurance policies and pay premium thereon without any permission from RBI. See also Repatriation.

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Existing Credit cards in India

'A' can acquire and continue to hold both domestic and international credit cards issued by banks in India. He can pay for the same from his NRE/ NRO account or by way of remittance from abroad.

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Existing Loans in India

In respect of loans given, no permission is required. However the resident borrower should be intimated, as he is required to repay the loan by making credit to the NRO A/c only. Interest on such loan can be freely repatriated outside India net of Indian taxes.

Loans obtained from Authorised Dealer / Banks can be continued if the dealers / banks are satisfied about their continuance on commercial grounds. However the period of loan or overdraft shall not exceed the period originally fixed at the time of granting the loan or overdraft. The repayment may be either by way of inward remittance or through funds held in NRO, NRE or FCNR account of the borrower. There is no clear guideline as yet as to loans obtained from persons other than authorised dealers /banks. We are of the view that the guidelines as applicable to loans from authorised dealer would apply here as well though to avoid litigation, ‘A” may apply to RBI.

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Existing Security/ Guarantee in India

Loan given to another person against the collateral security of shares/ immoveable property of ‘A’ is permitted. Guarantee by ‘A’ in relation to loan to a resident can be continued provided no direct or indirect outgo from India is involved by way of guarantee commission or otherwise.

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Continuation of a Directorship of a company in India

To continue directorship in Indian companies, permission from RBI is not required. However it is advisable that the concerned company is formally intimated about the change of residential status and the new overseas address is submitted. The Indian company can make payment in Rupees to its non-wholetime director towards travel expenses to n fro and within India, sitting fees, commission or remuneration as agreed which can be repatriated abroad by ‘A’ after payment of taxes.

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Continuation of a Trusteeship of a trust in India

To continue trusteeship, permission from RBI is not required. However it is advisable that the trust is formally intimated about the change of residential status and the new overseas address is submitted.

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Continuation as a Proprietor/ Partner of a concern/ firm in India

There are no clear guidelines on continuation as a partner/ proprietor. But ‘A’ can continue as a Proprietor/ Partner of a concern/ firm in India in general though it is advisable to apply to RBI by way of a letter with full details in the absence of a prescribed format. Care should be taken that the firm or the proprietary concern is not engaged in any agricultural / plantation activity or real estate business. If it is so, ‘A’ must resign before becoming non- resident. However ‘A” may continue to be a partner or carry on with a proprietary concern engaged in real estate development with due permission from RBI.

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Repatriation

There are no restrictions on repatriation of current income i.e. rent, dividend, interest etc. net of Indian taxes. Only an undertaking by the remitter and CA certificate as to the payment/ deduction of tax is required.
Repatriation of sale proceeds of investments acquired out of forex resources/ NRE funds has been discussed in Investment opportunities.
Now full capital account convertibility is available to NRIs to the extent of USD 1 million per calendar year for any bonafide purpose out of:

  • Balances held in NRO account;
  • Sale proceeds of assets like shares and securities, deposits, PF, immoveable property* etc. which are otherwise held on non-repatriation basis;
  • Sale proceeds of assets acquired by way of inheritance or legacy.

*However in case of immoveable property acquired out of Rupee funds, the sale proceeds can be repatriated only if the 'property/ sale proceeds' were 'held/ retained in NRO account' cumulatively for a minimum period of 10 years.

‘A’ has to produce the requisite documentary evidence in support of the acquisition/ inheritance/ legacy of funds/ assets proposed to be remitted besides the undertaking and CA certificate for tax compliance to avail of this facility.

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Power of Attorney

It is recommended that A should execute a power of Attorney (general or special) in favour of a trusted friend/ relative/ professional to undertake certain transactions on his behalf while he is away. The power of attorney holder can operate bank account for local disbursement (for expenses) but can not make remittance outside India nor can make a gift or extend a loan to any person Resident in India / Resident outside India. In case of NRO account, joint account with a resident is permitted. Accordingly, in such a case, a power of Attorney need not be executed for operation of bank account if there is a joint account holder.

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