||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.
|New NRI/ Emigrating Indian
Mr. A is leaving India for taking up employment/ setting
up business outside India. He has queries on the following
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.
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
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
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.
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)
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.
*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
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
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.
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
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.
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.
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.
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.
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.
Insurance policies in India
‘A' can continue to hold insurance policies and pay
premium thereon without any permission from RBI. See also
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
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
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.
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
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.
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.
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
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
- Sale proceeds of assets acquired by way of inheritance
*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.
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.