What is an NRI?
Posted by Frank Gogol
There are separate laws for Indians who have settled abroad. If you’re moving abroad for employment or want to shift back to India, you need to know about these rules. These rules determine how you’ll be taxed for your income and under what circumstances you can stay in the country. In this article, we’ll explain the definition of NRI and some of the acts that govern them.
Table of Contents
Who Is A Non-Resident Indian?
A non-resident Indian is anyone who is currently residing in a foreign country with Indian citizenship. These people have been absent from India for a substantial period, which complicates their taxation. The reason for residing outside of India can vary from studying to employment to business purposes. Whatever it might be, the intention is to stay outside of India for an uncertain time.
NRIs are also known as Overseas Indians because they live overseas. There’s another term called PIO or Persons of Indian Origin. And these two are often used interchangeably, but there’s a technical difference between the two. NRI are people who are Indian citizens but residing abroad. As you’ll see in later sections, there’s a more technical definition of NRI.
On the other hand, PIOs are people who are foreign citizens but once held an Indian passport. If they were born abroad to Indian parents or parents who once held an Indian passport, they would qualify for PIO, but not for NRI status.
Another term that is used is OCI, which stands for Overseas Citizens of India. This is a type of permanent residency offered to People of Indian Origin and allows them to live and get employment in India. This does not, however, make them citizens of India.
According to the stats released by the Ministry of External Affairs, there are close to 32 million Overseas Indians who qualify as either NRI or PIO.
NRI Defined by the FEMA Act
FEMA (Foreign Exchange Management Act) Act provides a legal framework to understand the definition of NRI. In the legal context of FEMA, NRI is limited to the tax status of an Indian citizen who is living abroad. He can also be a PIO. Under the FEMA Act, the length of the stay is uncertain, which can be because of personal or professional reasons.
As per section 6 of the Indian Income Tax Act 1961, these people have not lived in India for a specific period of the year to tax normally under the Income Tax Act. Hence, their income tax has to be restructured. As per the Income Tax Act, a person is considered NRI if:
- The taxable Indian income exceeds ₹15 Lakhs for a calendar year.
- The person has lived in India for at least 120 days in the previous calendar year.
- The person has lived in Indian for at least 365 days for four immediate calendar years preceding the current year.
If the total Indian taxable income is not more than ₹15 Lakhs but stay in India does not exceed 181 days, they’ll also qualify as an NRI.
If the person doesn’t qualify as NRI as per the above definition, then they’ll be termed as “Resident But Ordinarily Resident” or RNOR and not a usual Indian resident. To be an RNOR, a person has to live as a non-resident in India in at least 9 of the 10 previous calendar years.
In case the person doesn’t meet the above conditions, he/she will be treated as an Ordinary Resident. The entire income, which includes the foreign income, will be taxed as per the Indian Income Tax Act.
Although both FEMA and the Indian Income Tax Act serve the same purpose of defining an NRI, they’re somewhat different. So at a given point in time, a person can be an NRI as per the FEMA act but not under the Income Tax Act.
Double Tax Avoidance Agreement (DTAA)
When you transfer money from one country to another, then you’re likely to face taxation twice – one in the source country and the other in the home country. To avoid paying taxes twice, there’s a Double Tax Avoidance Agreement available for NRIs and PIOs. These agreements are signed between India and other countries.
According to the DTAA, the income generated in a particular country will be subject to local taxation, but at a lower rate or even a nil rate. If the source country is India, you can claim the benefits by applying for a Tax Residency Certificate. Submit this when filing for your tax along with Form 10 F and PAN. PAN or Permanent Account Number is compulsory, and without it, you cannot avoid the tax legally.
If the interest income generated goes to an account held by a non-resident from India, then there’s a 20%+ surcharge and cess applicable on the tax amount. FCNR and NRE deposits are exempted from this deduction.
But if India has a treaty in place with the foreign country, you can expect lower percentages if you submit a valid TRC, Form 10 F, and PAN.
In this section, we answer Frequently Asked Questions about NRI and taxes.
What Is The Role Of The FEMA Act In Taxation?
FEMA Act decides where you can invest as an NRI. If you qualify as an NRI under the FEMA Act, you can open NRE and NRO accounts and legally invest in India.
What Is The Role Of Income Tax Act For NRI Taxation?
The Income Tax decides how the earnings from the investment from NRE and NRO accounts will be taxed.
Who Exactly Is A RNOR?
RNOR or Resident and Not Ordinarily Resident are usually NRIs who are returning to India. So, you’re an Indian resident who has held an NRI status for 9 out of 10 preceding years.
Does Grandparent’s Indian Passport Make Anyone Eligible For OCI?
Yes. If your grandparents hold an Indian Passport, you can qualify for OCI unless you’re a Pakistan or Bangladesh citizen.
Is Dual Citizenship Offered By India For NRIs?
Currently, dual citizenship is not offered by India to either the citizens or the NRIs.
The definition of NRI keeps on changing from time to time. This is because of the changing economic landscape. So, always keep yourself updated on the latest changes.
The taxation can be complicated for NRIs. With the Indian economy growing steadily year over year, many NRIs and PIOs are investing in India. But incorrect taxation can have massive consequences. Therefore, it’s advised to get in touch with a taxation expert for clarity over taxation.