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What Is an NRI?
There are separate laws for Indians who have settled abroad. If you’re moving abroad for employment or moving 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 a nonresident Indian (NRI) and some of the acts that govern them.
Who Is a Nonresident Indian?
A nonresident 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. NRIs 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 status, but not for NRI status.
According to statistics released by the Ministry of External Affairs, close to 32 million Overseas Indians qualify as either an NRI or a PIO.
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.
NRI Defined by FEMA
The Foreign Exchange Management Act (FEMA) provides a legal framework to understand the definition of NRI. In the legal context of FEMA, an NRI is limited to the tax status of an Indian citizen who is living abroad. He can also be a PIO. Under FEMA, 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 recalculated. As per the Income Tax Act, a person is considered an 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 India 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 the stay in India does not exceed 181 days, they’ll also qualify as an NRI.
If the person doesn’t qualify as an NRI as per the above definition, they’ll be termed as a “Resident But Ordinarily Resident” or an RNOR, and not a usual Indian resident. To be an RNOR, a person has to live as a nonresident in India for at least nine of the 10 previous calendar years.
If the person doesn’t meet the above conditions, he/she will be treated as an Ordinary Resident. Their entire income, which includes 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 FEMA but not under the Income Tax Act.
Double Tax Avoidance Agreement
When you transfer money from one country to another, you’re likely to face taxation twice — once in the source country and again in the home country. To avoid paying taxes twice, there’s a Double Tax Avoidance Agreement (DTAA) available for NRIs and PIOs. These agreements are signed between India and other countries.
According to the DTAA, 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 your taxes, along with Form 10F 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 nonresident 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 10F, and PAN.
In this section, we answer Frequently Asked Questions about NRIs and taxes.
What is the Role of FEMA in taxation?
FEMA decides where you can invest as an NRI. If you qualify as an NRI under FEMA, you can open NRE and NRO accounts and legally invest in India.
What is the role of the Income Tax Act for NRI taxation?
The Income Tax Act decides how the earnings from investments from NRE and NRO accounts will be taxed.
Who exactly is an RNOR?
An RNOR is usually an NRI who is returning to India. So, you’re an Indian resident who has held an NRI status for nine out of 10 preceding years.
Does a grandparent’s Indian passport make someone eligible for OCI?
Yes. If your grandparent holds an Indian passport, you can qualify for OCI, unless you’re a Pakistan or Bangladesh citizen.
Does India offer dual citizenship to NRIs?
Currently, dual citizenship is not offered by India to citizens or NRIs.
The definition of an 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.
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, if you have further questions, consult a tax expert.