Determining Non-Resident Status Under FEMA Regulations
Non-residents are governed by two main legal frameworks: the Income Tax Act of 1961 and the Foreign Exchange Management Act (FEMA) of 1999. While the Income Tax Act addresses the taxation of non-residents’ income, FEMA governs the investment options and banking transactions available to them. This article explains how a person becomes a non-resident under FEMA regulations.
Unlike the Income Tax Act, which determines residency based on physical presence in India, FEMA considers both an individual’s physical stay and their intentions. Under FEMA, a person is classified as a resident if they have been in India for more than 182 days in the previous year. However, a person becomes a non-resident immediately if they:
- Leave India for employment abroad.
- Depart to start a business or profession outside India.
- Leave India with the intention of staying abroad indefinitely.
In these situations, non-resident status is established as soon as the person departs. However, if an individual leaves India for a temporary period, such as for medical treatment, business trips, or vacations, they remain a resident under FEMA.
FEMA also classifies students going abroad for studies as non-residents upon their departure, even if their stay is for a definite period.
Similarly, if an individual returns to India for employment, to conduct business, or to stay indefinitely (e.g., for retirement), they immediately regain resident status under FEMA.
The key difference between FEMA and the Income Tax Act is that while tax residency is determined at the end of the financial year, residency under FEMA changes the moment a person leaves or enters India with specific intentions.
It’s important to note that under FEMA, foreign citizens can become residents of India without losing their foreign citizenship, and Indian citizens can become non-residents without renouncing their citizenship. A person’s citizenship does not affect their residential status under FEMA.
In some cases, an individual may be classified as a resident under FEMA and a non-resident under income tax laws, or vice versa.
This distinction is important for managing investments and banking transactions in compliance with Indian regulations.
