Understanding the residential status of an individual is critical for determining tax liabilities, compliance requirements, and reporting obligations under Indian law. For Non-Resident Indians (NRIs) and residents alike, the criteria for residential status under the Income Tax Act (ITA) and FEMA (Foreign Exchange Management Act) play a pivotal role in shaping their tax responsibilities. With the increasing emphasis on combating black money and improving transparency, the Indian government has implemented stringent rules governing the disclosure of foreign assets, income, and financial interests. These laws directly impact NRIs, making it essential to stay informed about the regulations and ensure compliance.
1. Residential Status under the Income Tax Act (ITA) and FEMA
Income Tax Act – Criteria for Residential Status
Under Section 6(1) of the Income Tax Act (ITA) 1961, the residential status of an individual is determined based on their physical presence in India during a financial year. This is a crucial factor in determining whether the income earned by an individual will be taxed in India or not.
Resident: An individual is considered a Resident if they have been in India for 182 days or more during the financial year or for 60 days or more in the current year, with an aggregate of 365 days or more during the previous four years.
Non-Resident (NR): If the individual fails to meet the above criteria, they are considered a Non-Resident (NR).
Resident but Not Ordinarily Resident (RNOR): This status applies to individuals who qualify as residents but fail to meet specific conditions regarding their stay in India over the past years. These conditions are typically met by NRIs who have been in India for less than 2 years in the last 10 years or for fewer than 729 days in the last 7 years.
FEMA – Residential Status
The Foreign Exchange Management Act (FEMA), 1999, is another critical statute that governs foreign exchange and investments in India. It provides guidelines for determining whether an individual is a resident or non-resident under Indian law for the purpose of holding foreign assets or making foreign investments.
Resident under FEMA: An individual is considered a resident under FEMA if they have been in India for more than 182 days during the preceding financial year, excluding certain cases such as employment or business assignments abroad.
Non-Resident under FEMA: If the individual does not meet the FEMA residency criteria, they are deemed a non-resident for the purposes of holding foreign assets and investments.
2. Black Money and Disclosure Requirements for NRIs
The Indian government has taken significant steps to curtail the movement of black money and to prevent the concealment of foreign assets. Black money refers to illicit wealth or income that has been hidden or not declared to tax authorities, often acquired through illegal means. NRIs are required to comply with disclosure requirements related to foreign assets and foreign income under various provisions of Indian law.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
To address the issue of black money, the Indian government enacted the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. This law specifically focuses on individuals who have hidden foreign income or assets and failed to disclose them to Indian authorities.
Section 3: Requires Indian residents and NRIs to disclose their foreign assets and income. Any undisclosed foreign income or asset is liable to be taxed.
Section 4: The undisclosed foreign income or assets are taxed at a rate of 30% of the total value. A penalty of up to 90% of the tax due can be levied on those who fail to report their foreign assets.
Section 5: Allows for the mandatory disclosure of foreign bank accounts, investments, and properties in the annual income tax return.
Income Tax Act – Disclosure of Foreign Assets
Under Section 139 of the Income Tax Act, taxpayers are required to disclose their foreign income and assets while filing their tax returns. This includes reporting foreign bank accounts, investments, and properties. The requirement is critical for both residents and NRIs, especially as India has signed agreements with multiple countries for the automatic exchange of tax information under the Common Reporting Standard (CRS).
Form ITR-2: NRIs are required to fill out this form to disclose foreign income, assets, and bank accounts. Any non-disclosure or misreporting can attract heavy fines and penalties under the Income Tax Act.
Penalties for Non-Disclosure: Failure to report foreign assets can lead to penalties under Section 271(1)(c) and Section 270A of the Income Tax Act. Penalties range from 100% to 300% of the tax sought to be evaded.
3. Case Law on NRI Residential Status and Black Money Laws
Case Reference: Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)
In the Union of India vs. Raghubir Saran case, the Supreme Court deliberated on the issue of residential status under the Income Tax Act. The case is crucial because it emphasized the importance of determining physical presence and the intention of staying in India to determine tax liability.
Key Points from the Case:
The Supreme Court ruled that an individual’s physical presence in India and their intention to reside in India or abroad is a determining factor in establishing residential status for tax purposes.
The case reinforced the need for genuine disclosure of foreign income and assets, warning against attempts to evade tax on foreign income by concealing assets abroad.
Citation:
Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)
This case serves as a guiding reference for interpreting residential status under the Income Tax Act and clarifies the role of intentions and stay duration in determining tax liabilities. For NRIs, it underscores the importance of accurately declaring their foreign income and assets to avoid complications under Indian tax laws.
4. Compliance Requirements and Strategic Considerations for NRIs
Filing of Tax Returns: NRIs must file their tax returns every year, regardless of whether they earn income in India. Non-disclosure of foreign income or assets can lead to severe penalties under the Income Tax Act and Black Money Act.
Tax Liabilities for RNOR: RNOR individuals are exempt from tax on foreign income that is earned abroad, provided it is not brought to India. However, they must still disclose foreign bank accounts and foreign investments.
Penalties for Non-Disclosure: Non-disclosure of foreign assets or income can lead to hefty fines under the Black Money Act and Income Tax Act. NRIs must ensure that they comply with these regulations to avoid being penalized for evasion.
Tax Transparency: India has entered into automatic exchange of information agreements with several countries to combat tax evasion. As such, NRIs must proactively disclose their foreign income and assets to avoid the risks of black money.
Conclusion
For Assessment Year 2025-26, NRIs must remain vigilant about their residential status under both the Income Tax Act and FEMA. In addition to these regulations, the Black Money Act imposes stringent disclosure requirements regarding foreign assets and income. Non-compliance with these laws could lead to substantial fines and legal repercussions. By ensuring proper disclosure, adhering to tax compliance, and understanding the case law surrounding residential status, NRIs can navigate the tax landscape successfully and avoid costly penalties.
Citation References:
Union of India vs. Raghubir Saran (1974) 97 ITR 572 (SC)
This case provides key insights into determining residential status and underlines the importance of genuine disclosures of foreign income and assets for NRIs.
