Avoiding Compliance Traps with the Right Residency Evaluation
Residency is not just a matter of geography — it defines your entire tax universe. A person can be a resident under FEMA and non-resident under the Income Tax Act, or vice versa — and this mismatch can create serious compliance risks, financial surprises, and reporting obligations for NRIs, returning Indians, or Indian citizens working abroad.
With recent changes introduced through Finance Acts 2020 and onwards, it has become even more critical for professionals and individuals to self-evaluate their residential status accurately. This article presents a comprehensive legal comparison of residency rules under both the Income Tax Act, 1961 and the Foreign Exchange Management Act (FEMA), 1999, including section-wise law, interpretation, real-life illustrations, and practical insights for proactive compliance.
Let’s break it down with clarity, accuracy, and purpose — ensuring you make informed decisions across borders.
Understanding the residential status under both the Income Tax Act, 1961 and FEMA, 1999 is crucial for Indian citizens, NRIs, and professionals working or living abroad. The two laws follow different principles, and a person can be a Resident under one law and Non-Resident under the other, leading to potential regulatory and tax complications.
A. Income Tax Act, 1961 – Section-wise Legal Framework and Interpretation
Section 6(1): Basic Conditions of Residency
Law: An individual is considered a Resident in India if:
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He/she is in India for 182 days or more during the relevant previous year,
OR -
He/she is in India for 60 days or more in the relevant previous year and has been in India for 365 days or more during the four preceding previous years.
Interpretation:
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The first condition alone is sufficient to become a resident.
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The second condition applies in all other cases unless specific relaxations apply under Explanation 1.
Explanation 1(b) to Section 6(1): Relaxation for Indian Citizens or Persons of Indian Origin (PIOs)
Law (Post Finance Act, 2020):
Where an Indian citizen or PIO comes to India on a visit, then:
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The threshold of 60 days is replaced by 182 days if income (excluding foreign income) is ≤ ₹15 lakh.
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The threshold is 120 days if income (excluding foreign income) is > ₹15 lakh.
Interpretation:
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This relaxation prevents genuine NRIs and PIOs from being treated as residents due to short visits.
-
Once income exceeds ₹15 lakh and stay exceeds 120 days, they become Resident but Not Ordinarily Resident (RNOR).
Section 6(1A): Deemed Resident Provision
Law (Inserted by Finance Act, 2020):
An Indian citizen shall be deemed to be resident in India, even if not physically present in India for the required period, if:
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Total income (excluding foreign income) exceeds ₹15 lakh; AND
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He is not liable to tax in any other country by reason of residence or domicile.
Interpretation:
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This provision addresses tax avoidance by global HNIs who do not become tax residents anywhere.
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Such deemed residents will be treated as RNOR, limiting their tax exposure to Indian income and business-controlled income from abroad.
Section 6(6): Resident But Not Ordinarily Resident (RNOR)
An individual is RNOR if:
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He has been a non-resident in 9 out of 10 preceding previous years,
OR -
He has been in India for ≤ 729 days during the 7 preceding years.
Interpretation:
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RNORs enjoy limited taxation: Only Indian income and foreign income derived from a business controlled from India is taxable.
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This status is particularly useful for returning NRIs.
Residency Test Under Income Tax Act (AY 2025–26 Onwards)
| Category | Days of Stay in India | Total Income (Excl. Foreign) | Status |
|---|---|---|---|
| Indian citizen/PIO visiting India | < 120 days | > ₹15 lakh | Non-Resident (NR) |
| Indian citizen/PIO visiting India | ≥ 120 days but < 182 days | > ₹15 lakh | RNOR |
| Indian citizen/PIO visiting India | ≥ 182 days | Any | Resident (ROR or RNOR) |
| Indian citizen/PIO visiting India | < 182 days | ≤ ₹15 lakh | Non-Resident (NR) |
| Indian citizen having no tax liability abroad and income > ₹15 lakh | Any stay | > ₹15 lakh | Deemed Resident (RNOR) |
B. FEMA, 1999 – Legal Definition and Interpretation
Section 2(v): Definition of Person Resident in India
Law: A Person Resident in India is someone who has:
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Resided in India for more than 182 days during the preceding financial year, BUT
Excludes individuals who have gone abroad or come to India for: -
Taking up employment
-
Carrying on business or vocation
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Any other purpose that indicates an intention to stay indefinitely
Interpretation:
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FEMA residency is purpose-based, not solely on physical presence.
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The 182-day test is overridden if the purpose of travel reflects a change in residential intent.
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An Indian going abroad for a job becomes Non-Resident under FEMA from Day 1.
RBI Clarifications & Master Directions
Key references:
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RBI Master Direction No. 7/2015-16 on NRI investment and banking
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RBI FAQs and Circulars clarify:
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Who can open and maintain NRE/NRO accounts
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What constitutes Repatriable vs Non-Repatriable income
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Rules for investment in immovable property and mutual funds
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Interpretation: Misclassification can lead to:
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FEMA violations (penalties under Section 13 of FEMA)
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Ineligible repatriation or foreign investment
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Regulatory scrutiny by RBI/ED
Comparative Table: Income Tax Act vs FEMA Residency Rules
| Criteria | Income Tax Act, 1961 | FEMA, 1999 |
|---|---|---|
| Reference Year | Current Financial Year | Preceding Financial Year |
| Threshold Days | 60 / 120 / 182 days (based on income and nationality) | 182 days (but overridden by purpose of travel) |
| Income Thresholds | ₹15 lakh (for special relaxations and deemed residency) | No income thresholds |
| Deemed Resident Provision | Yes – Indian citizen not taxed elsewhere (Sec 6(1A)) | No such provision |
| Resident from Day 1? | No – Requires physical stay | Yes – If coming to India for employment or business |
| Liability on Global Income | Yes – If Resident (ROR); Limited for RNOR | Not applicable – FEMA regulates capital/investment flows |
| Impact of Misclassification | Incorrect ITR filings; Wrong residential status; tax notices | FEMA breach; penalties; ineligible investments |
Self-Evaluation Tips for NRIs and Returning Indians
| Checkpoint | When to Evaluate |
|---|---|
| Count your stay in India (days) | At the end of every financial year |
| Check total taxable income (excluding foreign) | Before July 31st of the assessment year |
| Reassess purpose of visit/relocation | On each arrival/departure |
| Determine FEMA residency (purpose > days) | On date of departure from or return to India |
| Reclassify bank accounts (NRE/NRO/SB) | Within 90 days of status change |
| File correct ITR (ITR-2, ITR-3, etc.) | As per residential status under Income Tax |
Final Thoughts
Understanding and regularly reassessing your residential status under Income Tax Act and FEMA is critical to avoid:
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Wrong tax reporting
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Misuse of bank accounts or repatriation facilities
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Regulatory scrutiny and penal consequences
It is always advisable to maintain travel logs, track income sources, and consult a professional for cross-law compliance.
