How different is the residential status under FEMA and Income Tax Act?

As per the IT laws, a person can either be a resident or a non-resident in India. Individuals are treated as residents in India if they fulfil any one of the two conditions: They were in India for 182 days or more during the relevant financial year or were in India for 60 days or more in the relevant FY and their cumulative stay in India is 365 days or more in the four preceding FYs.

These are the basic provisions where an individual will be treated as resident, while in all other cases, a person will be treated as a non-resident.

However, as per Finance Act, 2020, for those with an annual income above ₹15 lakh, the period of staying in the country has been reduced to 120 days or more.

For example, can an Indian citizen who stayed in India during the relevant FY for a period of 129 days be treated as resident in India as per Income Tax Act? Their stay in India of immediately preceding four previous years is of 460 days. The answer is ‘no’ since this individual has not stayed in India for a period of 182 days, even though she has stayed for more than 365 days in the preceding four previous years. However, if this individual’s total income (other than income accrued or arising from foreign sources) exceeds ₹15 lakh, she will be treated as resident of India because she has stayed for more than 120 days during the relevant financial year.

Residential Status as per Fema: Fema recognises individuals as a ‘Person Resident in India’ or ‘Person Resident Outside India’. If during the previous financial year a person stays for more than 182 days in India, then the person will be treated as resident under Fema; in all other cases he will be treated as non-resident. However, there are some exceptions to this rule.

A person is treated as non-resident with immediate effect even though he has stayed in India for more than 182 days during the relevant previous year if during the current year the person leaves India or stays outside India for employment, for business or vacation or for an uncertain period of stay.

Likewise, when an individual has not stayed in India for more than 182 days during the relevant previous year, but during the current year comes to India or stays in India for any of the three purposes stated above, she becomes a resident with immediate effect. Under Fema, it may happen that a person was resident in India for part of the year and a person resident outside India for another part of the year.

For instance, if the person was in India for 182 days or more during the relevant previous year but goes out of India for employment purpose and again comes back for employment purpose; then the person will be Person Resident in India before he leaves India, he will be Person Resident Outside India after he leaves India and again will be treated as Person Resident in India when he comes back to India for employment purpose.

The key difference in determining residential status as per IT Act and Fema are that under the former, there is only one residential status for the relevant year, while there can be more than one residential status for the relevant year under Fema .

Further, under the IT Act, citizenship of the person is important, if an individual wishes to get exemption from paying tax in India. However, under Fema, citizenship is not important. It should be noted that the nationality of a person doesn’t impact its residential status neither under IT Act nor under Fema.

Now, the question to ask is how does residential status under IT Act and FEMA affect taxability and to whom should the taxpayer give precedence?

Residency status as per IT Act determines taxability of the total income and it is also relevant for filing Income Tax Return (ITR). Residency status under Fema doesn’t affect tax liability because in this case an individual’s residency changes from a particular date and may not be the same for the full year.

Under Fema, the residency status mainly impacts cross border payments and who can exercise the liberalised remittance scheme (LRS) as it is not allowed to non-residents.

Jigar Mansatta is proprietor, Jigar Mansatta & Associates.