Understanding Residential Status Under FEMA

Did you know that the definitions of residential status under the Income Tax Act of 1961 and FEMA don't align? This means that even if you’re classified as a non-resident under the Income Tax Act, you could still be considered a resident under FEMA — potentially derailing your financial plans! Navigating residential status under FEMA is far more complex, with additional challenges and FEMA compliance services you might not expect. Understanding these differences is crucial to avoid costly surprises!

Understanding your residential status is crucial—it’s the starting point for determining whether your actions will fall under the scope of FEMA regulations. Whether you're investing, purchasing an asset, giving a loan or a gift to your relatives, transferring funds, or engaging in any financial activity, your status as a resident or non-resident shapes how those transactions are treated by law. Knowing where you stand ensures you're on the right side of FEMA compliance and helps you navigate the complexities of foreign exchange rules with confidence.

Categories:

Under the Foreign Exchange Management Act (FEMA), residential status is primarily classified into two broad categories:

1. Person Resident in India
2. Person Resident Outside India.

Additionally, FEMA grants a distinct set of benefits and rights to individuals of Persons of Indian Origin (PIO) and Overseas Citizens of India (OCI) , offering them unique privileges in foreign exchange transactions and investments.

Factors determining Residential Status:

There are three key factors to consider when determining your residential status under FEMA:

1. Duration of Stay – How long have you stayed in India?
2. Intention – What is the reason for your stay in or outside India?
3. Surrounding Facts and Circumstances

Legal Provisions:

The residential status under FEMA follows the main criteria that if an individual is in India for more than 182 days during the preceding financial year, he/ she shall be considered a Person Resident in India.

However, there are two exceptions to this criterion-

Exception (A):

(A) A person who has gone out of India or who stays outside India, in either case-

1. For or on taking up employment outside India, or
2. For carrying on outside India a business or vocation in India, or
3. For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period.

This criterion covers individuals who are leaving India and wish to stay abroad for employment, business, or an uncertain period. In this case, even if an individual has spent more than 182 days in India in the previous year, they shall be considered as a person resident outside India for the year in which they have left for employment.

Exception (B):

(B) A person who has come to or stays in India, in either case, otherwise than-

1. For or on taking up employment in India, or
2. For carrying on in India a business or vocation in India, or
3. For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

Criterion B is a bit more complicated to understand. If an individual comes to India for the following reasons, he shall be considered as a resident.

1. For or on taking up employment in India, or
2. For carrying on in India a business or vocation in India, or
3. For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period.

However, the question is since the second criterion is an exception to the main rule of 182 days, do we even consider this when an individual has spent less than 182 days in India?

In strict legal terms, the exception cannot be considered if the main criterion is not fulfilled. However, in practice, exception (B) can be viewed in standalone terms; otherwise, it would defeat the purpose and intention of the law and give rise to multiple instances of misrepresentation.

FEMA is an intention-based law which is further solidified by the facts of the case.

To give you practical insights, in a past case between an individual v/s the ACIT, Non-Corporate Circle, the Indian court in their precedent showed that the days spent in India were disregarded, with greater emphasis placed on the intent to pursue employment in India. The exception of B(a) was viewed solely without considering the main criterion.

To address the gap in the residential status of students moving abroad for further studies, the RBI, in a past circular, clarified that students going abroad for higher education could be classified as Persons Resident Outside India (PROI). This classification is based on the fact that their stay outside India exceeds 182 days, and the duration of their stay is uncertain.

Compliances and Reporting on Change in Residential Change:

When an individual's residential status changes, it is essential to follow certain compliance procedures and reporting requirements to ensure that they remain in full accordance with legal regulations. This may involve:

1. Updating financial institutions.
2. Notifying relevant authorities.
3. Making necessary amendments to official records.

Failing to comply with these requirements can lead to legal or regulatory issues, making it crucial to have expert guidance in managing FEMA compliance services.

Are you unsure about your residential status or which category best aligns with your planned structure? You may need assistance managing the submissions and compliances required when your residential status changes.

With over 70 years of expertise, KDP Accountants can streamline the entire process, making the transition smooth, simple, and stress-free. Let us handle the details so you can focus on what matters most.

Niriksha Goyal
Author

Ms. Niriksha is in her final year of the rigorous Chartered Accountancy program, demonstrating her commitment and drive toward excellence. An inquisitive and thoughtful individual, she continuously seeks to deepen her knowledge across various fields, often engaging in intellectual exploration that keeps her on her toes.
Niriksha’s expertise lies in Foreign Exchange Management Act (FEMA), cross-border transactions, financial structuring, and advisory services. She has honed a deep understanding of these specialized areas, which allows her to provide comprehensive solutions to clients navigating complex international financial landscapes. Her proficiency extends to representing clients before the Reserve Bank of India (RBI), where she adeptly handles regulatory matters, ensuring that her clients’ cross-border dealings remain compliant and strategically sound.