How to Become an NRI? Meaning, Rules and Benefits Explained

The NRI meaning generally refers to an Indian citizen or a person of Indian origin who lives outside India. However, the exact definition depends on the law under which the status is being determined.

Under the Income-tax Act, residential status is primarily based on the number of days you stay in India during a financial year. Under FEMA, your status depends on your residence and the purpose or intention of your stay in India or abroad.

This means the answer to what is NRI may differ depending on whether the matter relates to taxation or foreign exchange regulations.

There is no separate application through which an Indian citizen automatically becomes an NRI. Your status is determined according to the applicable rules.

The two main frameworks used to determine how to become NRI are:

• The Income-tax Act, 1961: primarily for determining tax residency

• FEMA regulations: for foreign exchange and financial transactions

Under the income-tax act, 1961

Under the Income-tax Act, a person is generally considered a resident in India if they meet either of the following conditions:

• They stay in India for 182 days or more during the relevant financial year.

• They stay in India for 60 days or more during the relevant financial year and for 365 days or more during the four preceding financial years.

If you do not meet the applicable conditions for being a resident, you are generally treated as a non-resident for income tax purposes.

However, special rules apply to certain Indian citizens, including those leaving India for employment and Indian citizens or persons of Indian origin visiting India from abroad.

Amendment under the finance act

The Finance Act, 2020 introduced important changes to the residency rules for certain individuals.

For an Indian citizen leaving India for employment outside India or as a crew member of an Indian ship, the 60-day condition is replaced with 182 days.

For an Indian citizen or person of Indian origin visiting India:

• The 60-day period is generally replaced with 182 days where the prescribed Indian income threshold does not exceed ₹15 lakh.

• The 60-day period may be replaced with 120 days where Indian income, excluding foreign-source income, exceeds ₹15 lakh, subject to the applicable conditions.

The Finance Act also introduced the concept of a deemed resident for certain Indian citizens who are not liable to tax in another country and meet the prescribed income conditions. Such cases may require a more detailed review of the individual's circumstances.

NRI status definition by FEMA

FEMA determines residential status for foreign exchange and certain financial transactions. The FEMA approach is different from the Income-tax Act because it considers the nature and intention of a person's stay.

Generally, an individual who leaves India or stays outside India for employment, business, vocation or another purpose indicating an intention to stay outside India for an uncertain period may qualify as a person resident outside India under FEMA.

Similarly, a person may be treated as an NRI for FEMA-related purposes when they reside outside India and have moved abroad for an uncertain period. This may include:

• A person going abroad for employment

• A professional taking up work outside India

• A student pursuing studies abroad

• A seafarer working on international ships

• A spouse accompanying a person employed abroad

Your FEMA classification can affect your eligibility to open NRI bank accounts, invest in India, repatriate funds and carry out other permitted foreign exchange transactions. Therefore, simply counting days may not be enough when determining your status under FEMA.

You can determine your NRI eligibility by checking your status separately under the Income-tax Act and FEMA.

Step 1: Check your days of stay in India

Count the number of days you were physically present in India during the relevant financial year. Also check your stay in the preceding four years where the 60-day or other applicable conditions apply.

Step 2: Identify the reason for staying abroad

For FEMA purposes, consider why you moved outside India. Employment, business, studies or another purpose involving an uncertain period of stay abroad may be relevant to your residential classification.

Step 3: Check special tax rules

Special rules apply if you are an Indian citizen leaving India for employment, a crew member of an Indian ship, or an Indian citizen or person of Indian origin visiting India.

Step 4: Review your income level

Certain tax residency rules apply differently when an Indian citizen or person of Indian origin has income exceeding the prescribed ₹15 lakh threshold, excluding foreign-source income.

Step 5: Check both laws separately

Your tax residency under the Income-tax Act and your residential status under FEMA may not always be the same. Check both definitions before changing bank accounts, making investments or determining your tax liability.

Step 6: Consider the purpose of the transaction

For tax filing, focus on the Income-tax Act. For NRI banking, investments, repatriation and foreign exchange transactions, FEMA regulations may also be relevant.

Being a Non-Resident Indian (NRI) comes with various advantages that can assist you in accomplishing your financial objectives and dreams. A few of these advantages include:

You can earn better interest rates on your deposits and investments in India compared to your country of residence. For example, NRIs can open NRE or FCNR accounts that offer attractive interest rates on foreign currency deposits without any currency risk.

You can easily transfer money to and from India through various modes of remittance, such as wire transfers, online banking, cheques, and demand drafts. You can also repatriate your funds from India without any restrictions, subject to certain conditions and documentation.

NRIs can access various investment plans in India, such as equities², mutual funds, bonds, and real estate.

Once you understand how to become an NRI, it is important to review the banking and financial rules applicable to your NRI status. FEMA regulations govern many banking, investment and foreign exchange transactions carried out by NRIs in India.

NRI bank accounts

An Indian NRI cannot continue using an ordinary resident savings account after their residential status changes. Depending on the nature and source of funds, they may need to convert or open an appropriate NRI account.

The commonly used NRI bank accounts include:

• NRE account: Primarily used to manage foreign earnings transferred to India. Funds are generally repatriable, subject to applicable rules.

• NRO account: Used to manage income earned in India, such as rent, pension, dividends or other permitted income. Repatriation is subject to FEMA and banking regulations.

• FCNR account: A foreign currency deposit account that allows eligible NRIs to hold fixed deposits in permitted foreign currencies.

The appropriate account depends on the source of income and the purpose of the funds.

Investment rules for NRIs

An NRI may invest in several Indian financial instruments, subject to FEMA, RBI, SEBI and other applicable regulations. These may include:

• Equity shares

• Mutual funds

• Bonds and government securities

• Fixed deposits

• Real estate, subject to applicable restrictions

• Other permitted investment instruments

The investment route, documentation and repatriation rules may differ depending on whether the investment is made on a repatriation or non-repatriation basis.

Repatriation of funds

Repatriation refers to transferring money from India to another country. An NRI may repatriate eligible funds through permitted banking channels, subject to FEMA rules.

The amount that can be repatriated may depend on the type of NRI account, source of funds and applicable taxes. For example, NRE account balances are generally freely repatriable, while repatriation from an NRO account is subject to prescribed limits and conditions.

Loans and property transactions

NRIs may be eligible for loans from authorised Indian lenders for permitted purposes. They may also purchase residential or commercial property in India, subject to FEMA regulations.

However, an NRI cannot generally purchase agricultural land, plantation property or a farmhouse through the usual purchase route without meeting the applicable conditions or obtaining the required approval.

Reporting and compliance

Banks and financial institutions may require NRIs to provide documents relating to their residential status, overseas address, PAN and source of funds.

Therefore, changes in NRI status should be communicated to banks and other financial institutions. NRIs should also ensure that their bank accounts and investments comply with the latest FEMA and regulatory requirements.

An NRI is not automatically exempt from paying tax in India. An NRI is generally taxed in India on income that is received, deemed to be received, accrued or deemed to accrue in India.

Therefore, after determining how to become an NRI in India, you should also understand which Indian income remains taxable. The tax treatment depends on the nature and source of income, applicable tax provisions and the relevant tax treaty.

Taxable income for NRIs

Income earned or received in India may be taxable for an NRI. Common examples include:

• Salary for services rendered in India

• Rental income from property located in India

• Capital gains from eligible Indian assets

• Interest income from taxable investments or accounts

• Income from a business or profession with a taxable connection to India

Income earned and received outside India is generally not taxable in India merely because an NRI transfers it to an Indian bank account later. However, the tax treatment can vary based on the nature of the income and the applicable provisions.

Tax on salary income

Salary income is generally taxable in India when the services are rendered in India, even if the salary is paid outside India.

However, taxability may differ in certain situations, including short-term employment and cases covered by a Double Taxation Avoidance Agreement (DTAA). The facts of employment and the relevant tax treaty should be considered.

Tax on rental income

Rental income from a property located in India is generally taxable in India, irrespective of where the rent is received.

NRIs may also be required to pay tax on such income according to the applicable income tax rules. Tax deduction at source may apply to rent paid to an NRI, and eligible deductions may be claimed when permitted under the tax law.

Tax on capital gains

Capital gains arising from the transfer of taxable capital assets in India may be taxable for an NRI. This can include gains from assets such as:

• Shares

• Mutual fund units

• Real estate

• Bonds and other securities

The tax treatment depends on factors such as the type of asset, holding period and applicable provisions. Certain NRIs may also have special provisions for investments made using foreign exchange assets.

A non-resident may also be eligible for applicable capital gains exemptions when the prescribed conditions are met.

Tax on interest income

The tax treatment of interest income depends on the type of bank account or investment.

For example, interest from an NRE account may qualify for tax exemption when the applicable conditions are satisfied. Other forms of interest income, including certain NRO account interest, may be taxable in India.

TDS may also apply to taxable interest paid to an NRI.

TDS rules for NRIs

Taxes may be deducted at source from certain payments made to NRIs, including specified interest, rent, capital gains and other taxable income.

The TDS rate depends on the type of income and the applicable provisions. In some situations, the rate available under a DTAA may be more beneficial than the rate under domestic tax law, subject to the fulfilment of applicable conditions.

An NRI may generally claim credit for eligible TDS while filing an income tax return.

Double Taxation Avoidance Agreement (DTAA)

The DTAA is relevant when the same income is taxable in India and another country. India has entered into tax treaties with several countries to help reduce or avoid double taxation.

Depending on the relevant treaty, an NRI may be able to:

• Claim a lower tax rate on specified income

• Claim tax credit in one country for taxes paid in the other

• Claim other treaty benefits, subject to eligibility

To claim a beneficial DTAA rate, the taxpayer may need to provide documents such as a Tax Residency Certificate and other prescribed information.

The provisions of a DTAA can be used when they are more beneficial than the applicable domestic tax provisions, subject to eligibility and compliance requirements.

Tax deductions and exemptions

An NRI may be eligible for certain deductions and exemptions available under the Income-tax Act, depending on the applicable tax regime and nature of income.

However, the availability of deductions may differ for certain types of NRI investment income and capital gains covered by special tax provisions. The selected tax regime may also affect the deductions that can be claimed.

Income tax return filing for NRIs

An NRI may need to file an income tax return in India when their income is taxable in India and they meet the applicable filing requirements.

The appropriate ITR form depends on the nature of income. For example:

• ITR-2 may apply where an NRI does not have income from business or profession.

• ITR-3 may apply where an NRI has income from a business or profession.

Certain exceptions from return filing may apply in specified situations where the NRI earns only particular categories of income and tax has been deducted as required.

Foreign tax credit

If the same income is taxed in India and another country, an NRI may be eligible to claim relief through a DTAA or foreign tax credit, depending on the circumstances.

The availability of such relief depends on the residential status, applicable treaty and taxes paid in the relevant country. Proper tax documentation is important when claiming foreign tax relief.

Choosing between normal and special NRI tax provisions

Certain Indian NRI taxpayers may be eligible for the special tax provisions applicable to specified income from foreign exchange assets. These provisions may offer concessional tax treatment in certain situations.

However, NRIs may need to compare the special provisions with the normal tax rules before determining the appropriate treatment. The applicable option depends on the nature of income, investment and other conditions.

Understanding how to become an NRI involves more than moving abroad. Your NRI status depends on your residential classification under the Income-tax Act and FEMA, making it important to assess your NRI eligibility carefully. The NRI full form is Non-Resident Indian, but the NRI meaning may vary based on legal and financial regulations. Whether you are learning how to become NRI in India or understanding the tax obligations of an Indian NRI, knowing the applicable rules can help you manage your banking, investments, taxation and financial transactions in India effectively.