How do criteria for determining residential status under Income Tax Act differ from FEMA?

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Residential status plays a crucial role in taxation and foreign exchange regulations. Today's Ask Wallet Query decodes that the criteria under the Income Tax Act and Foreign Exchange Management Act (FEMA) are not the same, often leading to different outcomes.

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I was in India during Financial Year (F.Y.) 2024–25 for a total of 176 days. In the four years preceding F.Y. 2024–25, I stayed in India for more than 365 days. I returned to India for good during F.Y. 2024–25. Can I claim non-resident status under FEMA? If not, can I claim tax exemption on interest from my NRE fixed deposits for the period after I returned to India?

The year-wise details of my physical stay in India are as follows: FY 2014–2015: 38 days, FY 2015–2016: 12 days, FY 2016–2017: 7 days, FY 2017–2018: 11 days, FY 2018–2019: 82 days, FY 2019–2020: 366 days, FY 2020–2021: 365 days, FY 2021–2022: 223 days, FY 2022–2023: 130 days, FY 2023–2024: 179 days, FY 2024–2025: 176 days (All remaining days were spent outside India.)

Expert Advice: The criteria for determining residential status under the Income Tax Act differ from those under FEMA. Under the Income Tax Act, residential status is based on the number of days of stay in India and is determined after the end of the financial year. Once determined, it applies for the entire year to compute tax liability.

Under FEMA, the basic condition is that a person is considered a resident if they are in India for more than 182 days in the previous year. However, there are exceptions. A person is considered a non-resident as soon as they leave India to take up employment or a vocation abroad or leave with the intention to stay outside India indefinitely. Conversely, one becomes a resident immediately upon arriving in India to take up employment or with the intention of staying indefinitely.

Therefore, unlike income tax law, under FEMA a person’s residential status can change within the same year. It is also possible to be a resident under tax laws but a non-resident under FEMA, and vice versa.

Interest on NRE accounts is exempt as long as you are a non-resident under FEMA, regardless of your residential status under the Income Tax Act. For instance, if you return temporarily to care for your parents and thus qualify as a resident under income tax rules, you may still remain a non-resident under FEMA provided you intend to return abroad.

Since you have returned to India permanently, you became a resident under FEMA immediately upon arrival. You must inform your bank of this change so they can redesignate your NRE account as a normal resident account. Request your bank to issue interest certificates for the broken period so that you can correctly report taxable interest on your NRE account in your ITR.

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