NRI (Non-Resident Indian): Full Form, Meaning, Types, and Tax Rules

Will a person who is going on a world tour for eight months become a Non-Resident Indian (NRI) upon return? Many of us have similar doubts regarding a person's residential status when they go abroad. To understand when a person becomes an NRI, one has to understand the meaning of NRI and how NRI status is decided. This article helps you understand how and when a person becomes an NRI, the investment opportunities available for NRIs in India, and the tax rules.

‍

Who Is An NRI?

The definition of an NRI is different under the prevailing Foreign Exchange Management Act (FEMA) regulations and the Income Tax Act, 1961 (IT Act). The IT Act states that the residential status helps determine tax liability in India, and the FEMA regulations state that the residential status determines eligibility for making financial transactions in India, such as opening NRI bank accounts, making investments, repatriating funds, etc.

‍

NRI Definition As Per Income Tax Act

A Non-Resident Individual is an individual who is not a resident of India for tax purposes. To determine whether an Individual is a Non-Resident or not, his residential status is required to be determined u/s 6 of the Income Tax Act, 1961, as given below: 

A person is considered NRI if:

(a) He/She has not lived in India for 182 days or more during the financial year.

OR

(b) If He/She is in India for less than 365 days during the four years preceding that year and less than 60 days in that year.

‍

Points to note

1. The 60-day period mentioned in (b) above is extended to 180 days for the following individuals: Indian citizens and persons of Indian origin who visit India during the year and Indian citizens who leave India in any previous year as crew members or for the purpose of employment outside India.

2. The Finance Act 2020, with effect from assessment year 2021-2022, has increased the period of 60 days mentioned in (b) to 120 days in case of an Indian citizen or a person of Indian origin whose Total Income, other than Income from Foreign Sources, exceeds ₹15 lakh during the previous year.

3. The Finance Act 2020 has also introduced new Section 6(1A), applicable from Assessment Year 2021-22. It provides that an Indian citizen earning a Total Income over ₹15 lakh (other than income from foreign sources) shall be deemed to be a Resident of India if they are not liable to pay tax in any country.

‍

NRI Definition As Per FEMA

According to India's Foreign Exchange Management Act 1999 (FEMA), an NRI is an Indian citizen or Foreign National of Indian Origin residing outside India (except Nepal or Bhutan) for employment, carrying on business or vacation etc. in circumstances that would indicate an intention to stay outside India indefinitely.

‍

Eligibility Criteria For NRI Status

To become an NRI, the Indian citizen should meet any one of the eligibility criteria:

• The person has to stay abroad for at least 183 days in a financial year.
• The person must stay less than 365 days during the four years preceding that year and less than 60 days in the current year.

‍

How To Determine Your NRI Status

To determine your NRI status, you should check the number of days you spent in India. If you meet any one of the above two conditions, you qualify as an NRI for tax purposes.

‍

Types Of NRIs

Below are the three principal NRI classifications.

• Central or state government representatives and public sector employees are living overseas.
• Indian civilians working abroad in institutions such as the International Monetary Fund (IMF), the United Nations Organization(UNO), the World Bank, and so on.
• Indian residents residing overseas due to education, jobs, carrying a business, being on vacation or seafarers.

‍

Taxation Rules For NRIs

NRIs are recommended to file an Income Tax Return (ITR) when they have taxable income in India. As per the Income Tax Act 1961, NRIs are mandated to file an ITR in India only if their total annual income in India exceeds:

• ₹2.5 lakh as per the old tax regime or
• ₹3 lakh as per the new tax regime.

‍

Taxable Income for NRIs

• Income Earned or Received in India: Salary, rental income, business income, etc.
• Income from Indian Assets: Interest from fixed deposits, savings accounts, bonds, dividends from Indian companies, etc.
• Rental Income: Rental income earned from properties in India
• Capital Gains: Capital gains from the sale of assets in India, like mutual funds, property, etc.

‍

Non-taxable Income for NRIs 

• Foreign Income: Income earned outside India 
• NRE and FCNR Interest: Interest earned on FCNR and NRE accounts
• Gifts and Inheritances: Gifts received from relatives or as inheritance 

Here’s an useful read on Understanding Residential Status & Its Tax Implications For NRIs

‍

Deductions and Exemptions Available for NRIs

NRIs are also allowed certain deductions and exemptions, however please note these are available only if you are filing taxes under the old tax regime.

• Deductions under 80C: Under 80C, NRIs can claim a maximum deduction of 1,50,000 INR for investments in life insurance premiums, Child tuition fees, ELSS mutual funds, Public Provident Fund (PPF), National Savings Certificate (NSC), and principal repayment on home loans.
• Deductions under 80D: Up to 25,000 INR is deductible under 80D for premiums paid towards health insurance of self, spouse or dependent children. In addition, an NRI can also claim a deduction for parents' insurance (father or mother or both) up to Rs 25,000. The deduction is allowed up to 50,000 if parents are senior citizens.
• Deductions under 80E: NRIs can claim a deduction for interest paid on an education loan. Under this section, there is no limit to the amount that can be claimed as a deduction. The deduction is available for a maximum of eight years or until the interest is paid, whichever is earlier. The deduction is not available on the principal repayment of the loan.
• Deductions under 80G: Deductions are allowed for donations to social causes.
• Deductions under 80TTA: Like resident Indians, non-resident Indians can claim a deduction on income from interest on savings bank accounts up to a maximum of Rs 10,000.
• Deductions under Section 54 and 54F: NRIs can claim tax exemptions on Long-Term Capital Gains by reinvesting gains from selling residential property into new residential property.
• Deductions under Section 54F: NRIs can claim exemptions on gains from selling non-residential assets if the proceeds are reinvested in a new residential property.

‍Note: The above deductions are only available under the old tax regime; and are not available under the new tax regime.

You can connect with a tax expert on iNRI who can help you navigate the nuances of NRI taxation. 

‍

Financial And Legal Implications Of NRIs

Investing in India as an NRI offers significant opportunities but has essential financial and legal implications. NRIs are subject to taxation on income earned in India, such as rental income, capital gains, and interest on deposits. 

They can benefit from the Double Taxation Avoidance Agreement (DTAA) by avoiding paying taxes in both India and their country of residence. NRIs invest through NRE, NRO, and FCNR accounts, with different rules for taxation, repatriation, and foreign currency risks. While funds in NRE and FCNR accounts are freely repatriable, NRO accounts have repatriation limits. Investments can include real estate, mutual funds, and stock markets, though NRIs are restricted from purchasing agricultural land. 

Compliance with the Foreign Exchange Management Act (FEMA) is crucial for investments and fund transfers. NRIs often use a Power of Attorney (PoA) to manage their assets from abroad. Inheritance laws allow NRIs to inherit property, but taxes apply to income from such assets. Careful financial planning, legal compliance, and consulting with experts ensure successful investment strategies in India for NRIs.

‍

Banking And Financial Management for NRIs

Banking and financial management for NRIs involve critical considerations for managing income, investments, and repatriation while complying with Indian laws. NRIs can open NRE, NRO, and FCNR accounts to manage foreign and Indian earnings, offering different tax benefits and repatriation options. Investments in real estate, mutual funds, stocks, and fixed deposits provide growth opportunities, though taxation varies by asset class. NRIs are taxed on Indian income and benefit from DTAA to avoid double taxation. Repatriation rules allow for the free movement of funds from NRE and FCNR accounts, while NRO accounts have limits. Estate planning, inheritance, and Power of Attorney are essential for smooth financial management and KYC compliance for banking and investments.

‍

Investment Opportunities in India for NRIs

NRIs have shown exemplary interest in investing in India for various reasons, such as strong economic growth, better return on investments, rupee depreciation, tax benefits, and family support. Some of the investment opportunities in India for NRIs are:

• Real Estate: NRIs can purchase residential and commercial properties in India. However, they cannot purchase agricultural lands, plantations, or farmhouses. As per FEMA guidelines, payments should be made from the NRE/NRO/FCNR accounts only and cannot be made through traveler's cheque, foreign currency notes, or any other mode except as specified above.
• Equities: NRIs can invest in stocks, Exchange-Traded Funds (ETFs), and Equity Mutual Funds. To invest in stocks, they must have a valid NRO/NRE demat account and trading account under the Portfolio Investment NRI Scheme (PINS). NRI can also apply for Initial Public Offerings (IPOs).
• Mutual Funds: NRIs can invest in various mutual fund schemes available in the market, such as debt, equity, hybrid funds, etc., through lump sum or Systematic Investment Plan (SIP), depending on their preference. Before investing, they must be classified as NRIs as per FEMA guidelines and should invest only through a rupee-denominated account.
  Get your KYC started in less than 5 mins with iNRI. 
• Fixed Income or Debt Instruments: NRIs can invest in fixed deposits in banks, post offices, and other places, as well as government bonds, corporate bonds, infrastructure bonds, and non-convertible debts. They can also invest in National Savings Certificates (NSC), and the National Pension Scheme (NPS), but with some restrictions. Continue to hold Public Provident Funds (PPF), However, NRIs are prohibited from investing in RBI bonds.‍
• Gold: NRIs can invest in digital gold, physical gold, gold ETFs, and gold mutual funds. However, as per FEMA guidelines, they are not allowed to invest in Sovereign Gold Bonds (SGBs). If the investment is made as a resident Indian, the investor can hold it until maturity or opt for an early withdrawal.

Learn how to select the right debt mutual funds to manage risk in your NRI portfolio on our blog here.

How Can iNRI Help NRIs?

With iNRI, NRIs can invest in various mutual fund schemes, apply for PAN and OCI cards, and open NRO/NRE Bank Accounts. iNRI also provides taxation services such as tax consultancy, tax return filings, repatriation, etc.

‍

Conclusion

Understanding NRI status is essential for any Indian citizen living abroad or planning extended stays outside India. NRI status changes how a person invests in India, their tax liability, etc. NRI significantly contributes to the Indian economy through investments in real estate, mutual funds, fixed deposits, etc. Even after the nuclear test at Pokhran in the year 1998, when the USA sanctioned India, it was NRIs who saved India by oversubscribing to government bonds. NRIs who missed the opportunity to invest in India and be a part of the development journey should invest now, as the development journey has just started.

We at iNRI can facilitate NRIs' participation in India's development journey by facilitating

‍

‍

Frequently Asked Question (FAQs): NRI Meaning

‍

What are the main differences between NRI, OCI, and PIO?

NRIs are Indian citizens residing in other countries. OCIs are citizens of other countries of Indian origin. They enjoy lifelong free visas and have similar rights as Indian citizens, except they can't vote and hold public office. PIO once was a separate category but is now merged with OCI.

Here’s a details blog Who is NRI vs PIO vs OCI?

‍

Can NRIs buy property in India?

Yes, NRIs can purchase residential and commercial properties in India. They cannot purchase agricultural land, plantation property and farmhouses but can inherit them.

‍

Can NRIs open a bank account in India?

Yes, NRIs can open specific bank accounts in India, such as NRO/NRE and FCNR accounts.

‍

Are there any restrictions on NRIs regarding investment in India?

NRIs are generally allowed to invest in various sectors in India. Still, some restrictions exist, such as not being permitted to invest in SGBs, purchase agricultural land in India, or carry out intra-day trading in the Indian stock market.

‍