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December 2023

NRI – Interplay of Tax and FEMA Issues – Residence of Individuals under The Income-Tax Act

By Ganesh Rajgopalan, Chartered Accountant
Reading Time 33 mins

Editorial Note: This article starts a series of articles on Income-tax and FEMA issues related to NRIs with a focus on the interplay thereof. Apart from a residential status definition under both Income-tax and FEMA, the series of articles will cover issues under both laws related to change of residence; investments, gifts and loans by NRIs; as well as transfers by them from India.

1. PRELIMINARY

Countries exercise their sovereign right to tax based on whether the income arises in their country or whether a person has a close connection with that country. The taxation laws define that close connection — an extended period during which the person stays in a country, or has his domicile there, or any similar criteria. Given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him, income tax may properly extend to that person in respect of his foreign income.1The Income-tax Act, 1961 (the “Act”) imposes such comprehensive or full tax, on persons who are residents.

1   Wallace Bros. & Co Ltd vs. CIT (1948) 16 ITR 240 (PC).

Section 5 of the Income-tax Act, 1961 (the “Act”) provides for the scope of total

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