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Indian Taxation and Investing

  Sanjiv Gupta CPA  Published 
Indian Taxation and Investing

Existing laws outline the taxation both for residents and non-residents in India. An individual must settle its obligations to the government depending on his residential status. However, rules governing their taxes create confusion among Indian citizens and foreigners in the country.

The Income Tax Act was ratified in 1961 outlining the manner of levying, administering, collecting, and recovering income tax for the Indian government according to income (individual) or profit (companies). All collected taxes from people and companies are utilized by the government to implement the necessary programs and projects primarily intended for boosting the economy’s growth. Since its inception, the law has undergone revisions to take into consideration current inflation and other related developments or situations.

Enacted in 1999, the Foreign Exchange Management Act (FEMA) consolidated and amended the law relative to foreign exchange in a bid to facilitate external payments and trade as well as oversee India’s currency market. This regulatory law covers all branches, offices, and agencies outside the country as long as it is owned or controlled by a resident of India. It replaced the Foreign Exchange Regulation Act.

These two pieces of legislation have always caused confusion among clients, regardless if they are based in India or domiciling outside the country for the longest time. Both laws distinguish those residents from non-residents and the amount of tax that must be paid to the government. 

Income Tax Act

An income tax is defined as the tax levied by governments on earnings of people and businesses. Proceeds from income tax serve as revenues for these governments. In most cases, the higher the income (or profit), the higher their tax rate is. In India, the Income Tax Act dictates whether a person is a resident or non-resident Indian (NRI) based on the number of days spent in the country. It also governs the income that can be generated from a non-resident external (NRE) account or non-resident ordinary account (NRO). Conversely, the FEMA determines if he is allowed to make an investment, say, mutual funds, as a resident or non-resident. It also takes into account the intent in deciding on one’s residential status.

Under the Income Tax Act, a person’s residential status is a resident, non-resident, or resident but not an ordinary resident. For non-residents, they can be considered a non-resident Indian or outright foreigners.

One who has been residing in India for 182 days in a year, or has been in the country for four preceding years and 60 days in the current year is considered a resident. In the case of the second qualification, a person cannot obtain the non-resident status if this would be his first time to travel outside India. This requirement excludes person of 

Indian origin living abroad but is visiting India as well as crew members of an Indian ship who are/will be based outside the country.

A resident but not an ordinary resident pertains to a non-resident returning to India if he has been staying in the country for not more than 729 days in the last seven years before the fiscal year in consideration or a non-resident for at least nine out of the years before the year under evaluation. It also accounts the number of years a person holds the non-resident status.

Non-residents, meanwhile, pertains to a person of Indian origin if one of his parents or grandparents were born in the country.

Foreign Exchange Management Act

FEMA states that an individual is a resident, non-resident, or not permanently living in India. If non-resident, it is sub-categorized as non-resident Indian, a person of Indian origin (has an Indian passport), or outright foreigners.

Under FEMA, those who have settled in India for over 182 days in the past year is classified as a resident. But the prerequisite does not apply to people who visits or works in a nation other than India, goes to another country and intends to remain there for an indefinite period, and establishes a business outside the country.

Non-residents, according to FEMA, are those individuals who have been living outside the country for 182 days (or less). It does not apply to people who go and remains in India to work, lives in the nation for an indefinite period, and comes to take up a business or vocation.

As mentioned earlier, FEMA regulates investments (mutual funds in particular). This law gives any person or entity to acquire a land or open a public provident fund (PPF) account. It also allows non-residents to have an NRE, NRO, or FCNR(B) account. They can also invest in any mutual fund using their NRE or NRO account.


FEMA enables non-residents to open an NRE or NRO account in India. They can open an NRE account (savings, current, recurring, or fixed deposit) to keep all earned interests from overseas investments. Aside from being a tax-free account, NRE holders can deposit foreign currency, and withdraw Indian rupees.

With NRO, non-residents can manage their hard-earned money in India through this savings or current account. Although NRO is taxable, it allows account holders to deposit Indian rupees and/or foreign currencies and withdraw rupees.

Both accounts allow account owners to enjoy full repatriability.

Key to Investing in India

The very first step to thriving in India through investment(s) is determining the residential status. It depicts the type of venture one can enter into and the total amount of tax that needs to be paid to the government. Both the Income Tax Act and FEMA provide the guidelines for knowing whether or not an individual or corporation is resident. Despite being a developing country, India offers different investment options such as equity, mutual funds (debt and/or equity), real estate, bonds, and bank fixed deposit that residents and foreigners can look at to achieve their short- and long-term financial goals. It all boils down to playing the cards right, waiting, and taking the risk to succeed.