COURTKUTCHEHRY SPECIAL FOR INDIAN INVESTING IN FOREIGN COUNTRIES
Resident vs. Citizen: What Indians Must Know Before Investing Abroad
FEMA vs. Income Tax Act – Two Different Tests
Residency, Not Citizenship, Governs Overseas Investments
By Vishwas Kumar
New Delhi: April 07, 2026:
When Indians plan to open companies or LLCs abroad, one of the most misunderstood aspects is the difference between being a citizen of India and being a resident of India. The Reserve Bank of India (RBI), through the Foreign Exchange Management Act, 1999 (FEMA), regulates overseas investments based on residency status, not citizenship. This distinction is critical because a citizen of India may be resident outside India, and therefore not governed by FEMA restrictions, while a foreign national may be resident in India and subject to FEMA rules.
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FEMA’s Definition of “Resident”
Section 2(v) of FEMA defines a “person resident in India” broadly. It includes individuals who have stayed in India for more than 182 days in the preceding financial year, but with important exceptions:
- Those who have gone abroad for employment, business, or any purpose indicating an intention to stay outside India for an uncertain period are not residents.
- Conversely, those who come to India for employment, business, or with an intention to stay indefinitely are considered residents.
Residency under FEMA is therefore determined not just by the number of days spent in India, but also by the intention to stay. This makes it distinct from the Income Tax Act, which relies purely on physical presence.
Income Tax Act’s Residential Status
Section 6 of the Income Tax Act divides individuals into three categories:
- Resident and Ordinarily Resident (ROR)
- Resident but Not Ordinarily Resident (RNOR)
- Non-Resident (NR)
Here, residency is determined by the number of days spent in India during the previous year. Importantly, this status is assessed annually, and one can be resident in one year and non-resident in another. Unlike FEMA, the Income Tax Act does not consider intention to stay.
Why the Distinction Matters for Overseas Investments
- FEMA governs foreign exchange transactions: If you are a resident under FEMA, your overseas investments are regulated by RBI. You must comply with limits and reporting requirements under the Liberalised Remittance Scheme (LRS).
- Citizenship is irrelevant under FEMA: A citizen of India living abroad for employment may be non-resident under FEMA and free to invest abroad without RBI restrictions.
- Income Tax Act governs taxation: Even if you are non-resident under FEMA, you may still be resident under the Income Tax Act for tax purposes, depending on your physical presence in India.
This dual framework means that before opening a company abroad, Indians must carefully determine their residency under both FEMA and the Income Tax Act.
Key Legal Points to Remember
- Residency under FEMA is intention-based: If you leave India for employment or business abroad with no definite return date, you are non-resident under FEMA.
- Residency under Income Tax Act is day-count based: Spending 182 days or more in India in a financial year generally makes you resident for tax purposes.
- Dual residency possible: You may be resident in India under FEMA but non-resident under the Income Tax Act, or vice versa.
- RBI regulates residents, not citizens: Only residents under FEMA are subject to RBI’s restrictions on overseas investments.
- Duty of disclosure: It is the assessee’s responsibility to provide evidence of residency status to tax authorities.
- Unnatural exclusion of heirs or unexplained delay in disclosure of assets abroad can trigger scrutiny: Courts and regulators apply heightened standards when suspicious circumstances exist.
Practical Implications
- An Indian citizen working in the U.S. for several years is non-resident under FEMA and can freely invest in U.S. companies.
- A U.S. citizen living in India for more than 182 days may be resident under FEMA and subject to RBI rules.
- An Indian citizen who spends 200 days in India in a year may be resident under the Income Tax Act, even if he is non-resident under FEMA.
Thus, before opening a company abroad, one must check both FEMA and Income Tax Act residency rules to avoid regulatory violations and tax complications.
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FAQs
Q1: Can an Indian citizen living abroad open a company outside India without RBI approval?
Yes, if they are non-resident under FEMA. Citizenship does not matter; residency status does.
Q2: What if I am resident under Income Tax Act but non-resident under FEMA?
You may have to pay taxes in India on global income, but RBI restrictions on overseas investments may not apply.
Q3: Is registration of a company abroad allowed for residents under FEMA?
Yes, but subject to RBI’s Liberalised Remittance Scheme (LRS) limits and reporting requirements.
Q4: Can a foreign national living in India be subject to FEMA?
Yes. Residency under FEMA applies to all persons, regardless of nationality.
Q5: How often is residency status determined?
Under FEMA, it depends on intention and circumstances. Under Income Tax Act, it is determined annually based on physical presence in the previous year.
Q6: What is the main difference between FEMA and Income Tax Act residency?
FEMA considers intention to stay inside or outside India, while the Income Tax Act considers number of days stayed in India.
Q7: Can I be resident in two countries at the same time?
Yes. Dual residency is possible. Tax treaties often resolve conflicts by assigning residency for tax purposes.
CONCLUSION:
This judgmental clarity between resident vs. citizen and FEMA vs. Income Tax Act is why lawyers and advisors stress careful planning before Indians open companies abroad. It ensures compliance with RBI regulations and avoids unexpected tax liabilities.