NRIs face residency test upon India return, must stick to 182-day rule
Mumbai, Aug 21, 2025
Given the lack of legal clarity in India around status, assuming they are residents immediately after return could invite penalties and prosecution
A recent appellate tribunal ruling has complicated matters for non-resident Indians (NRIs) returning to India by replacing the Reserve Bank of India’s (RBI) intent-based residency test with the Foreign Exchange Management Act’s (Fema) stricter requirement. Until clarity emerges, NRIs should exercise caution and avoid major financial transactions not fully compliant with FEMA regulations.
What is the controversy?
Section 2(v)(i) of FEMA includes two tests for residency. The first requires a physical stay of 182 days in the preceding financial year. The second, which is intent-based, allows residency even without meeting the 182-day rule if the intention to reside in India for an extended period is evident.
RBI has long followed the intent-based approach. Once an NRI returns with the intention to stay — say, on retirement or for employment — they are treated as residents from the date of return, allowing immediate conversion of non-resident external and non-resident ordinary (NRE and NRO) accounts and access to transactions that residents can undertake.
“In effect, RBI places greater weight on intention and conduct, rather than requiring a 182-day physical stay in the previous financial year,” says Suresh Surana, a Mumbai-based chartered accountant.
The tribunal in New Delhi, however, held that intent alone is insufficient. In the Pradeep Mishra versus special director, Directorate of Enforcement, Lucknow case, it ruled that at least 182 days of physical presence in the preceding financial year is mandatory under Fema.
“By doing so, the tribunal effectively subordinated the intent-based carve-outs to the 182-day condition, treating physical stay as a mandatory prerequisite. This interpretation diverges from RBI’s long-standing intent-based approach,” says Surana.
Myriad implications for returnees
This stricter reading is expected to create several hurdles for returning NRIs. “A person may have to wait up to 18 months before declaring themselves a person resident in India,” says Dhruv Chopra, managing partner, Dewan P. N. Chopra & Co.
Conversion of NRE/NRO accounts to resident accounts is only possible after an individual qualifies as a resident. “The conversion will now happen in the financial year following the one in which the individual spent more than 182 days in India. Premature conversion may lead to non-compliance under Fema,” says Riaz Thingna, partner (tax), Grant Thornton Bharat.
Additionally, only resident Indians are allowed to purchase agricultural land. NRIs returning to India must now ensure they are residents before entering into such transactions.
Residents can invest freely in Indian companies. “Non-residents must comply with sectoral caps, pricing guidelines, and reporting obligations under FEMA,” cautions Thingna.
Their private investments will remain subject to foreign direct investment (FDI) norms. “Any such investments will require adherence to procedural compliances, such as filing of Form FC-GPR, FC-TRS, etc.,” says Chopra.
Capital movement will also get affected. “They will only be able to receive gifts from residents up to the Liberalised Remittance Scheme (LRS) limit of $250,000,” says Archit Gupta, founder and chief executive officer (CEO), ClearTax. While residents can remit $250,000 annually, non-residents are capped at $1 million.
Experts say Fema limits on gifting and lending to relatives and companies will be harder to navigate without clear residency. “Overall, the ruling risks unsettling the financial transition for NRIs returning mid-year, and could create uncertainty in banking, investments, and taxes,” says Gupta.
Penalties and other risks
Experts warn that past transactions could also be scrutinised. “Since this ruling is in the nature of an interpretation of law, it may be inferred that it can have a retrospective impact on past transactions also,” says Thingna.
“If returning NRIs assumed that they were residents upon arrival, based on RBI’s rules, and immediately reorganised bank accounts, bought property, or invested in shares, these actions could be challenged under the Fema interpretation,” says Gupta.
Thingna points out that the ruling is likely to be appealed.
Proceed with caution
Until clarity emerges, experts advise caution. “Do not rush to convert NRE/NRO account to a resident account. And until the picture is clear, delay major investments and property purchase decisions,” says Deepak Kumar Jain, founder and CEO, TaxManager.in, the tax advisory and e-filing portal platform of Rising Advisory Services.
One common practice among NRIs is to buy land for a house soon after returning to India. “According to the ruling, this needs to be postponed until they have resided for at least 182 days in the financial year prior to the one in which land is purchased,” says Xerxes Antia, partner, corporate transaction and restructuring, BTG Advaya.
An NRI should apply for conversion of their bank account only once they have spent 182 days in India in the previous financial year.
Jain suggests that all major transactions should be backed by clear intent, proper documentation, and RBI/authorised dealer (AD) approvals.
NRIs should avoid undertaking certain transactions. “Transactions such as accepting gifts or investing in specific assets, certain inheritance and transfers, are barred for non-residents. Hence, caution should be exercised herein,” says Vivek Jalan, partner, Tax Connect Advisory Services.
Jalan further suggests that funds in special bank accounts (like NRE or NRO), even after conversion to a regular account, should not be used for the purchase of agricultural land until the FEMA criteria for residency are met.
Until the law gets settled, NRIs should adhere to the stricter FEMA interpretation. “The ruling has made it clear that for an NRI to be considered a person resident in India, they need to fulfil the test of having been a resident for at least 182 days in the previous financial year,” says Antia. NRIs should seek professional advice before undertaking major financial moves, so as not to invite prosecution and penalties.
Tread with caution
* Returning NRIs should avoid immediately converting their non-resident accounts into resident accounts
* NRIs should postpone buying property (especially agricultural land) or making large investments until they have satisfied the residency requirement
* NRIs should refrain from engaging in barred activities for non-residents, such as accepting certain gifts, investing in restricted assets, or using NRE/NRO funds for agricultural land purchases
* They should wait until they clearly qualify as residents under FEMA’s 182-day rule
[The Business Standard]
