Returning to India? Tribunal ruling may hit property, gifts, fund transfer

Business Standard

5 days ago

A recent tribunal decision has reopened a long-standing debate on when a returning Non-Resident Indian (NRI) officially becomes a 'resident' under Indian law. This status isn't just a bureaucratic label—it directly impacts your ability to buy property, hold bank accounts, invest, or even receive gifts.
The conflict
Under RBI rules, NRIs returning to India must convert their NRO/NRE accounts into resident accounts almost immediately upon arrival if they intend to stay for good. FEMA, however, contains a provision that — if interpreted flexibly — treats NRIs as residents from the day they arrive with an intention to settle or work.
The Tribunal, however, has decided otherwise:
To be considered a resident under FEMA, two conditions must be met:
Intent – The person must intend to stay in India permanently or for an indefinite period for employment, business, or vocation.
Physical Presence – They must have stayed in India for at least 182 days in the preceding financial year.
This literal interpretation creates a year-long limbo for many returning NRIs, especially those arriving after September — they would neither be considered residents under FEMA nor be allowed to operate fully as non-residents due to RBI account conversion requirements.
One of the core reasons this ruling matters lies in how India's exchange control framework works. Under the Foreign Exchange Management Act (FEMA), whether you can gift assets, buy property or shares, repatriate money abroad, or even carry out certain investments depends on your residential status. This status is determined not just by how many days you spend in India, but also by your intention to stay.
"Under Indian law, the concept of residency diverges under the tax laws and FEMA. While the tax laws provide for a definitive day-count test (primarily 182 days) to determine tax residency, FEMA evaluates both the number of days stayed in India and the individual's intention to reside or stay abroad. The tribunal's dual-condition test requiring both physical presence and demonstrable intent aligns with FEMA's flexible and purpose-driven interpretation, which overrides the rigid 182-day rule under the tax law. Accordingly, even if a returning NRI qualifies as a tax resident, they may still be treated as a non-resident under FEMA if they intend to return abroad. Pursuant to RBI directives, NRE/NRO accounts must be reclassified to resident accounts upon acquiring resident status under FEMA, not merely upon meeting tax residency thresholds. Banks, therefore, rely on FEMA's intention-based test and may require declarations and supporting documents before mandating account conversion. For NRIs returning mid-year, particularly post-September, challenges may arise around property purchases, investment eligibility, and bank account reclassification, as regulatory benefits and obligations shift based on residency status under both frameworks," explained Aurelia Menezes, Partner, King Stubb & Kasiva, Advocates and Attorneys.
Obstacles for NRIs Arriving mid year, as explained by Alay Razvi, Managing Partner, Accord Juris
If an NRI returns after September:
They will not have spent 182 days in India in the previous financial year, and by the tribunal's interpretation, may not be a 'resident' until the next year.
This delays the ability to:
- Purchase property (especially agricultural land, which is restricted to residents)
- Invest in shares or securities as a resident
- Open/convert usual resident bank accounts
They may be required to operate as non-residents for banking/investment purposes, or risk being in technical violation of banking/FEMA rules.
NRIs in this limbo-period could face:
a. Restrictions on receiving gifts of shares or funds from resident relatives, lending to non-relatives, or making certain investments reserved for residents
b.Donors themselves could breach limits if the recipient is not a legal resident
c. Anomalous scenarios such as operating a 'resident' account when still technically non-resident or being forbidden to operate certain accounts altogether until the 182-day condition is satisfied.
NRIs technically retain the right to challenge the tribunal's decision in higher (High Court/Supreme Court) forums, arguing for an interpretation based on intent/purpose of return, as is consistent with RBI's master directions. Class action or individual writs can be filed seeking clarity and practical application of FEMA that aligns with RBI guidance.
The Case That Sparked It
The Tribunal penalised an NRI who returned in May 2012, settled in India, and purchased agricultural land in his wife's name the same year. Despite his intent to stay permanently, he was deemed a non-resident for that year because he hadn't spent 182 days in India in the preceding year.
The Tribunal Order (in a case involving Pradeep Mishra) has been misinterpreted by some to mean both conditions must be met. In fact, as Akshat Pande, Managing Partner at Alpha Partners, clarifies:
'The condition of intention to take up employment, etc., overrides the 182-day requirement.'
"The tribunal's recent insistence on a past physical presence of 182 days in the previous financial year overlooks both the RBI's operational practice and the principle of 'intention-backed conduct.' This rigid interpretation risks penalising genuine returnees and creates ambiguity in routine matters like bank account reclassification, repatriation, and investment compliance. It is essential for the RBI and FEMA authorities to provide a harmonised, intention-and-conduct-based framework to ensure legal clarity for returning NRIs," said Shiju PV, Managing Partner, IndiaLaw LLP.
How banks handle it
Banks generally go by RBI's immediate conversion mandate once you show intent to settle, even if the FEMA 'preceding year' condition isn't met. This means:
If you've taken a job or started a business, account conversion is triggered.
The conversion process itself is unlikely to face resistance—banks are typically cooperative if you approach them early.
Can returning NRIs manage or resolve conflicts between the tribunal's strict interpretation and the existing banking practices mandated by RBI and FEMA guidelines?
"An NRI has to convert his bank account status from PROI to PRI if (i) he completes 182 days in a financial year or (ii) takes up employment or business or shows intention to stay for an uncertain period in India, whether or not he has completed 182 days in a financial year. So far they are complying with this requirement, there is no conflict. Banks are generally extremely helpful to resolve such issues if approached at the right time," said Akshat Pande, Managing Partner, Alpha Partners.
There is, however, a small upside:
Non-residents can still repatriate up to $ 1 million per financial year from their NRO accounts.
In contrast, resident individuals face a lower Liberalised Remittance Scheme (LRS) limit of $250,000.
For succession and estate planning, NRIs can continue to inherit Indian assets previously held by Indian residents under Section 6(5) of FEMA, so there is no change there.
'In terms of succession or estate planning, an NRI can still bequeath Indian assets formerly held by Indian residents under Section 6(5) of FEMA. Hence, in this area, status quo should be maintained," said Keshav Singhania, Head – Private Client, Singhania & Co.
Practical takeaway: Lawyers advise following the RBI's conservative approach—re-designating your NRE/NRO accounts if your status changes—to avoid operational headaches later. Not doing so could result in transaction delays, account restrictions, or compliance disputes.
'Given the interpretational issues raised by the Tribunal, it is still advisable to follow RBI's prudent and conservative directive to re-designate NRE/NRO bank accounts. On a practical level, not doing so may cause practical challenges,' said Singhania.
What Should Returning NRIs Do?
Given the ambiguity and possible practical challenges (like banks freezing or delaying transactions), experts recommend following the RBI's conservative approach: