Q. I would like to know the difference in taxation for a person of Indian origin having money in rupees who emigrates to another country for business purpose for unlimited period. What is a non-resident ordinary (NRO) account? Should such person as described above convert their accounts into an NRO account? Or should they keep their bank accounts as ordinary resident accounts and continue to pay income tax as usual? My second question is about taxation on income that is earned outside India. Should one club it with Indian income and pay tax on income earned outside India?

The income tax liability of a person depends on her residential status under the Income Tax Act and not under Foreign Exchange Management Act (Fema). Under the Indian tax laws, the residential status is determined on the basis of number of days stay in India during the financial year starting 1 April and ending on 31 March the following year. If her stay in India exceeds 182 days in that financial year, her worldwide income is liable to tax.

This may particularly happen in the initial year if a person goes outside India for business or employment in the second half of the financial year. In such a case, the income earned outside India would be liable to tax in India subject to the benefits of Double Tax Avoidance Agreement, if any, with the country in which the income has arisen.

If the income is taxed in India, she would be entitled to get the tax credit for foreign tax paid on such income. She would have to file her return of income accordingly. If she is a non-resident in the subsequent years, her foreign income would not normally be liable to tax in India. Uder Fema, if a person goes outside India for employment or business, she would be normally be considered to be a non-resident. Fema goes primarily on intention. On becoming a non-resident, she has to comply with certain formalities with regard to her existing bank accounts by intimating her bankers about the change in the residential status. The bank accounts would then be redesignated as NRO accounts.

All the income from her existing investments would continue to be credited to the same bank account, which is redesignated as an NRO account. She can also open a new non-resident external (NRE) account wherein she could remit funds from abroad which would be freely repatriable outside India. The advantages of an NRE account include exemption from income tax on interest earned, and repatriation benefits for both principal and interest.