Foreign Exchange Management Act (FEMA) and the Income Tax Act (ITA) have different definitions, provisions, rules, regulations, procedures and requirements. The definition of Resident or residential status is just one of the many examples.
FEMA regulates anything related to foreign exchange; whereas, the ITA regulates anything related to taxation. For any investment related questions by NRIs or for any foreign exchange related questions by residents and non-residents therules, requirements and provisions of FEMA are to be complied with. The ITA is to be referred only for the taxation aspects of such investments.
While everyone is aware about the provisions of the ITA; there is not enough awareness about the FEMA provisions. As a result, most of the NRIsand their advisors search and use the definition or provisions as per the ITA and apply them for making decisions relating to foreign exchange or for making investments in India, which is incorrect.
It is very important for NRIs to know and understand that it is FEMA and not the ITA, that regulates their investments including bank accounts, real estate, equity, mutual funds, business; as well as money transfers, remittances, borrowing/lending, gifts, etc. Only the taxation aspect of their activities in India is regulated by the ITA.
Thus, NRIs can get their answers as to whether, what, when, how long, why, and how to invest in India from FEMA. The Income Tax Act must be referred to only for questions related to whether any income is taxable and when, why or how to file income tax returns.
In short, refer FEMA for Investments and ITA for Taxation.