A Warning: What would be the impact on you and your family members if personal finance things don’t work out as per your expectation when you return to India…?
Bad news: 90% of NRI investors are not with the right financial planner.
Good news: You can choose the right financial planner now.
As an NRI returning to India, you need a well-thought-out financial plan. Making any impulsive decision will have an adverse effect.
Returning NRIs can save tax on their overseas income through their Residential Status until a period of 3 years after return. You may be curious to know more about that. This article is an attempt to clarify the tax implications for NRIs returning back to India.
Table of Contents
- 1) Residential status in India & its effects in taxability
1) Residential Status in India & its effects in taxability
Residential status describes the duration of the physical presence of a citizen inside Indian Territory. The Income-Tax Act defines the provision for determining the residential status of a person. The taxability of an individual is highly dependent on the residential status of that person for a particular financial year.
Under the Income-Tax law, a person must fall into one of these three categories,
- Resident but Nor Ordinary Resident in India (RNOR)
- Resident and Ordinary Resident in India (ROR)
a) Who is an NRI?
To determine your residential status as per the Indian Income-Tax law, you need to examine these two basic conditions given below.
(i) If an Indian citizen is in India for more than 182 days in the relevant Financial Year
(ii) is in India for more than 60 days in the relevant financial year and more than 365 days in the preceeding 4 Financial Years
then the individual is determined as a Resident of India if at least any one of the condition is satisified. The individual is determined as a Non-Resident only if both the conditions (i) & (ii) are not satisfied. For better understanding take a look at the infographic given below,
There is an exemption for individuals belonging to certain categories to satisify only the first condition as mentioned below,
- Indian citizen who leaves India during the previous year for the purpose of employment
- Indian citizen who leaves India as a member of the crew of an Indian ship
- Person of Indian Origin (POI) or Overseas Citizen of India (OCI) who comes to visit India on a visit during the previous year
Individuals who fall into these categories need not satisify both the conditions. They will be determined as NRI if they satisfy the condition (i) alone, i.e. if they stay outside of India for more than 182 days in the relevant year, then they are still considered as an NRI.
b) Who is an RNOR?
RNOR stands for “Resident Not Ordinary Resident”.
As per the Indian Income-Tax law,
(iii) If you have been a non-resident in India in 9 out of 10 years preceding that financial year.
(iv) If you live for less than 729 days out of 7 years preceding that financial year,
Then you are considered as RNOR for that particular financial year you are returning to India and the subsequent year (2 years).
A Resident other than an NRI or NOR is generally referred to as an Ordinary Resident (ROR).
You can find out your residential status through the Official Income-Tax Residential Status Calculator.
c) NRI/RNOR status after returning to India
Your NRI status after returning to India will be deemed as RNOR status for 2 years and then eventually when the conditions for RNOR status is not satisfied, your residential status will become a ROR (Ordinary Resident). However, taxability of an NRI and RNOR are the same.
You must know the important things to do before losing your RNOR status (NRI 2 years includes the year of returning and the immediate subsequent year). Because once you lose your RNOR status you will be restricted from many tax benefits.
I will elaborate on the checklist of the to do’s before losing the RNOR status at the end of this article.
2) Income Tax implications for a Returning NRI
What do you think you need to do to ease you financially when you return to India…?
How about understanding the tax implications for a returning NRI…?
In order to potentially reduce the taxability & ease the finances of an NRI returning to India, it is mandatory to understand the Income Tax implications for a returning NRI.
Income earned in India is taxable for an NRI in India. Income earned outside India is not taxable for an NRI in India.
It means the taxability of your overseas income (such as rental income, capital gains, bank interest, dividends, etc.) arising out of your assets outside of India (such as bank accounts, stock market/securities, life insurance policies , loans, company deposits, debentures, bonds, residential properties, etc.) largely depends on your residential status in India.
Let’s see an example – As an NRI/RNOR returning to India, you want to buy a new property in India by selling one of your overseas assets.
In this case, if you sell your overseas assets and receive the sales proceeds (money) in your overseas bank account, you do not have to pay any taxes in India.
But, you need the sales proceeds (money) to be in the Indian account to buy your new property in India. Now, if you can simply transfer the money from your overseas bank account to your bank account in India, you do not have to pay any taxes in India.
a) Income Tax rules of an NRI returning to India
Income received or received on your behalf or accrues in India during a financial year by a NOR/NRI are fully taxable as per the Income-tax slab.
Income which accrues or arises outside India and received outside India in a financial year from any other source, by a NOR/NRI is not taxable.
Income which accrues or arises outside India and received outside India during a financial year and remitted to India during that financial year, by both ROR and NOR/ NRI are not taxable.
b) Income Tax Benefits when you are an NRI/RNOR
When you are an NRI/RNOR, you will be exempted from income tax in India for your following incomes:
- Capital gain arising from the sale of fixed and financial assets held overseas (like properties and shares)
- Interest received from FCNR and RFC deposits
- Withdrawals or pension from the retirement account or pension scheme held overseas
- Interest or dividends earned in deposit or securities held overseas
- Rent received from properties held overseas
Based on your return date to India, you stand to enjoy these tax benefits for 2 to 3 years. However, all your Indian income will be taxed.
Unlike the US Federal Reserve, the Indian Income-Tax Act does not ask for its citizens to provide
with the details of foreign investments in the form of FATCA .
3) After losing the NRI/RNOR status
When you are returning to India as an NRI, you will be considered as an NRI only for a limited
period of time and then you will become an RNOR on certain conditions.
Over time, you will lose your RNOR status also as and when you stop satisfying any one of the conditions mentioned for being an RNOR.
When you move out from RNOR and become an ordinary resident then even your global income will be taxed in India.
Suppose if your global income is taxed abroad, then you can claim the tax benefits as per the Double Taxation Avoidance Agreement. Therefore, you will not pay tax twice for this global income after you return.
If you are planning to sell an overseas property or withdraw from overseas retirement accounts, it is advisable to do these when you are an NRI or RNOR to avoid taxation in India.
a) What an NRI should do on return to India
What should be your next step after you return to India?
i) On return to India, you should re-designate your bank accounts as domestic Resident accounts or transfer the balance in your NRE/FCNR accounts to Resident Foreign Currency (RFC) accounts, if you feel the need to do so.
ii) FCNR accounts can be continued till the date of maturity and upon maturity, can be converted to RFC accounts.
iii) Also, you need to open a resident Demat account, to transfer the shares from your NRI Demat account and should close the NRI Demat account.
iv) If you have invested in mutual funds as an NRI, then as and when you return to India, you need to update them with your resident bank details and change the residential status in mutual fund investments from NRI to a resident.
v) What happens to the NRE FDs on returning to India? Can the returning NRI continue the NRE FD till maturity? Does the NRE FD need to be closed on return?
This is a common and important query about the NRE FDs on return to India. Let’s understand the problem with an example.
Siva returns from the US to India by September 2019, and the NRE FD that he holds will mature only by June 2022 i.e. after three years from the return to India. Now what should Siva do about the NRE FD after returning to India?
When Siva approaches the bank regarding this query, a bank which is not properly instructed of the RBI regulations would give either of the two answers below,
The bank would either suggest Siva to continue the NRE FD as such until maturity which is a violation of FEMA and can attract serious retribution – or – the bank would ask Siva to prematurely close the NRE FD and open a new Resident FD which will attract penalty for premature closure of the NRE FD and also a reduced interest rate.
But as per RBI norms, Siva’s NRE FD account can be converted to Resident FD account without any penalty and without any change of interest rate and date of maturity. The only change is that the interest earned will be taxed according to your slab if applicable.
As per the RBI Master Directions, upon returning to India permanently, the existing NRE FD account of the NRI account-holder is required to be converted to Domestic Resident FD account without any changes in the promised Rate of Interest.
The interest earned from NRE FD is not taxable, however after it is converted to a Resident FD the earned interest is taxed as per your income tax slab. TDS will be deducted if applicable.
b) How long can I maintain my NRE account after returning to India?You cannot maintain your NRE account and NRE FDs when you are an RNOR. You need to convert your NRE account to resident account immediately upon returning to India.
You need to convert these accounts to resident accounts within a reasonable period of time. The reasonable period can be assumed as 3 months. If you have not converted the NRE account to resident account within 3 months, it would be considered as FEMA violation. It is better to avoid those hardships and convert the NRE accounts within a reasonable period.
Even after becoming a resident if you continue your NRE account and FDs, then the interest from them will be taxable. Interest from NRE account and FDs are tax-free only for non-residents.
What’s the FIRST (and easiest) step you must take from the above as a returning NRI?
c) RFC Account
Resident Foreign Currency (RFC) is a Scheme approved by Reserve Bank of India permitting persons of Indian nationality or origin, who have returned to India on or after 18th April 1992 for permanent settlement (Returning Indians), after being resident outside India for a continuous period of not less than 1 year, to open foreign currency accounts with banks in India for holding funds brought by them to India.
Simply, Resident Foreign Currency (RFC) accounts are bank accounts maintained by Indian residents for Global-scale transactions in Foreign Currency. Only returning NRI’s can open RFC account since it is specially established for NRI’s who want to bring their earnings in foreign currency from their overseas bank account to their bank account in India.
Interest income from RFC accounts is taxable. But if you qualify as an RNOR, then the interest income from RFC account is not taxable.
RFC accounts can be opened in different forms like current account or savings account or term deposits.
d) Retaining Overseas Assets
It is not necessary for the NRI returned and turned Resident, to obtain any permission from RBI or any other authority to retain your overseas assets.
Section 6 (4) of FEMA has granted permissions for returning NRIs to retain the overseas assets.
4) Final Thoughts
To summaries, an Ordinary Resident (ROR) is liable to pay tax on his global income, while an NRI is liable to tax on the income ‘earned’ in India.
You may reap the above tax benefits until you claim that you are an NRI, but once you pronounce your residential status as Resident, you will avail no benefits and will be considered as a full-time resident of India and will have to follow the regular tax format.
That is you will enjoy NRI income tax benefits until the time you hold the NRI status in India.
What human resources do you have access to mentor your personal finance-related issues before and after returning to India…?
A Certified financial planner can make all the difference to your personal finances. Here’s a step by step guide to choose a right financial planner for NRIs.
What is the one step you could take right now that would indicate you are moving forward in the right direction as an NRI…? How about having a short discussion with a financial planner about your challenges and difficulties…?
To invest your savings properly and become wealthier after your return to India, you need a route map to take you from where you are financially and where you want to go financially. You will have a clear route map only when you create a financial plan for yourself and your family.
I hope this article has given valuable insights about the tax implications for you as an NRI. Let us know your thoughts in the comment section.
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