Under Indian tax provisions, NRI is an individual who is an Indian citizen or person of Indian Origin who is not a resident in India. RBI issues guidelines on varied matters relating to an NRI individual. These guidelines relate to opening and maintaining of bank accounts in India as well as for investments in and outside India. Income Tax for NRI will depend upon his Residential Status for the year. It is important to determine the residential status of an individual before determining their taxability.
Who is NRI?
As per Income Tax Act, an individual is considered as a Resident in India, if the individual meets either of the “basic conditions” of presence in India as below:
- 182 days or more during the current Financial Year; or
- 60 days or more during the current Financial Year and 365 days or more in total during 4 preceding Financial Year.
If neither of these two conditions is satisfied, the individual would be treated as an NRI. The tax year is calculated from April 1 to March 31. Further, there is another category of non resident Indians, known as ‘Not Ordinarily Resident’ (NOR). You can become an NOR either if your stay in India:
- In the 7 financial years immediately preceding that financial year is less than 729 days, or
- If you were a Non-Resident for 9 of the 10 financial years immediately preceding that financial year.
Tax Implications for NRI Returning to India
The taxability of your income outside India (such as rental income from property outside India, capital gains, bank interest, dividends, etc.) arising out of your assets (such as bank accounts, stocks/securities, residential properties, etc.) shall majorly depend on your residential status in India.
While returning to India you may sell your overseas assets in capacity of a NOR or NRI. In such cases if you sell any overseas assets and receive the sale proceeds outside India, you do not have to pay any taxes in India. Further, you can first receive the sale proceeds in an overseas bank account and thereafter remit part or whole of the proceeds back to India without creating any Indian tax liability.
Tax Liabilities for NRI Returning to India
Taxability in India is dependent on whether an individual qualifies as a Resident, NOR or Non-Resident. For income which accrues or arises outside India and received outside India during the preceding previous years and remitted to India during the previous year is not taxable to NOR/ NRI.
For income received or deemed to be received or accrues or arises in India during the previous year, is fully taxable for NOR/ NRI. However they can take the benefit of DTAA (Double Tax Avoidance Agreement) between the two countries for the doubly taxed income. This can help avoid paying tax on the same income twice.
The income which accrues or arises outside India and received outside India in the previous year from any other source is not taxable for NOR/ NRI.
Other Considerations while Returning to India
- As per the guidelines, an individual is required to intimate the change in his residency to the concerned institutions such as banks, financial institutions, mutual fund, etc.
- For instance, balances held in Non Resident Ordinary (NRO) account will have to be converted to resident status i.e. a normal savings account once the individual becomes a resident in India.
- FCNR accounts can be continued till the date of maturity and upon maturity, can be converted to RFC accounts.
- One should keep in mind that under DTC, a person may qualify as Resident Indian on account of removal of NOR concept. In such situation, it would bring assets situated outside India under the ambit of wealth tax.
- DTC also proposes to levy wealth tax on net wealth in excess of INR 1 crore as compared to 30 lakhs of existing provisions.
- Resident Foreign Currency is a Scheme approved by RBI that permits persons of Indian nationality or origin to open foreign currency accounts with banks in India for holding funds brought by them to India. It is permitted for those 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.
- Further, if the Returning NRI had been non-resident for a continuous period of 2 years, he gets exemption from income-tax for subsequent 9 years on the interest earned in RFC account.
- Returning individuals should therefore focus on understanding the impact on India taxation, and plan their taxation matters accordingly.
A person resident in India might maintain a foreign currency account outside India if he had opened it when he was resident outside India or inherited it from a person resident outside India.
An RFC (Resident Foreign Currency) Savings Account is a savings account maintained in foreign currencies for NRIs who have returned to India and hold funds in foreign currency. The types of RFC accounts are: Savings Bank, Current account and Term Deposits.
Non-resident accounts will be re-designated to resident accounts in India on the return of the account holder to India and consequently becoming resident in India.
Most individuals make a mistake of continuing a resident savings account even after becoming an NRI but the law does not allow it. Or in simple words, it is illegal to hold resident savings bank account for NRIs and it will attract hefty penalties.