Tax Implications for the NRI Moving back to India

If you are planning to move back to India as an NRI, then you need to manage all the taxation in India, which is a little bit of a challenge for a Non-Resident Indian. 

An NRI going back to India will include many financial planning, managing foreign assets and investments, and tax planning in accordance with the Reserve Bank of India rules and regulations and Indian laws. 

Your tax liability in India will be determined by your residency status in India. When you return to India, your residency status will be Non-resident to the Resident but Not Ordinarily Resident (RNOR) and is further to Resident and Ordinarily Resident (ROR). 

In this blog, we will going to see tax implications for the NRIs who are returning to India and help in managing the transaction easily. 

When an NRI Become a Resident

According to the Income Tax Department of India, an NRI means a person who does not live in India permanently. NRIs maintain connections with India to invest and to be a part of the cultural activities. So NRIs need to manage their foreign assets and taxation in India. 

The tax implications of a Non-Resident Indian depend on their residency status, which is determined by the number of days they have spent in India during a financial year, according to the Income Tax Act of 1961. 

It is important to know the NRI status in India according to Section 6 of the Income Tax Law. An individual can fall into 3 categories, given below: 

• Non-resident 
• Resident but not ordinarily resident
• Resident and ordinarily resident in India

According to the Finance Act of 2020, an individual is considered to be a non-resident by day count under section 6 of the Income Tax Act. 

Here are the following points through which an NRI can determine this residency status. If they meet the following conditions, then they will be treated as residents of Indian, and if they fail to meet then they will be considered as non-residents of Indian. 

• If you stay in India for more than 182 days in a financial year, then you will be considered a resident of India. 
• If you stay in India for more than 60 days in the current financial year and stay in India for a minimum of 356 days in the last 4 preceding financial years. 

For the Indian citizens and the persons of Indian origin, the 60-day stay limit, be extended to 120 days in India, whose indian income od more than 15 lakhs INR, which helps you close to becoming an Indian resident while visiting India during the change in your tax status. 

When you return to India permanently, your resident status will be Resident but Not Ordinarily Resident (RNOR) if you have stayed in India as an NRI for the last 9 out of 10 previous years or for less than 729 days in the last 7 years. 

Your RNOR status will change up to 2-3 years, and your status will be changed from RNOR to ROR during the intermediate period. You can reconstruct your finances and tax treatments in India. When you get the ROR status, then all the resident taxation rules will be applied to you the same. 

Understanding tax implications while moving back to India as an NRI helps you to plan better and makes your taxation in India easy. Here are the tax implications of an NRI given below: 

Tax Implications as an RNOR

• The income you earn in India or receive in India is taxable. 
• If you have any foreign income apart from Indian income, then this income will be exempt from Indian taxation unless it comes from a business which is located and controlled in India. 
• After 2-3 years, your residency status changes from the RNOR to ROR after your return, and during the intermediate period, you can reconstruct your finances. 

Tax Implications as an ROR

• If you get a Resident and ordinarily resident status, then your whole global income will be taxable in India, which includes interest, dividends, gains from the sale of foreign assets, and foreign rental income. 
• You must report all your foreign assets and income in the Indian income tax return in accordance with the Indian laws. 

DTAA Management 

• Through the help of the Double Taxation Avoidance Agreement (DTAA), India has signed with more than 90+ countries, which helps the NRIs to prevent being taxed twice on the same income. 
• You need to submit your tax residency certificate, which you get from your residence country and the Income tax report in India to get the benefits of the DTAA. 

Additional Income Tax Treatments 

• If you have an RNOR status, then the interest you will earn on your Non-resident external (NRE) account will be exempt from tax until you get the ROR status in India. 
• The interest you get on the Foreign currency non-resident account (FCNR) will be tax-free until the maturity of the deposit, even if your residency status is RNOR. Once your status changes to ROR, your interest in the FCNR account is taxable.

NRI Income Tax Planning and Rules 

Here are some of the tax benefits as an NRI or an NOR that you can get before converting your residency status in India as an ROR. After changing the status, you will lose many advantages which are only applicable to Non-resident Indians. So, to get all the benefits, here are some of the tax planning and rules for the NRIs. 

• You can get a tax exemption on the deposition of the interest from the foreign currency non-resident accounts and resident foreign currency.
• If you had a retirement account in a foreign country, then you would get tax exemption on the withdrawal of the pension from the pension scheme, which depends on the type of pension, the DTAA provision, and the country. 
• If you have any foreign assets outside India or have any capital gains in a foreign country, then you can get the tax exemptions. 
• If you are receiving a rental income from any foreign property, then you will get the tax exemption for this. 
• Tax exemption on the interest and dividends that you will earn through the securities and deposits that you have in foreign countries. 

If an NRI gets income in a foreign country, then it will not be taxable in India, but if he generates a rental or any salary income in India, then he needs to pay the tax on the income in India. 

If an NRI generated an income outside India during a financial year, and the income is transferred to India in the same financial year, then it will not be taxable in India. 

Management of the NRI Income and Foreign Assets While Returning to India 

When an NRI moves back to India, they need to manage their finances and income in India according to Indian laws. However, there is one main process which an NRI needs to do when they move back to India, which is to process a Resident foreign currency account, which has many benefits while managing the NRI's foreign assets and Income. 

Opening an RFC Account: One of the first things when an NRI returns to India is to open an RFC account in India, which helps the NRIs to manage their financial and income in India. You can open an RFC account in India when you return to India permanently, which allows you to hold your foreign currency without the need to convert it into Indian rupees. 

Holding several foreign currencies: Once you open an RFC account, you will be able to hold different types of currencies while residing in India, like the USD, EUR, GBP, JPY, etc This will help you with the currency fluctuations and protect the currency value of your foreign earnings. 

Transfer full amount: You can transfer the full amount from your RFC account, which includes all the principal amount and the interest, without any restriction. This will help you to get the financial support anytime and provide you with an easy way to transfer the funds anytime when you need. 

Easy Conversion: You will get the simplified and easier conversion process for the funds that you have in your RFC account. You can convert your funds to Indian currency easily and at the best conversion rates, which helps you to make investments and local payments.

Tax-free Interest on RFC Fixed Deposit: You can have your RFC account until you have the RNOR status, which is for 1-3 years. Until that time, you need to pay tax on the interest on the fixed deposit in your RFC account.

Transfer Funds easily from NRE/FCNR account to RFC account: When you move back to India, you need to close your NRE and FCNR accounts in India, and you can easily transfer the funds from these accounts to the RFC account without the need to convert the funds to Indian currency. 

RFC account for financial needs: Whether you need to pay your expenses in India or in a foreign country, invest in foreign securities or donate money to some charitable trust, you can use the RFC account, which provides you with various financial benefits. For the easy process, you can add a resident joint holder to your RFC, which makes your process faster and quicker. 

Eligibility and Documentation: For opening an RFC account, you need to submit some of the proof, which includes your passport, proof of residence for the last year in a foreign country, PAN card, and an RFC declaration form. You will get help from the foreign banks for the process. 

An RFC account helps the NRIs to manage their foreign currency assets while reconstructing the Indian resident accounts, which helps the NRIs to get low currency risks, manage all the tax implications, and return to India easily. 

Smart Tax Planning Tips for the NRIs Moving Back to India

 Here are some of the smart tax planning tips for the NRIs returning to India: 

Assets Sale: Sale of the assets when your residency status is RNOR will provide you with benefits from the tax exemptions on the capital gains. 

DTAA: India has signed the Double Taxation Avoidance Agreement with over 90+countries, which provides the taxation relief for the NRI and along with it, they can also get the tax residency certificates, which will also benefit you with DTAA. 

Disclosure: Make sure that you are reporting your foreign assets and income in the Indian Income Tax report to avoid getting penalties from the Black Money Act. 

Timings: You can extend your RNOR status and avoid the global taxation in India if you return to India after October 2nd. 

Tax Savings Investments: You can claim the deduction up to INR 1.5 lakh under the old tax regime by using the Section 80C ELSS funds option. 

Account Management: You need to retain the FCNR account until maturity and use the RFC account to hold your foreign currency. Before the change of your residency status, you need to make your withdrawals from your NRE account and optimise tax liabilities. 

What If an NRI Lose their NOR or NRI Status 

You can avail the benefits of the DTAA, which India has signed with over 90+ countries, when you have the residency status as NRI or NRO. However, in a few years, your residency status will change from the NRI to ROR in India.

Once your residency status changes from NRO to ROR, you will not get the taxation benefits as an NRI under the DTAA, and you will also have to pay taxes on the income that you earn globally.

If you also plan to sell the property that you own in a foreign country and want to withdraw an amount from your foreign accounts, then you can sell during your RNOR status, which provides you more tax-efficient option. Selling property when you become an ROR means all your global capital gains are taxable in India. 

What NRI Should Do After Returning to India?

Here are some of the points which you can do while returning to India as a Non-resident of India (NRI). 

• You should inform your financial institutions and convert your NRE/NRO accounts in India to a resident savings account while returning to India. 
• Once your residency status is updated, you need to open a resident mutual fund investment account and transfer all your existing investments in your Indian resident account from your NRI demat account. 
•  You need to convert your NRE FD account into an Indian resident FD account which you will get the same interest rate as before. However, it also depends on the bank policy and the interest rate conversion of the banks.

Final Thoughts 

When NRI returns to India, they will get 1-3 years of RNOR stats, in which they can get the benefits like tax exemptions on the global income, and it also provides them with much time to understand all the financial and tax implications. 

However, adjusting and managing all this can be a challenge for the NRIs, so Visament is here to help and make the NRI process more secure and understandable with experts' assistance, which will help them to determine their residency status and also help them to manage their foreign assets and investments in Indian when an NRI returns to India. 

For more information, you can contact the Visament website, which has active agents who are ready to help you 24/7 and solve your issues, doubts and queries in just a few minutes. 

Choosing the Visament website will help you save time and get perfect tax-saving investment plans. While you return to India, we also make sure that you provide maximum benefits while in accordance with Indian laws and regulations.