Planning your return to India after working abroad for a decade or two, but worried about the tax implications. We are here to simplify things to give you a smooth transition experience. As per Indian law, the two applicable statutes governing taxation and foreign investment for returning NRIs are Foreign Exchange Management Act (FEMA) and the Income Tax Act (ITA). To determine the tax liability first the NRI should determine his residential status in that particular Financial year and the origin of his income.
As per FEMA, if a person comes to India with the intention to stay in India for an uncertain period of time then he is termed as a resident of India. In this case, if an NRI comes back to settle down in India then he is considered as a resident irrespective of his stay in India under this act.
As per the IT Act, the residential status of a person is determined based on his stay in India. An NRI becomes a resident if he or she satisfies any one of the below conditions;
- Stays 182 days or more in the financial year (FY) in India (As per Budget 2020 the period is reduced to 120 days for people whose taxable income in India is more than 15 lacs)
- Stays 60 days or more in the FY and 365 days or more in the four consecutive FYs preceding the relevant FY
Even if a person is a resident he can be either an RNOR or ROR;
NRI who satisfies both conditions mentioned below is considered as ROR. If he satisfies any one or none of the below conditions is considered an RNOR.
- Stay in India for at least two out of the 10 FYs immediately preceding the relevant FY
- Stay in India for a total of 730 days or more during the seven FYs preceding the relevant FY
ROR is taxed on Indian and foreign income however an RNOR is taxed only on his Indian Income. Ideally, an NRI can retain his RNOR status for the first 1 or 2 years provided that he was an NRI for the past 10 – 15 years. RNOR status gives you ample time to wind up your foreign transactions in a very tax-effective manner.
What an NRI Should do on his return to India?
1) Bank Account: As per RBI, NRI should immediately inform their banks, regarding the change in their residential status within a reasonable period to avoid penalties. You can either visit any bank branch across India and submit a declaration along with the necessary documents or contact your relationship manager to initiate the process.
2) Convert your NRE/NRO/FCNR account to a resident savings account or RFC account: Once you come back to settle down in India then you need to convert your NRE & NRO accounts to Resident SB accounts. If you want to hold the foreign currency to meet any foreign payments like children’s education expenses abroad or to receive any employer benefits, pension income, or insurance policy proceeds from outside India, then you can convert your NRE account to an RFC account. The interest on the RFC account is tax-free until you retain your RNOR status.FCNR accounts can be held till maturity after which you have the option to convert your FCNR accounts to RFC account if required. Close all the existing standing instructions in NRE/NRO account and Create fresh standing instructions in the Resident SB account and RFC accounts.
3) Mutual Fund: If you have invested in mutual funds then change your tax status from NRI to Indian Resident by contacting your Mutual fund distributor in case if invested through MFD or else you can directly walk into any of the mutual fund branches to update your residential status. If your NRE/ NRO account is attached for your mutual fund investments then ensure that your bank account is updated in every folio number to avoid SIP bounce and to ensure a seamless redemption process.
4) Demat Account / Trading Account: In the case of a Demat account or a trading account, you are required to contact your bank or broker with whom you have your demat or trading account to change your residential status from NRI to Indian Resident. Change your Bank account which was attached to NRE/ NRO account to the Resident SB account.
5) Buy Required insurance: It is recommended to buy adequate term and health insurance coverage for you and your family members as soon as you step into India with an intention to settle here in India if you don’t have any insurance back in India.
An NRI can also take health and term insurance while staying abroad as he gets the benefit of lower premiums at a younger age and continuing that policy will help him to fulfill the waiting period criteria for any pre-existing diseases.
It is not viable to have any health insurance, it is all about having the right and adequate health insurance to cover your medical emergencies and expenses.
Whom to meet or consult during this transition?
Close all your foreign bank accounts before leaving the country and collect the closure statements. If you intend to continue, then hold on with a single bank account instead of multiple accounts for ease of maintenance. Close all your outstanding liabilities and collect the no-due certificate. Cancel all the Standing Instructions.
Your Chartered Accountant or tax consultants in both countries:
Check with your tax consultant if there are any exit taxes to be paid before leaving the country. Check out if there are any dual taxation issues and work out methods to reduce the tax implications on your India savings and investments through DTAA. Contact a qualified chartered accountant to ascertain your tax status in India and to compute approximate tax liability.
Your Financial Planner:
Connect with your financial planner to discuss the changes in your finances and residential status. Check for the required insurance to be taken. Plan for your end-of-service benefits, future cash flows, and goals. Discuss your foreign properties, income, and liabilities if any.
Settling down in your homeland may be exciting but going through all this process is daunting and tiresome but planning at least 3 months in advance, taking professional help and properly timing your return to India will ensure a smooth and easy transition.
Also Read: Is FCNR Deposits Ideal for NRIs?
This article should not be construed as investment advice, please consult your Investment Adviser before making any sound investment decision.
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