If you are a Non-Resident Indian (NRI) and returning to India, you may have certain income tax worries. You may be curious to know that. Article answers following queries related to NRI- Who is a NRI, Tax implications for a Returning NRI, Tax liabilities of a Returning NRI and What you as a NRI should do on return to India?
If you are a citizen of India or a person of Indian origin who is outside India visits India in any year you would be regarded as NRI if your total stay is less than 182 days in the relevant tax year. Alternately, if you are not physically present in India for 60 days or more in that relevant previous year and 365 days or more during the four preceding relevant previous year then you are also considered to be an NRI. 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.
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.
A Resident other than an NOR is generally referred to as an Ordinary Resident (ROR).
In case an Indian citizen or a person of Indian origin visits India in any tax year, the above mentioned 60 days shall be replaced by 182 days. The proposed Direct Tax Code, however, does not give this preferential benefit to the non resident Indians or person of Indian origin visiting India.
The taxability of your overseas income (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, life insurance policies, loans, company deposits, debentures, bonds, residential properties, etc.) largely depends on your residential status in India.
As a returning NRI, you may try to sell your overseas assets while you are still a NOR or NRI. As a NOR or NRI, if you sell any overseas assets and receive the sale proceeds outside India, you do not have to pay any taxes in India. If you need to buy a house in India out of the sale proceeds, 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.
For income received or deemed to be received or accrues or arises in India during the previous year, both ROR and NOR/ NRI are fully taxable. [Where such income is doubly taxed, you may take benefit of the DTAA (Double Tax Avoidance Agreement) between the two countries. This can help avoid paying tax on the same income twice.]
For income which accrues or arises outside India and received outside India in the previous year from any other source, for ROR is fully taxable, while NOR/ NRI is not taxable.
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, for ROR is fully taxable, while NOR/ NRI is not taxable.
On return to India, you should designate your accounts in your bank as domestic Resident accounts or transfer the balance in your NRE/FCNR accounts to Resident Foreign Currency (RFC) accounts, if you so desire. FCNR accounts can be continued till the date of maturity and upon maturity, can be converted to RFC accounts.
You should also keep in mind the upcoming new Income tax laws – the Direct Tax Code (DTC) that is proposed to come into effect soon. There is a proposal under the DTC to remove the concept of ‘NOR’. 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 Rs 1 crore as compared to 30 lakhs of existing provisions.
Resident Foreign Currency 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. Also, 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.
To summarise, an Ordinary Resident (ROR) is liable to pay tax on his global income, while a NRI is liable to tax on the income ‘earned, received or accrued in India’ in India.
You may reap the above tax benefits until you claim that you are an NRI, but once you pronounce your residential status 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 till the time you hold the NRI status in India.
(The author is Ramalingam.K an MBA (Finance) and certified financial planner. He is the Director & Chief Financial Planner of holistic investment planners (www.holisticinvestment.in) a firm that offers Financial Planning and Wealth Management. He Can be reached at [email protected])
(Republished with Amendments)