In view of unpredictability of US immigration policy, uncertainty in H-1B renewal, long queues for Green Card, many H-1B visa holders are planning to return to India. In some cases, family issues or education of children, pull of business opportunities in India are key drivers to returning to India. Reasons for return can be varied as well as personal but the tax and compliance consequences are purely technical and need to be addressed on priority basis. In this article, let us explore the nuances in following sequence:
1. US Compliances before returning
2. Determination of status of residential status in India
3. FEMA and Banking compliances
4. Income Tax
5. Investment and Assets
6. Action Points
1. US Compliances before returning: Before you get on that flight, here is what you need to do on the US side.
- File your US Tax return (Form 1040 or dual status return) or extend it.
- FBAR (Foreign Bank Account Report) (FinCEN 114) — If your savings in Indian bank accounts (NRE/NRO/savings) exceeded $10,000 aggregate at any point of time during your stay in USA, you are required to file FBAR. Ensure past compliance. Penalty is 50% of account balance.
- FATCA (Form 8938) — Disclosure of foreign financial assets if thresholds exceeded (USD 50K).
- Form 1040-NR — If US-source income (dividends, rental income, etc.) continues after departure, file as non-resident alien for that income.
- Do not liquidate your 401(k)-retirement savings
- Be careful of timing of return. If you are returning between April to June, your RONR status will trigger from next year. For best outcome, plan to return between Oct to March.
2. Residential Status in India: Under the Income Tax Law, there are three categories of residents : ROR (Resident and Ordinarily Resident), RNOR (Resident and Not Ordinarily Resident), NR (Non Resident).
- Resident means stay in India for more than 182 days or 120 days in case of high income earners.
- In case of Non-Resident, only India sourced income is taxable. This is typically when you are staying abroad and holding H-1B Visa.• RNOR: This is transitional period of 1 to 3 years. In this case, India income is taxable and foreign income is exempt if not received in India.
- RNOR Tests: Test 1 — NRI in 9 of last 10 FYs or | Test 2 — In India ≤ 729 days in last 7 FYs. Pass either → RNOR until both tests fail. The goal of tax planning should be to maximize the RNOR window.
- ROR: After RNOR window is closed, then the worldwide income is taxable. For foreign assets, the Schedule FA needs to be filed.
3. FEMA and Banking Compliances: Under FEMA, residential status is decided by intent and physical stay, not by tax days. On your permanent return, you become FEMA Resident. It is advised that the person must inform all banks within 30 to 60 days.
- NRE Account must be converted to the Resident Savings Account or RFC account. Please note that the interest under NRE account is exempt only for non-resident under FEMA.
- NRO Account should be converted to the Resident Savings Account.
- FCNR (B) Deposit account should be kept till maturity. Thereafter, convert it to RFC Account
- RFC Account: One can hold USD/GBP/EUR. It is the best account for returning RNOR with forex savings. The interest earned is exempt during RNOR period.
4. Income Tax implications during RNOR phase:
- India salary/business income is taxable and one needs to file ITR before due dates
- India rental income is taxable with 30% standard deduction
- India short term and long term capital gains are taxed at 20% and 12.5% respectively.
- US Salary after return is exempt during RNOR phase.
- US Bank interest and dividends are exempt during this phase, so keep them in US bank account.
- US Capital gains tax are exempt. Defer to RNOR period, pay US tax and claim DTAA benefits.
- RFC account interest is exempt during RNOR phase.
- Special 120-day Rule for High-Income Earners Under the Income Tax Act, 2025, if your income from Indian sources exceeds ₹15 lakh in a financial year, you become RNOR (not NRI) if you stay in India for 120 days or more — instead of the previous 182-day limit. This matters because even a 4-month visit home during the year can change your tax status if you earn above ₹15 lakh from India.
5. Investment and Assets:
- Demat account must be converted from NRI Demat to Resident demat account and NSDL and CDSL must informed.
- If shares have been sold under NRI status, the NRI rules will apply. However, post return, you will be taxed as resident. Inform and update the KYC with broker.
- For India based property, no additional compliance is required, except you may need to update your PAN.
- In case of US stocks/401(k) withdrawal, declare in the Schedule FA on becoming ROR. Be very careful before 401(k) withdrawal, otherwise, you will be subject to US 10% penalty, US Tax and also taxable under India-USA DTAA.
- Overseas property: US rental income is taxable in India but credit of US tax already paid can be availed. Capital gains will be taxable in India under DTAA.
- US Social Security: Check Totalization Agreement between India and US: H-1B holders who paid Social Security taxes in the US may be entitled to US benefits even after return to India.
6. Action Points:
(a) Determine FEMA residency date – Day of return
(b) Inform all banks of residential status change – Within 30–60 days
(c) Convert NRE accounts → Resident/RFC – Within 1–3 months
(d) Redesignate NRO accounts- Simultaneously
(e) Convert NRI demat to resident demat -Immediately
(f) Determine RNOR status for IT purposes- At year-end / with CA
(g) File final US tax return – By April 15 of following year
(h) File Indian ITR declaring Indian income- By July 31
(i) Disclose foreign assets in Schedule FA – On becoming ROR
(j) Review 401(k)/US investment strategy- Before withdrawals
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In case, you are a H-1B Visa holder planning to return to India and have any concern and queries or need any support, you may like to contact us.
CA. Abhinarayan Mishra, FCA, FCS, IP, RV; Partner, KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; 9910744992, ca.abhimishra@gmail.com; @crossbordertaxindia; www.crossbordertaxindia.com
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