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TAXABILITY OF NRI RETURNING TO INDIA
The taxability of an individual in India depends upon his residential status in India for any particular financial year.
Determination of residential status –
Any one of the following 2 conditions needs to be satisfied for an individual to be resident in India-
- Stays in India for a period of 182 days or more for the relevant previous year
- Stays in India for a period of 365 days or more in the 4 preceding previous years AND 60 days or more in the relevant previous year.
Once an individual qualifies as a resident in India, next is to determine whether he is an ordinary resident. Both the conditions needs to be satisfied-
- Has been a resident of India in at least 2 out of 10 years immediately previous years and
- Has stayed in India for at least 730 days in 7 immediately preceding years
Therefore, an individual can be classified as-
- Resident ordinary resident (ROR)
- Resident but not ordinary resident (RNOR)
- Non Resident (NRI)
Tax liabilities of ROR, RNOR and NRI-
- 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.
- 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, both ROR and NOR/ NRI are not taxable.
Tax benefits of RNOR/NRI returning to India-
RNOR when returns to India, will be exempt from tax in India in the following cases-
- Capital gain arising from sale of fixed and financial assets held overseas (like properties and shares).
- Interest received from FCNR (Foreign Currency Non-Repatriable) and RFC (Resident Foreign Currency) deposits.
- Withdrawals or pension from the retirement account or pension scheme held overseas.
- Interest or dividends earned in deposit or securities held overseas.
- Rent received from properties held overseas.
RNOR to Ordinary resident after returning to India-
When you move out from RNOR to Ordinary Resident, even the global income is taxable in India. If your global income is taxed abroad, tax benefits can be claimed as per the Double Taxation Avoidance.
If a RNOR/NRI who becomes Ordinary Resident is planning to sell overseas property or withdraw from the overseas retirement accounts, he/she should do so when he/she is RNOR/NRI to avoid its taxation in India.
NRI returning to India can save tax on their Global Income for up to 3 F.Y.’s by taking advantage of their RNOR status; however, they are still liable for tax on their Indian sourced income as an RNOR.
Under FEMA, an NRI returning to India is free to hold, own, transfer or invest in assets situated outside India. However, the provision is only applicable if the asset was acquired when the individual was resident outside India or was inherited from a person resident outside India.
On return to India, following points must be kept in mind-
- 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. FCNR accounts can be held till 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). 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 Scheme approved by RBI-
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.