Tax Implications For NRI: Return of the Native

by Mr. Adhil Shetty, BankBazaar.com

NRIs are often confused about the tax implications of coming back to India for good. We dispel the doubts..

With the world looking at India as a hub of commercial activity and a potential powerhouse of trade, many non-resident Indians (NRIs) are coming back to their homeland. Notwithstanding the eagerness to contribute to the growing Indian economy, they are often confused about the tax implications of surrendering their NRI or ‘Person of Indian origin’ (PIO) status.

Here, we look at the tax implications of an NRI’s permanent return to India.

The overall tax implications and liabilities, including those arising out of capital gains, bank interest or dividends, depend on the residential status of the individual. NRIs coming to India after selling their entire overseas assets and receiving the proceeds outside the country need not pay any of the above taxes in India.

Adhil Shetty, CEO
BankBazaar.com

If an NRI wants to buy a house in India using the same funds, he needs to transfer the sale proceeds from his overseas bank account to India either fully or partially, as the case might be, without creating any tax liability in India.

Foreign Exchange Management Act (FEMA)..

All returning NRIs need to comply with the Foreign Exchange Regulation Act, and with Indian taxation and banking regulations, to make a successful transition of status.

Overseas assets..

An NRI willing to relocate to India can keep all of his overseas assets — properties, bank deposits, stocks, life insurance policies and other financial instruments such as bonds — while he was living abroad.

Even after he comes back to India for good, there is no cap on the number of overseas assets held at the time of the return. 

On the other hand, an NRI is free to dispose of all his overseas properties, obtain the proceeds in the foreign country and remit the same to India without evoking any tax liability in India.

Indian assets..

There are three main guidelines that a non-resident Indian should adhere to after returning to India for good. 

These include redesignating his bank account status to that of a resident Indian, maintaining or closing his RFC account and updating his resident Indian status with all the mutual funds and companies he has invested in.

Updating bank accounts..

All non-resident Indians, upon returning to the country, need to update their residential status with their bank. All bank accounts need to be changed to that with a domestic resident status. 

NRIs can also transfer the balance funds from their NRE/FCNR accounts to a resident foreign currency account (RFC). There is no immediate need to close the FCNR account, and it can be operational till the date of maturity. Upon maturity, it can be converted to an RFC account.

Resident foreign currency account..

Simply speaking, these are bank accounts that can be maintained by resident Indians in a foreign currency. An NRI returning to India can place all of his foreign currency in an RFC account. While interest is credited quarterly and is taxable, an RFC account can be opened as a savings or term deposit account.

Usually, NRIs returning to India close their FCNR account and transfer the funds to the RFC account following the migration. An RFC account works well for an NRI returning to India with any kind of pension money.

Shares..

 After an NRI returns to India for good, he is responsible for informing all companies and mutual funds in which he has holdings.

Tax liability after return..

This depends on his residential status as per the Income tax Act, 1961. A returning Indian who has been an nri for over nine years would qualify as resident, but not ordinarily resident (RNOR) for two successive years. 

The proposed Direct Taxes Code (DTC), likely to be passed by parliament, has provisions to remove the RNOR concept, effectively bringing all overseas assets under the ambit of wealth tax.

DTC proposes wealth tax on any assets over R1 crore. The code, once implemented, would mean that any person other than an NRI (as per the definition in the Income Tax Act, 1961), would be liable to pay tax on his global as well as domestic income. NRIs, on the other hand, would be subject to paying tax on only the income earned in India.

About the author

The writer is CEO, BankBazaar.com    

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