Non-resident Indians who return to India to settle permanently face several financial challenges upon arrival.
NRIs are not taxed on income earned outside India, but upon returning, they gain a Not Ordinarily Resident (NOR) status and are eventually converted to Ordinarily Resident (OR) status. Understanding taxation implications on your bank account earnings, mutual funds and stock investments, properties etc, is crucial upon returning to India.
As an NRI, you would have held various bank accounts in India, including NRO, NRE, FCNR(B), and international accounts, which will require your attention after relocating to India.
Overall, there are four major financial areas that NRIs need to address after returning to India – bank accounts, foreign investments, residency status, taxation.
Bank Accounts
“RNOR status is valid for up to two to three years and can provide major benefits from a tax perspective as your global income will not be taxed in India. RNOR status acts as a buffer for those NRIs with foreign pension income, investments, properties, etc., allowing time to reorganize assets or repatriate funds without tax implications in India.
Many returning NRIs are usually unaware of this and they don’t plan the transition well, neglecting this can lead to heavy tax burdens on global income in India,” says Nishant Kohli Founder, NRI Nivesh.
“Most importantly, RNORs are not required to declare foreign assets in Schedule FA of the ITR,” adds Kohli.
NRIs are liable to pay taxes if their income in India exceeds the basic threshold limits, based on earned, accrued, or received income in India, before deductions and exemptions.
Dilshad Billimoria, Founder, Managing Director & Chief Financial Planner at Dilzer Consultants, “Convert NRE/NRO accounts back to resident savings accounts says, “NRIs returning to India should close any unnecessary NRE/NRO accounts as per RBI guidelines and consider opening a Resident Foreign Currency (RFC) account to park foreign earnings in India. They also need to update KYC details in all Indian bank accounts with a new residential status.”
FEMA and NRIs
If you have foreign bank accounts and investments abroad, as per FEMA regulations, you can continue holding them as a resident Indian. However, it is better to ensure that the country’s tax laws allow you to continue holding those foreign assets.
NRIs returning to India without updating their investments may violate FEMA rules, leading to potential non-compliance and incorrect taxation or exemption of income. It is crucial to inform banks, financial institutions, and the IT Department of resident status under FEMA or Income Tax norms.
“FEMA and the Income Tax Act have different ways of defining residency. You could be classified as a resident for tax purposes, but still classified as an NRI for FEMA purposes, which can create compliance issues for your investments, real estate, and for your bank accounts,” says Kohli.