Moving back to India? Five most costly reporting mistakes returning NRIs make in their first ROR tax return

Moving back to India is one of the most important financial transitions an NRI can make. Though the decision to return often begins with excitement about settling back home, it also brings a complex shift in tax and financial status.

Once the initial phase settles, many returning Indians move through a tax transition known as RNOR (Resident but Not Ordinarily Resident) before eventually becoming Resident and Ordinarily Resident (ROR). Each stage carries different tax implications.

In an exclusive conversation with FinancialExpress.com, CA Sagar Soman, Consultant – NRI Taxation & Cross-Border Wealth Advisory, explains how returning NRIs should navigate this transition and avoid common mistakes.

RNOR is a valuable tax window but not a long-term strategy

According to Soman, many returning NRIs try to maximise tax-free growth during the RNOR phase by keeping money abroad. However, this decision should not be automatic.

“RNOR is a legitimate and valuable tax window for returning NRIs,” he explains. “But keeping money abroad is not automatically the most tax-efficient  or the most prudent choice.”

The correct decision depends on several factors including the nature of the foreign income, how long the RNOR phase will last before transitioning to ROR, and whether the person is ready to handle the documentation and disclosure requirements.

Soman stresses that tax efficiency should never be the only factor guiding financial decisions. 

“A temporary tax advantage should not override broader capital allocation discipline — including liquidity needs, currency exposure, settlement plans in India and overall post-tax outcomes,” he says. “A structure that is tax-efficient but commercially misaligned is not efficient in substance.”

The ‘transitional vacuum’ that can occur during RNOR

In some situations, returning NRIs may briefly fall into what Soman calls a “transitional vacuum.”

This happens when the person qualifies as RNOR in India, meaning global income is not fully taxable in India, and at the same time they may be considered non-resident in the foreign country under that country’s tax rules.

Because each country tests tax residency independently, there can be a narrow window where capital gains triggered during that period may not be taxed in either jurisdiction, provided domestic law and treaty rules permit it.

“This is legitimate tax planning,” Soman says. “But it is highly fact-sensitive.”

The outcome depends on several factors including residential status in both countries, the nature of income (passive investment income versus business income), treaty provisions and source rules, immigration or citizenship status and timing within each country’s tax year

“Even a small change in days of presence or income classification can materially change the result,” he cautions.

RNOR is not a blanket tax exemption

A common misconception is that RNOR automatically means foreign income is fully tax-free. That is not always true.

“Foreign income may remain outside Indian taxation during RNOR in many cases,” Soman explains. “But income from a business controlled in India or a profession set up in India can still become taxable in India even if the money is earned overseas.”

For example, passive overseas investments may remain outside Indian tax but active consulting or business decisions made from India may make that income taxable. “The character and control of income drive the tax outcome but not merely the location of the bank account,” he says.

The ROR compliance cliff many people underestimate

Many returning NRIs focus heavily on minimising tax during RNOR but underestimate what happens once they become Resident and Ordinarily Resident (ROR).

Once this shift happens global income becomes fully taxable in India, foreign assets must be disclosed in Schedule FA in the tax return, foreign income reporting errors can attract serious consequences

“If acquisition costs, holding periods and foreign tax records are not maintained properly during RNOR, the first ROR return can become administratively complex and risk-prone,” Soman says. He emphasises that tax planning must also consider compliance. “Tax planning is not only about saving tax. It is about ensuring disclosure resilience.”

FEMA rules are separate from tax rules

Another area where returning NRIs often make mistakes is mixing up tax laws and FEMA (Foreign Exchange Management Act) regulations. “Tax and FEMA must never be mixed,” Soman says.

Once a person becomes a resident under FEMA, a different set of questions arise such as NRE and NRO accounts must be redesignated, NRE balances can be transferred to RFC (Resident Foreign Currency) accounts, rules apply on whether sale proceeds from foreign assets can remain abroad, overseas reinvestments may fall under Liberalised Remittance Scheme (LRS) limits

“FEMA asks a different question,” Soman explains. “Not ‘Is it taxable?’ but ‘Is it permissible and how must it be held?’”

Estate and succession risks if assets remain overseas

Another issue many returning NRIs ignore is succession planning. If foreign assets remain abroad and an unexpected event occurs, families may face complex cross-border issues such as foreign probate procedure, nomination mismatches across countries, inheritance or estate taxes abroad

FEMA complications when repatriating inherited funds

“A two-year tax advantage must be weighed against multi-jurisdictional succession complexity,” Soman warns. The disciplined approach returning NRIs should follow before deciding whether to retain funds abroad during RNOR, Soman suggests a structured approach.

Returning NRIs should:

Confirm residential status accurately in both countries

Classify income correctly (passive vs business-linked)

Assess if any legitimate transitional tax window exists

Prepare documentation for future ROR reporting

Analyse FEMA rules for holding or repatriating funds

Evaluate operational feasibility and succession planning

“RNOR is a valuable planning phase,” Soman says. “But it is a phase  not a strategy by itself.”

Transitioning to ROR: Common reporting mistakes NRIs make

Once RNOR ends and a person becomes ROR, foreign asset reporting becomes far more strict. According to Soman, the most common problem is confusion between two reporting timelines.

“Schedule FA follows the calendar year (January–December), while foreign income taxation follows the financial year (April–March),” he explains. “If taxpayers treat both periods as the same, their returns often become internally inconsistent.”

Mistake 1: Choosing the wrong residential status

Selecting the wrong residential category in the tax return is one of the biggest mistakes.

“The moment you become ROR, you must report foreign assets in Schedule FA and foreign-source income in Schedule FSI,” Soman says.

Mistake 2: Using financial year data for Schedule FA

Schedule FA requires disclosure of foreign assets held at any time during the calendar year ending 31 December.

Many taxpayers mistakenly prepare the schedule using the April–March financial year.

“Even accounts opened and closed during the calendar year must be disclosed,” Soman notes.

Mistake 3: Treating a foreign brokerage account as a single item

Foreign brokerage platforms often involve multiple reportable elements, including:

the custody account itself

the securities held through it

sale or redemption proceeds

joint or power-of-attorney accounts

“Many taxpayers disclose ‘I have an account with X broker’ and stop there,” Soman says. “But Schedule FA captures how you hold assets and what moved through them.”

Mistake 4: Using incorrect exchange rates

Another frequent mistake is using random exchange rates.

“Schedule FA values must be converted using the SBI telegraphic transfer buying rate on the relevant date,” Soman explains.

For foreign income, conversion rules follow Rule 115, which uses specific dates depending on the type of income.

Mistake 5: Skipping Schedule FA because there was no income

“Schedule FA is a disclosure schedule, not just a tax computation schedule,” Soman says.

Even if foreign assets generated no income, they still need to be reported once the taxpayer becomes ROR.

Mistake 6: Missing the foreign tax credit reporting chain

Foreign investments often generate foreign tax withholding.

To claim relief, taxpayers must correctly report:

income under the appropriate head

Schedule FSI (foreign source income)

Schedule TR and Form 67 for foreign tax credit

“Many returns fail system logic because the asset is disclosed in Schedule FA but the related income or tax credit is missing,” Soman explains.

Mistake 7: Filing the wrong ITR form

Another common issue is selecting the wrong tax return form.

“ITR-1 and ITR-4 do not contain Schedule FA,” Soman points out. “If foreign assets need to be reported, taxpayers must use the appropriate ITR form.”

Why compliance is of at most importance now

According to Soman, global data sharing has made foreign asset detection easier.

India receives financial account data through Automatic Exchange of Information (CRS/FATCA) systems. “If you recall last year’s tax season, CBDT’s ‘Nudge’ initiative alerted taxpayers based on such international data,” he says. Non-disclosure of foreign assets can trigger penalties under the Black Money Act, including fines up to Rs. 10 lakh in certain cases.

Overseas brokerage vs RFC account: Which is better?

For returning residents who want to keep large USD holdings, Soman suggests dividing assets based on their nature.

“The most efficient route is often to split by asset type,” he says.

Keep overseas brokerage accounts for foreign securities

Use an RFC account for USD cash you want to hold in India

An RFC account allows foreign currency balances to be maintained within India’s banking system.

However, it does not provide tax exemption once the person becomes ROR.

“Once you are ROR, India taxes global income whether the account is in India or abroad,” Soman says.

When RFC accounts make sense

RFC accounts are useful if the person wants:

foreign currency balances inside India

easier transfers for local expenses

smoother banking and compliance

During the RNOR period, interest on certain foreign-currency deposits may also receive favourable treatment.

When keeping an overseas brokerage account is better

If most of the wealth is invested in global securities, maintaining overseas brokerage accounts may be more practical.

“RFC is a bank deposit account, not a securities custody platform,” Soman explains. Selling overseas investments simply to move funds to India may trigger unnecessary capital gains.

How the India–US tax treaty works after RNOR ends

Once a taxpayer becomes ROR, India taxes global income. The India–US Double Taxation Avoidance Agreement (DTAA) generally prevents double taxation through a foreign tax credit system.

Example: US dividends

If a US investment pays $1,000 in dividends, the US broker may withhold $250 (25%).

India then taxes the full dividend based on the taxpayer’s slab rate.

“If the Indian tax on that income is ₹25,000 and the US withholding converts to ₹22,500, the taxpayer gets credit for ₹22,500 and pays only the remaining ₹2,500 in India,” Soman explains.

Example: Capital gains on US shares

For capital gains on US stocks or ETFs, the tax outcome is determined by domestic law.

“Once you are ROR, India will tax gains on foreign shares under Indian capital gains rules,” Soman says.

Whether the US also taxes those gains depends on US domestic tax laws.

Is partial repatriation a good strategy?

Many returning NRIs consider keeping some money abroad while bringing some funds to India. Soman believes this “two-bucket approach” is often the most practical.

“Yes, keeping a forex bucket for diversification and an India bucket for expenses is often workable,” he says. However, he emphasises that location of funds does not determine taxability. “Once you become ROR, India taxes global income regardless of where the money sits.”

How the two-bucket strategy can work

A practical framework could be: India bucket (INR) that is funds covering 12–24 months of predictable expenses, including housing and family needs.

Forex bucket (USD/GBP/EUR) that is funds kept abroad or in an RFC account for currency diversification and international investments.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a qualified professional before making investment decisions.