Moving back to India? Here are key tax implications you need to consider
September 19, 2020 6:15 PM
As per the guidelines, an individual is required to intimate the change in his residency to the concerned institutions such as banks, financial institutions, mutual fund, etc.
Foreign holdings such as foreign currency or immovable property situated outside India, can continue if such holdings were owned when the individual was a person resident outside India.
By Pranay Bhatia and Deepashree Shetty
Individuals have been moving across borders due to various reasons – a better standard of living, higher education, career escalations or even business expansions. Some of the economic and political policies of countries have also contributed to increased movement across nations. These perspectives are now seeing changes due to the current uncertain situation.
For an individual returning to India, here are few considerations to be kept in mind, while returning:
RBI issues guidelines on varied matters relating to an NRI individual i.e. an Indian citizen who is a resident outside India. These guidelines relate to opening and maintaining of bank accounts in India as well as for investments in and outside India.
As per the guidelines, an individual is required to intimate the change in his residency to the concerned institutions such as banks, financial institutions, mutual fund, etc. For instance, balances held in Non Resident Ordinary (NRO) account will have to be converted to resident status i.e. a normal savings account once the individual becomes a resident in India. Further, the balances in Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) Term Deposit may be continued till maturity or can be converted into Resident Foreign Currency (RFC) account or resident rupee deposit account.
Foreign holdings such as foreign currency or immovable property situated outside India, can continue if such holdings were owned when the individual was a person resident outside India. However, in case of alienation of such assets, RBI approval may be required depending upon the nature of each such transaction. Further, once the foreign assets are sold, proceeds must be brought into India within the stipulated period.
An important point to be noted is that the residency of an individual could be different as per the regulatory laws (Foreign Exchange Management Act, 1999 – FEMA) and income-tax laws (Income-tax Act, 1961). Hence, it is essential for an individual to understand these laws and determine the residency applicable to his case.
For returning Indians, the taxability on income would be based on the tax residential status in India and nature/source of income.
An individual’s tax residency during the Financial Year (FY) is based on the physical presence in India and is categorised into Non-Resident (NR), Resident but Not Ordinarily Resident (RNOR), Resident and Ordinarily Resident (ROR).
An individual who fulfils either of the below conditions shall qualify as a Resident in India:
Present in India for 182 days or more during current FY; or
Present in India for 60 days or more during current FY and cumulatively 365 days or more during preceding 4 FYs
Further, the individual is a global tax resident in India i.e. Resident and Ordinarily Resident (ROR), if the below conditions are fulfilled:
Present in India for cumulatively 729 days or more during preceding 7 FYs; and
Was a ‘Resident’ in atleast 2 out of preceding 10 FYs
A ROR individual is taxed on worldwide income whereas NR/RNOR is taxed on income earned or received in India.
Generally, an individual returning to India may qualify as a NR/RNOR in India for the initial two to three tax years. Thereafter, the individual is likely to qualify as a ROR in India.
The income-tax laws determining individual’s tax residency have undergone change and the amended laws would be applicable from FY 2020-21. The threshold period for a stay in India has been lowered in certain situations for individuals.
It is also a good practice to check on the overseas tax residency and obligations even after returning to India. These may include:
Tax implications in the other country on assets held and income generated from such country.
Double taxation issues on the income generated from overseas country. For example, rental income from a house property held overseas may be taxable for a resident in India. In such cases, necessary benefit (if any) under the relevant tax treaty needs to be analysed at the time of filing the Indian tax return.
Appropriate reporting of overseas assets and income is required in the Indian tax return form.
Apart from the tax and regulatory implications, there are other measures that need attention from returning Indians:
Keep a check on immigration and citizenship laws such as an appropriate visa for stay in India, application of Indian passport/OCI card, etc.
Assess the social security schemes in India (Provident Fund linked to employment, pension schemes, etc.) as well as benefits from the overseas social security accounts.
Do invest in insurances for financial and medical risks especially with the current uncertainty around the globe.
Estate planning to manage wealth in a planned manner.
Assess your situation regularly for the initial years.
Don’t make investments without understanding the risks and implications or in a haste.
Do not avoid or delay any of the compliance requirements under the laws as it may have financial implications.
With a comprehensive outlook towards the financial and tax matters, returning NRIs can plan their long-term stint in India.
(The authors are Pranay Bhatia, Partner and Leader – Tax & Regulatory Services and Deepashree Shetty, Director – Tax & Regulatory Services, BDO India)