Planning to Move Back to India? Understand the Tax Implications for NRIs

As an NRI planning to relocate to India? You know that a well-thought-out plan of action will ensure your transition back home is hassle-free. Amidst the many logistic arrangements you need to make, don’t neglect a crucial aspect that requires careful planning—your finances.

A common concern among many NRIs returning to India is income tax woes. Although the tax provisions in India are somewhat generous for NRIs, there are many considerations to keep in mind, to avoid any bittersweet experiences. This post provides an overview of the tax implications for returning NRIs.

1. Know the Taxation Bodies

First, familiarize yourself with the two main taxation bodies in India for NRIs: Foreign Exchange Management Act (FEMA) and the Indian Income Tax Act (ITA). FEMA covers where you can invest, whereas the Indian ITA regulates how your investments will be taxed.

2. Determine Your Residential Status

For the purposes of taxation, you need to know your exact residential status for the said financial year. Under FEMA, residency is based on intent, whereas under the ITA, it is determined using the “days present” residency test. Accordingly, you will either be classified a Resident (R), Resident but Not-ordinarily Resident (RNOR), or a Non-Resident (NR). There are plenty of tools available online that can help you determine your residency status.

3. Understand Your Tax Liabilities

Once you know your residential status, it is relatively easy to figure out other tax implications. If you qualify as a “Resident,” your foreign earnings are taxable in India. However, if you are considered as an “RNOR,” only the income you have earned in India will be taxed, not your overseas income.

You can hold your RNOR status for a maximum period of 3 financial years post your return to India. After you have attained a resident status, your foreign investments and income will become taxable in India. However, if your global income is already taxed overseas, you can claim tax benefits as per the provisions of the Double Taxation Avoidance Agreement, thus protecting yourself from being doubly taxed.

4. Know Your Tax Benefits

Until you hold the NRI status, you can enjoy several income tax benefits. As an RNOR, for instance, some of your overseas income may be claimed as exempt from income tax in India. These include capital gains from the sale of financial assets held overseas, rent received from properties, withdrawals from retirement or pension schemes held abroad, interest (or dividends) earned from securities held overseas, among others. It is advisable that you speak with a tax consultant to get clarity on these aspects.

5. Update Your Bank Accounts and Assets

Once in India, you must decide whether you want to continue your overseas accounts or have them closed altogether. Presently, NRIs are only allowed to maintain a Non-Resident External (NRE) account, Non-Resident Ordinary (NRO) account, and Foreign Currency Non-Resident (FCNR) account. If you decide to relocate to India, your NRO can be re-designated as a resident account. And, if you wish to retain your foreign earnings without converting them to INR, you have the option to open a Resident Foreign Currency (RFC) account and have the balance funds in your NRE savings account or FCNR account transferred therein.

Assets held in India – You need to update records in mutual funds in India, as well as other NRI investments you hold. Your existing NRI demat account would also need to be transferred to a newly opened resident demat account reflecting your new resident status, so ensure you update your status with your depository participant. You can continue to keep your FCNR deposits until maturity, after which they can be transferred to an RFC account.

Assets held Overseas – You may choose to hold your foreign assets (properties, investment, stocks, etc.) if they were acquired when you were an NRI. Alternatively, you could dispose them and remit the proceeds to India. From a taxation point of view, it is advisable to liquidate your foreign investments before you become an ordinary resident.

Tax-planning for NRIs requires careful planning. While you can learn from the experiences of close friends and family who have made the transition back home, it is prudent to seek professional advice. Talk to your bank manager or wealth advisor so they can help you better understand all NRI tax implications and guide you make the right financial decisions as you move back to India.