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Returning NRIs
Introduction:
India remains one of the fastest growing economies in the world. For those who are planning to
return and settle in India and wish to build a focussed investment portfolio, there's no better time.
However, adequate care has to be taken to ensure that your hard-earned wealth is properly
diversified to minimise risk, is tax efficient and is compliant in all ways with the extant legal
framework.
Residential Status and Income Tax law:
The government confers a special status on persons who become residents under the Income Tax
Act. If a person has been a non-resident for nine years, he can be an NOR for a year. If a person has
been a non-resident for 10 years or more, he can be an NOR (Not Ordinary Resident) for two years.
Further, under the Income Tax Act, there is a clause that if he has stayed in India for less than 730
days during the past seven years, he will be given an NOR status for a period of three years.
The impact of RNOR status is that foreign passive incomes like interest, dividend, royalty etc. would
not be taxable in India in respect of a person who is RNOR. Even share of profit of a partnership firm
or any other business income would not be taxable in India, if the business in respect of which such
income arises is not controlled from India. In other words, all foreign sourced income of RNOR is not
normally taxable in India unless it is derived from a business controlled in or a profession set up in
India.
Hence, Immaculate planning of income tax implications in advance i.e. prior to return to India holds
paramount significance for NRIs intending to return to India.
Residential Status under FEMA:
The Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident
even outside India are covered by FEMA. The determination of residential status under FEMA is
substantially different as compared to that under the Income Tax Act. Under the Income Tax Act,
residential status is determined based on only the number of days of stay in India. Under FEMA,
residential status is determined based on primarily the intention of the person.
A person becomes a resident in India if he comes to or stays in India:
To take employment in India;
To carry on a business or vocation in India
For any other purpose that indicates his intention to stay in India for an uncertain period.
Thus, one would become a resident for FEMA with effect from the date of arrival in India.
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Indian Assets:
NRI is required to re-designate all his banking accounts as Resident Accounts by informing the
banker of change in residential status. FCNR / NRE Fixed Deposit account may be continued till
maturity at the agreed rate of interest till maturity. On maturity, the proceeds of NRE/ FCNR
deposits can be converted into RFC account. Interest earned on NRO account till date of return can
also be credited to RFC account.
Liabilities incurred abroad:
These become a borrowing for the country, and so if the NRI has taken any loans abroad, he will
need RBI approval to continue with it. For example, if the NRI has house property abroad that is on
mortgage, the loan cannot be continued without RBI approval. Typically, if a resident earns income
outside India, he is supposed to bring it back within a specified period. In the case of returning NRIs,
however, the RBI has laid down that any income earned on assets held abroad can be retained
outside India. The returning NRI can also sell any foreign assets held abroad and reinvest the
proceeds overseas.
Similarly, NRI should inform of change in status to companies in which shares/ debentures are held
as also to firms in which one is a partner.
Overseas Assets:
As the law stands, NRIs can continue to hold assets outside India. Thus, property, shares, mutual
funds, securities and other investments can be held outside India without any approval from the
Reserve Bank of India (RBI); it isn’t even necessary to declare the assets before the RBI. The only
condition: the assets should have been acquired when he was an NRI.
There is no specific provision on movable assets like jewellery, motorcar and personal household
effects. Accordingly NRIs may continue to hold/ dispose such movable assets without permission of
RBI though to avoid any possibility of litigation; he may inform RBI of the same.
If required, overseas assets can be repatriated to India. Proceeds of assets held outside India at the
time of return, can be credited to RFC account.
RFC Account:
A returning NRI can open a Resident Foreign Currency (RFC) account. Funds in this account are free
from all restrictions regarding utilization in India/ abroad including investment (e.g. immoveable
property, shares) in any form outside India. The following funds are eligible for being held in RFC
account:
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Transfer from NRE/ FCNR account
Funds realized on conversion of overseas assets
Income from overseas assets
Pension and other benefits from employer abroad
Foreign exchange brought in India at the time of return to India
However it needs to be appreciated that the funds held in the RFC account offer a low return
compared to other investment avenues in India.
Tax issues:
There are two specific benefits that a returning NRI gets. One is a tax exemption on the interest
earned in an RFC account. As long as a person is Not Ordinarily Resident (NOR), the interest on RFC
deposits is tax-exempt. Once a person becomes Ordinary Resident, the interest, however, becomes
taxable. This exemption is available for FCNR deposit interest as well, but not for interest earned on
NRE accounts.
Concessional tax rates:
The other benefit is a concessional rate of tax on interest earned on deposits and debentures of
Indian companies, and some government securities. This comes under Chapter XII-A benefits,
whereby the NRI is liable to pay tax at 20 per cent on income earned on assets if they have been
bought in foreign currency. This benefit is available to people even after returning to India–till such
time as the assets mature. This allows room for tax planning. To benefit the most, an NRI can
stretch the term of his deposits with Indian banks to the maximum possible period before he
becomes a resident. If the NRI has income only under Chapter XII-A, he doesn’t even have to file
returns.
Our team has a vast experience of conducting an advisory session for such returning NRIs to guide
them on the provisions of various laws in India and the compliances under these laws to assist them
planning their finances and taxes on their return and ensure correct compliances.
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