Key Highlights
Returning non-resident Indians (NRIs) face significant changes as they transition back to India permanently. The regulations and financial landscape differ greatly for resident Indians, requiring NRIs to adapt and learn new aspects.
Introduction
Parting ways with NRI status upon returning to India can be challenging, particularly when it involves relinquishing tax benefits. As an Indian resident, your income, investments, savings, and overall finances will be subject to dramatically different income tax rules. So, how should NRIs plan their return? And when does NRI status expire?
Defining an NRI
An NRI is an individual of Indian origin or Indian citizenship who resides outside India for the purpose of employment, business, or any other intention indicating an uncertain period of stay away from India.
However, it's important to note that the determination of NRI status depends on the duration of an individual's stay in India. Although the Income Tax Act of 1961 does not provide a direct definition of an NRI, Section 6 outlines comprehensive criteria for determining Indian residency. Hence, anyone failing to meet these criteria can be classified as an NRI.
As per the Income Tax Act of 1961, an individual can be treated as an NRI for a specific financial year if they meet either of the following conditions:
Present in India for less than 182 days during that fiscal year, or
Present in India for less than 365 days in total over the preceding four fiscal years and less than 60 days in the current fiscal year.
The Finance Bill 2020, passed by Parliament in March 2020, introduced a slight but significant change to these rules, effective from 1 April 2020. Under the new regulations, the "182 days" period has been reduced to "120 days" for NRIs whose income generated in India exceeds Rs 15 lakh during that fiscal year. Consequently, if you are an NRI
with total taxable income from India exceeding Rs 15 lakh, staying in the country for more than 119 days in a fiscal year will not maintain your NRI status. This will expose you to potential taxation in India.
with a total taxable income in India is under Rs 15 Lakh, you can stay in India for up to 181 days, as before.
Changes in NRI Status upon Returning to India
NRIs returning to India on a permanent basis will lose their NRI status depending on the duration of their stay in India during the year of their return. If you return after October in a given fiscal year, you can still retain your NRI status for that year since your stay in India will be less than 182 days.
However, if you return before October, you will lose your NRI status within the same year.
After losing NRI status, returning NRIs are categorized as either resident but not ordinarily resident (RNOR) or resident and ordinarily resident (ROR) Indians.
RNOR is a transitional residential status granted to returning NRIs before they become ordinary residents of India (ROR). Returning NRIs can qualify as an RNOR for any fiscal year if they meet one of the following conditions:
They have been an NRI for 9 out of the 10 years preceding the fiscal year in question, or
They have spent no more than 729 days in India during the preceding seven years, or
If they are not a tax resident in another country, and their Indian Income exceeded Rs 15 lakh in the previous year as they stayed in India ranging from 120 days to 181 days that year.
NRIs who do not fulfil any one of these conditions directly become ordinary residents.
Navigating Tax Implications for Returning NRIs in India
Returning non-resident Indians (NRIs) may face changes in their tax status upon coming back to India. While they may lose their NRI status in the same year of return, they can still benefit from certain tax breaks for a few more years as resident but not ordinarily resident (RNOR) individuals.
As RNORs, they enjoy the same tax treatment as NRIs when it comes to Indian income tax. Similar to NRIs, RNORs are only taxed on income earned within India and are not liable for taxation on income earned abroad. Consequently, foreign income remains untaxed in India as long as individuals qualify as RNORs.
However, as time passes, individuals may no longer meet the conditions required to maintain their RNOR status. This transition occurs when they no longer fulfill the aforementioned RNOR criteria and become ordinary residents (RORs). Once they become RORs, their global income becomes taxable in India according to the provisions of the Income Tax Act, 1961.
Before returning to India, it is crucial for NRIs to inform their banks about the change in their residential status. The Reserve Bank of India mandates that NRIs moving back to India promptly notify their banks within a reasonable timeframe. Failure to do so can be regarded as a violation of the Foreign Exchange Management Act (FEMA) and may lead to penalties for returning NRIs.
To notify the bank, individuals can either visit any branch across India and submit a declaration with the necessary documentary proofs or reach out to their relationship manager to initiate the process.
For NRIs returning to India, it is essential to make certain financial adjustments to comply with Indian tax laws. Here are some useful tips to consider:
Changing bank account status: Redesignate your NRO or NRE account as a domestic resident account upon returning to India. If you prefer to keep your funds in a foreign currency, you can transfer the balance from your NRE/FCNR account to a resident foreign currency (RFC) account.
NRE FD status after return: If you hold an NRE FD, it will be converted into a domestic resident FD account without altering the promised rate of interest. However, the interest earned will be taxable based on your income tax slab.
FCNR deposit status: You can maintain an FCNR deposit until maturity. Afterwards, you will need to convert it into a resident rupee deposit account or a resident foreign currency account if you wish to continue holding the foreign currency.
Mutual funds/stocks investment: Inform your bank about the change in your residential status if you have invested in mutual funds in India as an NRI. Additionally, for investments in stocks, close your portfolio investment services (PIS) account and open a regular trading and Demat account meant for resident Indians.
Insurance: Insurance policies purchased in foreign countries may not provide coverage in India. Upon your return, ensure you acquire a comprehensive health and life insurance policy to safeguard yourself and your family.
In conclusion, timing your return to India is crucial in maximizing the benefits of NRI status. By making informed choices and taking proactive steps, you can optimize your privileges for an extended period.
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