Important Keyword: Income Tax, Income Tax for NRI, Resident Status.
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Income tax rules for NRI returning to India
In Indian tax regulations, an Non-Resident Indian (NRI) is defined as an individual who is either an Indian citizen or a person of Indian Origin but is not a resident in India. The Reserve Bank of India (RBI) issues guidelines covering a wide range of matters concerning NRI individuals. These guidelines encompass the opening and maintenance of bank accounts in India, as well as regulations for investments both within and outside India.
The tax liabilities for an NRI are contingent upon their residential status for the relevant year. It’s crucial to ascertain the residential status of an individual before determining their tax obligations. Depending on whether an individual qualifies as a resident or non-resident for tax purposes, their income will be taxed accordingly under Indian tax laws.
Who is NRI?
Under the provisions of the Income Tax Act, an individual is classified as a Resident in India if they meet either of the “basic conditions” of presence in India:
- Presence in India for 182 days or more during the current Financial Year.
- Presence in India for 60 days or more during the current Financial Year and 365 days or more in total during the 4 preceding Financial Years.
If neither of these conditions is fulfilled, the individual would be considered as a Non-Resident Indian (NRI) for tax purposes. The tax year in India runs from April 1 to March 31.
Additionally, there exists another category of non-resident Indians known as ‘Not Ordinarily Resident’ (NOR). An individual can be classified as NOR if:
- Their stay in India in the 7 financial years immediately preceding the relevant financial year is less than 729 days.
- They were a Non-Resident for 9 out of the 10 financial years immediately preceding the relevant financial year.
Tax Implications for NRI Returning to India
The taxability of income earned outside India, such as rental income from property, capital gains, bank interest, dividends, etc., is primarily determined by your residential status in India.
If you return to India and sell your overseas assets as a Not Ordinarily Resident (NOR) or Non-Resident Indian (NRI), you may not be liable to pay taxes in India on the sale proceeds received outside India. Additionally, you have the flexibility to receive the sale proceeds in an overseas bank account first and then remit part or all of the proceeds back to India without incurring any Indian tax liability.
Tax Liabilities for NRI Returning to India
Taxability in India hinges on whether an individual qualifies as a Resident, Not Ordinarily Resident (NOR), or Non-Resident. For income earned outside India, received outside India during preceding previous years, and remitted to India during the previous year, NOR/NRI individuals are not taxable.
However, income received or deemed to be received, or accruing or arising in India during the previous year is fully taxable for NOR/NRI individuals. They can, however, leverage the benefits of the Double Tax Avoidance Agreement (DTAA) between the two countries to avoid double taxation on the same income.
Income accruing or arising outside India and received outside India in the previous year from any other source is not taxable for NOR/NRI individuals.
Other considerations while returning to India include:
- Intimating the change in residency to relevant institutions such as banks, financial institutions, mutual funds, etc. For instance, balances held in Non-Resident Ordinary (NRO) accounts must be converted to resident status, i.e., a regular savings account, once the individual becomes a resident in India.
- FCNR accounts can be continued until the date of maturity and, upon maturity, can be converted to RFC accounts.
- Under the Direct Tax Code (DTC), a person may qualify as a Resident Indian upon the removal of the NOR concept. In such a scenario, assets situated outside India would be subject to wealth tax.
- The DTC also proposes to levy wealth tax on net wealth exceeding INR 1 crore compared to the existing provisions of 30 lakhs.
- Resident Foreign Currency (RFC) is a scheme approved by the RBI that permits persons of Indian nationality or origin to open foreign currency accounts with banks in India for holding funds brought by them to India. It is permitted for those who have returned to India on or after April 18, 1992, for permanent settlement (Returning Indians), after being resident outside India for a continuous period of not less than 1 year.
- If the returning NRI had been non-resident for a continuous period of 2 years, they are exempt from income tax for the subsequent 9 years on the interest earned in RFC accounts.
Returning individuals should, therefore, focus on understanding the impact of Indian taxation and plan their taxation matters accordingly.
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