NRIs: How are your retirement savings taxed overseas? Rules, explained
After repatriating, there are ways to maximise NRI tax perks on investments
Dubai: If you’re a Non-Resident Indian (NRI) who has worked abroad and looking to spend your retirement years in India, you may have been quizzed about how your overseas retirement accounts (FRAs) are taxed when you return to your home country.
This is because NRIs who returned to India after spending significant time abroad have often faced difficulties with receiving money from retirement accounts. In some countries like India, retirement benefits may be taxed on withdrawal. Here’s what you need to know.
Tax on overseas investment depends on NRI’s tax status
NRIs turn ‘tax residents’ when they return to India for the purposes of retirement, but that depends on when they land in the country. “The most important thing while going back for good is the timing,” said Dixit Jain, managing director at The Tax Experts DMCC, a Dubai-based tax advisory.
“One should carefully decide the date of return considering it may give some more time to plan foreign investments when the timing to return to India is good. Also, consider other ways to plan taxes better using the Double Tax Avoidance Agreement (DTAA) between India and UAE.”
When it comes to investments made overseas, Indian tax norms state that income that has been taxed earlier will not be taxed at the time of withdrawal or redemption of the investment. Also, income that was not taxable in India in the year due to the person being a non-resident or due to a Double Taxation Avoidance Agreement (DTAA), would not be taxed in India at all.
How overseas retirement funds are taxed in India?
“When NRIs who start a retirement account abroad return to India and continue to hold such accounts, there can be Indian tax and reporting implications when such individuals become Resident and Ordinarily Resident (ROR),” said India-based tax consultant Brijesh Meti.
“In case of ROR individuals, global income is taxable in India and hence, in absence of specific provisions, income earned from such retirement benefit accounts may be taxed on a year-on-year basis in India while continuing to be exempt or taxed on withdrawal basis in foreign countries.”
(As per tax norms Indian citizen will be deemed ROR if he or she has resided in India for at least 2 out of 10 immediate previous years, or has resided in India for at least 730 days in seven immediately previous years.)
How is investments earned overseas taxed in India?
As an Indian citizen, how any income you earn is taxed depends upon your residential status and the source of such income. How much of your income shall be taxable in India also depends on your residential status in India, which is determined as per the Indian tax norms for each financial year.
“If you’re an NRI or ‘resident but not ordinarily resident in India’ (RNOR), you will have to pay tax on income that arises in India or incomes that are received in India,” explained Meti.
“However, if you qualify as a resident taxpayer, you shall have to pay tax in India on your global income including any incomes from outside India.” So as a tax resident, any overseas income earned in any financial year is liable to income-tax in a year even if it is not received or brought into India.
Also, you’re an RNOR if you’re an Indian Citizen and not a tax-resident in any other country, and your Indian Income (income other than income from foreign source) exceeds INR1.5 million (Dh75,136). This applies if your period of stay in India in the previous year ranges from 120 days to 181 days.
So, if you are planning to return to India, time your return in a way that you can enjoy RNOR status for two to three more years to shift assets from abroad without attracting huge taxes and settling in India. This means any income earned in India would then be taxable, and income earned abroad will not be taxable, similar to NRIs, for a maximum period of three years post-return.
But how you can go about timing your return to maximise the time you will have a RNOR status? The rule is if by the end of March (the end of a financial year), you've stayed in India for less than 729 days, you can continue to be a RNOR.
However, by the very next year, you would clearly be in India for more than 729 days (after adding a year's 365 days) and thus you became an Indian resident for the next financial year.
If you're planning a return trip from overseas at a time around March, and you've realised that you've not completed the required 729 days in India, planning your trip in such a way that you travel before March, rather than after the month, will ensure you easily have an additional year to enjoy the RNOR status.
How? Because, as stated above, the rule states that by the end of a financial year, if you've stayed in India for less than 729 days, you can continue to be a RNOR. This is why Jain advised earlier that one should carefully decide the date of return considering it may give some more time to plan foreign investments - and related tax perks.
Key takeaways
Up until last year there has been a mismatch in the year of taxability of foreign retirement funds in India and the respective foreign country. This meant overseas investments were either taxed when the funds are received abroad or taxed for the entire locked-in period when withdrawn in India.
So to the benefit of NRIs, the government recently tweaked rules to allow expats returning to India for good, to claim relief on tax deducted on such money in India. Here’s an example on what this means. Let’s say you contributed to a UK-based retirement fund when you were a non-resident Indian.
Assuming you were a NRI until financial year 2020-2021, and withdraw your overseas income in India a year later, the rules state that the retirement benefits earned until 2021 (for the period for when you were legally an NRI), your investment income is taxed in the UK.
However, for the period after 2021, when your tax status has changed from non-resident to that of a resident Indian, your overseas investments are taxed in India. So you can apply for such when you file for Income tax returns in India.