Dubai: During such unprecedented times, many Indian citizens are returning or planning on returning home for good after spending many years abroad, for reasons such as retirement, loss of jobs, and so on.
Moving abroad for employment or planning to shift back to India permanently? How will your income be taxed? Can you continue holding NRE (Non-Resident External account) deposit, foreign accounts, foreign investments, foreign rentals etc? Well, everything begins with finding out whether you qualify as an non-resident Indian (NRI) or an Indian resident.
And this may not always be easy. To add to the confusion, the definition of non-resident is slightly different under the Income Tax Act and Foreign Exchange Management Act (FEMA).
Why do we need to worry about the definitions as per the Income Tax Act and FEMA?
FEMA is a regulatory law. There are regulations under the FEMA for undertaking transactions with non-resident Indians or any cross-border transaction, which is inbound or outbound investments, capital account or current account transaction etc. There are certain restrictions and approval procedure covered in the regulation which a non-resident Indian has to comply with at the time of taking on any such transaction. Hence it is necessary to know the residential status as per FEMA on any particular day.
Please note: Citizenship is not a relevant criteria for determining the residential status under FEMA law.
FEMA decides where you can invest. For instance, as per FEMA, you can open NRE or NRO (Non-Resident Ordinary account) accounts if you qualify as an NRI (person residing outside India). Your resident status as per the Indian Income Tax Act does not matter when it comes to deciding whether you can make a particular investment in India.
Under the Income Tax law, the purpose is to determine how your income is taxed. It is a law on the revenue you make. The income is determined for the full year. If a person is a resident, his global income is taxable in India. If a person is a non-resident, only income made in India will be taxable. Income earned and received outside India is not taxable in India. For earning income, no approval is required under the Income Tax act. Income tax law is only concerned with taxable income and the tax thereon. In short, Income Tax Act decides how the income from various investments will be taxed. For instance, the provisions in the Income Tax Act will decide how income from NRE and NRO deposits will be taxed.
For example: Your residential status as per FEMA will decide if you must make your investments in mutual funds as a resident or as an NRI. On the other hand, your residential status as per the Income Tax Act will determine if your mutual fund investments get taxed as a resident or as an NRI.
To make matters complicated, your residential status per FEMA and Income Tax Act can be different. And this leads to a good bit of confusion. While the Income Tax Act looks at the matter mathematically to decide whether you qualify as a resident or non-resident, FEMA looks at the intent too.
In this article, let’s try to decode both the laws:
Definition of ‘Non-Resident Indian (NRI)’ as per Income Tax Act:
As per the Income Tax Act, there are three residential statuses:
• Resident and Ordinarily Resident (ROR)
• Resident and Not Ordinarily Resident (RNOR)
• Non-Resident Indian (NRI)
You are a resident if you satisfy any of the following two conditions: Either you are in India for 182 days in the financial year, or, you are in India for 365 days in four preceding financial years and 60 days in the year. The second condition will ensure that most of those who are going abroad for the first time will not be eligible for NRI status.
There are a few exceptions though: The second condition is not applicable if you are leaving India for employment or as a member of crew of Indian merchant ship. In such cases, the ‘60 days’ in the second condition is replaced by ‘182 days’. Hence, the second condition automatically becomes ineffective.
Also another exception is that for Indian citizens or persons of Indian Origin (PIO) who stay abroad but are on a visit to India, the period of 60 days in the second condition is replaced by 182 days.
However, the Indian parliament’s 2020 Finance Bill has made a few drastic changes to the conditions above, which are as follows:
• In condition one, the period of ‘182 days’ was reduced to ‘120 days’ for an Indian citizen or a PIO who resides outside India and visits India. However, reduced period of 120 days shall apply only in cases where the income accruing in India of such individuals during the financial year is more than INR1.5 million (Dh75,136). In other words, the scenario remains the same for such individuals whose taxable income in India is less than INR1.5 million (Dh75,136) i.e. 182 days in case your income is less than INR1.5 million (Dh75,136).
• An Indian citizen or PIO having total income, other than income from foreign sources*, exceeding INR1.5 million (Dh75,136) would qualify as ‘resident but not ordinarily resident’ (RNOR) in India if he or she is present in India for 120 days or more but less than 182 days during the relevant financial year.
• The Finance Act, 2020 provides that an Indian citizen would be deemed to be RNOR if such an individual is not liable to pay tax in any other country or territory by reason of residence or domicile (the country that a person treats as their permanent home) in that country and his total income, other than income from foreign sources*, exceeds INR1.5 million (Dh75,136) in the relevant financial year.
As per the Income Tax Act, a Person of Indian Origin (PIO) is someone who either he or his parents or any of his grandparents were born in undivided India. An NRI is a citizen of India or PIO who is not a resident (ROR or RNOR).
Who is RNOR (Resident and Not Ordinarily Resident)?
This is applicable to non-residents who are returning to India. If you are not a Resident and Ordinarily resident (ROR), you can still be RNOR.
You are an RNOR if you satisfy any of the following conditions:
• You have been an NRI in nine out of ten years preceding the financial year under consideration. (OR)
• You have been in India for no more than 729 days during the seven previous years, preceding the financial year under consideration. (OR)
• If you are an Indian Citizen AND are 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 is a new condition and has been added through the Finance Bill, 2020. You can see this condition has no linkage to the number of days of stay in India. As I understand, this is to bring high net worth individuals who are planning their stays to avoid paying taxes anywhere under the tax bracket. (OR)
• You are a citizen of India or Person of Indian Origin (PIO) AND your Indian Income exceeds INR1.5 million (Dh75,136) in the previous year AND your period of stay in India in the previous year ranges from 120 days to 181 days.
Conditions (3) and (4) for RNOR status have been added in the Finance Bill, 2020 and will be applicable from the upcoming 2021 financial year. You will observe the RNOR status coming into the picture when you have been an NRI for many years. If you qualify as RNOR, your foreign income won’t be taxed in India (barring a few exceptions). Therefore, the tax treatment on foreign income for RNOR is similar to that of an NRI.
So, if you are planning to return to India, time your return in a way that you can enjoy RNOR status for a few years.
Preceding financial year means the financial year that precedes the financial year under consideration. So, if you are trying to determine residential status for FY2017, four preceding financial years will be FY2013-FY2016 i.e. April 1, 2012 to March 31, 2016.
Definition of ‘Non-Resident Indian (NRI)’ as per FEMA:
The definition for non-resident is provided under Foreign Exchange Management Act of 1999.
FEMA uses the term ‘Resident Outside India’, for Non-Residents. FEMA has two classifications for residential status – ‘Resident in India’ and ‘Resident outside India (NRI)’.
When are you an Indian ‘Resident’ as per FEMA?
You are a Resident in India if you have been in India for a period of more than 182 days during the preceding financial year. There are a few exceptions the above definition does not apply:
One exception is that if you have gone out of India (or stay outside India) for taking up employment. Another is that if you have gone abroad (or stay abroad) for carrying out a business. Also, it doesn't apply if you have gone abroad (or stay abroad) for any purpose that indicates your intention to stay abroad for an uncertain period.
In such exceptional cases, you can be considered Resident Outside India even if you have been in India for a period of more than 182 days.
When are you a Non-Resident Indian (NRI) as per FEMA?
Continuing with the definition in the previous section, you are a Resident Outside India (NRI) if you are in India for 182 days or less during the preceding financial year. There are a few exceptions.
The above definition does not apply if you come to (or stay in) India for taking up employment. Also is an exception if you come to (or stay in) India to carry on a business or vocation or if you come to (or stay in) India for any purpose that indicates your intention to stay in India for an uncertain period.
In such cases, you will be considered Resident in India even if you have stayed in India for less than 182 days during the preceding financial year.
If you are settled abroad and have come to India for a purpose other than employment or business and have no intention to stay in India permanently, you will continue to be considered Resident Outside India (NRI) irrespective of your duration of stay in India.
Similarly, persons returning to India permanently are considered residents from the first day of return, which by the way, you can only know if you have returned permanently. Hence, there can be an element of subjectivity in this case.
If you are a student leaving India to study abroad, you are NRI from the first day of your departure from India. This was clarified by RBI in a circular. There is no requirement of continuous stay in India. Your stay in India can be staggered over multiple trips/visits. Financial year is not defined in FEMA. However, it is assumed to refer April 1-March 31 period.
Differences between definition under FEMA and Income Tax Act
• For you to be resident in India, Income Tax Act requires stay of 182 days in India while FEMA requires a stay of more than 182 days.
• Income Tax Act considers current financial year for determination of residential status. FEMA considers preceding financial year.
• Income Tax Act DOES NOT consider the reason of stay in India or visit abroad for determination of residential status. FEMA does. Income Tax Act merely considers number of days of stay in India.
• When it comes to Income Tax Act, you are either resident or non-resident for the entire financial year i.e. you cannot be resident for part of the year and non-resident for rest of the year.
• The aforesaid limitation does not apply to FEMA. For example, in the above instance where you left India for employment abroad on March 20, you are resident till March 20 and non-resident after March 20.
How does it matter?
Your investments are governed by definition as per FEMA. For instance, you have to be NRI as per FEMA in order to own NRE, NRO or foreign currency accounts. Whether you want to open a Public Provident Fund (PPF) or purchase an agricultural land depends on your residential status as per FEMA.
On the other hand, taxation of your income is governed by Income Tax Act. It is quite possible that you are an NRI as per FEMA and a Resident as per Income Tax Act. The opposite is also possible.
Here are a few illustrations to understand the difference better.
Let's say, you leave India on November 15, 2015 to visit your brother in the US. You return to India on August 20, 2017.
Income Tax Act:
• Financial year 2016: You are ‘Resident’ since you have stayed in India for more than 182 days during FY2016.
• Financial year 2017: You are NRI as you have been outside India for the entire year.
• Financial year 2018: Resident since your stay in India will be more than 182 days.
• Financial year 2016: You are ‘Resident’ since you were in India for 365 days during financial year 2015 (preceding financial year)
• Financial year 2017: You are ‘Resident’ since you were in India for more than 182 days during FY2016 (preceding financial year)
• Financial year 2018: You are ‘Resident’ since you have returned to India permanently (even though your stay abroad was more than 182 days during FY2017)
Let's say, you leave India for employment on November 15, 2015.
Income Tax Act: Since you are in India for more than 182 days, you will be considered ‘Resident’ in financial year 2016. Your foreign income will also be taxed in India.
FEMA: Since you are going abroad for employment, you will be considered NRI from day 1 of your departure. You will be Resident until November 14, 2015 and non-resident thereafter.
Let's say you have been abroad for many years. You return permanently to India on February 15, 2016.
Income Tax Act: You are NRI for financial year 2016 since you were abroad for over 300 days in financial year 2016. Your foreign income won’t be taxed in India. For financial year 2017, you will still be resident. However, the decision between RNOR and ROR status will be based upon the period of stay abroad.
FEMA: You are NRI till February 15, 2016. Since you have returned permanently, you are resident after Feb 15, 2016. For financial year 2017 too, you will be considered resident.
Now assuming the readers know who are residents and non-resident Indians as per both the laws, it’s time to answer few specific points raised by the NRIs planning to return to India for good.
Common tax-related questions of a returning Indian:
1. What to do with NRO, NRE and FCNR accounts?
Returning NRIs, upon his return to India has to deal with his various accounts in India in the following manner. But before that here are some type of accounts you should be aware about.
FCNR is a kind of fixed deposit account opened for depositing income earned overseas. The account is held in foreign currency and is therefore protected against forex rate risks. The deposit is maintained in a foreign currency. The interest earned from a FCNR account is exempt from Income Tax. You (NRI) can open a FCNR account with two or more NRI joint account holders.
Now onto how one should deal with his or her verious accounts.
2. What to do with shares, securities and mutual funds purchased as NRI?
Returning NRI is required to inform all the companies, funds etc. as to change of residential status from NRI to Resident. Accordingly, one need to approach the asset management company or the bank to inform them about this change to help them determine the tax deduction liabilities in case of redemption or payouts.
3. Will my NRE account/fixed-deposit interest remain tax-free post return to India?
This is the most common question amongst the returning Indians and the answer to this is that interest amount on NRE accounts/deposits (re-designated as resident rupee account/deposit) becomes taxable on your return. If you transfer the balance to RFC account, the interest income will become taxable or exempt as per rules for RFC account. There is some confusion among investors that interest on NRE fixed deposits is always exempt from tax. Therefore, they somehow want to continue their NRE deposits. However, this is a misbelief. As per the Income Tax Act, NRE interest is exempt from tax only for those who qualify as NRI as per FEMA. Since, as per FEMA, you become resident from the very first day of permanent return, you cannot hold NRE deposits. Even if you continue holding such deposits, the interest on such NRE deposits is taxable. Therefore, there is no point in continuing those NRE accounts.
The interest on FCNR deposit will remain tax-free if the returning NRI remains RNOR (Resident but not Ordinarily Resident). As and when you become ROR (Resident and Ordinarily Resident), even interest on FCNR deposit is taxable.
4. What happens to the overseas investments and Income post return to India?
All kind of foreign exchange or overseas assets such as properties, bank deposits, stocks and securities, life insurance policies, loans, company deposits, debentures, bonds etc. acquired, held or owned by an NRI while he was abroad can be continued to be so held and dealt in any manner even after the NRI’s return to India for permanent settlement. The income generated from such investment shall remain tax free as long as you are Non-Resident or Resident and Non Ordinary Resident (RNOR). Once your status changes to Resident and Ordinary Resident (ROR), the global income is taxable, accordingly the incomes from such overseas investment shall be taxable in India. Further, all the overseas assets and investments needs to be reported in the Income Tax returns after his or her return to India.
5. What is the taxation on pension received from the foreign employer post return to India?
NRIs receiving pensions from former employers after returning to India may be liable for tax on that pension in India. This is subject to provisions of any double taxation avoidance agreement between India and the country from which the pension is received.
6. What is RNOR and how this helps in tax planning for returning Indians?
The definition and conditions of RNOR is already discussed above. However, attaining RNOR status may prove to be very helpful in terms of tax planning for a returning Indian. RNOR are almost treated like NRIs when it comes to taxation.
Your income earned outside of India is not taxed in India as long as you retain your RNOR status. As per the Income Tax Act, the interest on foreign currency deposits in Indian Banks is exempt for non-residents and RNOR.
Hence, interest on FCNR deposits will continue to be exempt from tax as long as you remain RNOR. Similarly, interest earned on RFC account will be exempt from income tax as long as you are RNOR. Since RNOR get favourable tax treatment (as compared to ROR), you can time your return in a way that you stay RNOR for as long as possible.
For example: If you are planning to go back to India for good in current year i.e. fiscal year 2020-21 you can defer the date of your return to let’s say October 3, 2020 assuming from April 1, 2020 till October 2, 2020 you have not been to India. In this case even in 2020-21 you will be a Non-Resident and RNOR will start from 2021-22 year, which will run upto two more years. We are taking 182 days criteria assuming your income in India is upto INR1.5 million (Dh75,136).
7. What is RFC Account and how it can help returning Indians?
A RFC Account can be maintained by a resident in Foreign Currency. This account can be useful for those NRIs who are returning to India.
Please understand RFC account, under discussion, are different from RFC (Domestic) accounts that can be opened by residents. RFC (Domestic) accounts are non-interest bearing accounts and are different from RFC accounts that are mentioned here. The focus of this post shall be returning NRIs. Persons who have been NRI for a continuous period of not less than 1 year and have become persons resident in India (as per FEMA and not Income Tax Act) on or after April 18, 1992 can open RFC account. RFC accounts can be denominated in any freely convertible foreign currency. RFC Accounts can be held in the form of savings, current and term deposits accounts.
Benefits of Resident Foreign Currency (RFC) Account
• Funds in the RFC accounts can be freely utilized for any genuine remittance outside India through normal banking channel.
• Balance in RFC account is fully repatriable. Both principal and interest are fully repatriable.
• Both principal and interest are payable in foreign currency. Hence, there is no exchange risk.
• Interest rates on RFC accounts or deposits are deregulated (reduction or elimination of regulation) and will vary across banks
• RFC accounts/ deposits are typically available in freely convertible currencies such as USD, GBP, Euro, AUD and CAD. However, not every bank will offer RFC account in all currencies.
• Funds in the RFC account can be freely remitted abroad or credited to fresh NRE/FCNR account if you regain non-resident status
8. Finally, the key DOs and DONT’s for returning Indians
• Prepare list of assets, investments and liabilities (loans, debts) abroad before moving back to India.
• Try to maximize the benefits of RNOR status by selecting a date which can extend the RNOR benefits.
• Seek professional opinions before moving back in order to comply with the requirements of the law and tax planning.
• Do not try to hide any investment or income outside India after returning to India
• Do not miss out any important paper work which shall be considered by IT department at the time of assessment.
• Any tax decision pertaining to returning to India shouldn’t be done in a hurry or without doing proper tax planning.
- Dixit Jain, managing director at The Tax Experts DMCC, guides NRIs on taxation rules in India, US or UK, advising returning Indians, new NRIs, among others