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December 2, 2020

How NRI can save Tax after coming to India?

by CA Shivam Jaiswal in Income Tax

How NRI can save Tax after coming to India?

An Indian residing abroad is popularly known as Non-Resident Indian (NRI). Income Tax Act has not directly defined NRI. Section 6 contains detailed criteria of who is considered as Resident in India and provides that anyone who doesn’t meet these criteria is a Non-Resident.

Who will be considered as a resident in India?

An individual will be treated as a Resident in India in any previous year if he/she is in India for:

  1. At least 182 days in that year, OR
  2. At least 365 days during 4 years preceding that year AND at least 60 days in that year.

An individual who does not satisfy both the conditions as mentioned above will be treated as “non-resident” in that previous year.

Definition of Resident is relaxed by dropping Condition 2 given above (i.e. only Condition 1 is applicable), for the following cases:

  1. An Indian citizen who leaves India in any year for the purpose of employment outside India or as a crew member of an Indian ship,
  2. An Indian citizen or a person of Indian origin who resides outside India and who comes on a visit to India.

What income of a non-resident will be taxable in India?

A person who is non-resident is liable to tax on that income only which is earned by him in India. Income which is earned outside India is not taxable in India. Income is earned in India if –

  1. It is directly or indirectly received in India; or
  2. It accrues in India or the law construes it as having accrued in India.

For instance, income from business arising through any business connection in India, income from any asset or source if such asset or source is in India, income from salaries if the services are rendered in India, Dividend paid by an Indian company even though this may have been paid outside India etc

Nature of incomeTaxability in the hands of NRI
Income which accrues or arises in IndiaTaxed
Income which is deemed to accrue or arise in IndiaTaxed
Income which is received in IndiaTaxed
Income which is deemed to be received in IndiaTaxed
Income accruing outside India from a business controlled from India or from a profession set up in IndiaNot Taxed
Income other than above (i.e., income which has no relation with India)Not Taxed

In simple words, if your status is ‘resident,’ your global income is taxable in India. However, if your status is ‘NRI,’ only income which is earned or accrued in India is taxable in India.Interest earned on an NRE account and FCNR account is tax-free. Interest on NRO account is taxable for an NRI.

How does the status of a NRI change when he returns permanently to India?

Many NRIs return to India after staying 20-25 years abroad, but are not aware of the new changes in taxation rules and it is important that they understand the implications before they return to India.

The change of residence from the host country also changes the NRI status and returning to India for permanent settlement will have serious implications if the recently amended tax laws are not followed, as far as declaration of income and tax obligations are concerned.

It is important to remember that NRIs returning to India permanently or for an indefinite period should take a note of the change in their ‘non-resident’ tax status. The moment NRI’s, enter India and live for 182 days, they lose the ‘non-resident’ tax status. But that does not necessarily mean that your tax status reverts to ‘resident’.

In certain cases, the ‘Resident but Not Ordinary Resident’ or RNOR status becomes applicable.

What do you mean by the RNOR status?

One will be considered Resident but Not Ordinarily Resident in a year, if they satisfy one of the two conditions for a Resident (mentioned above) and does not meet more than 1 of the below conditions:

  • Has been a ‘resident’ for tax purposes in at least 2 out of the 10 immediately previous years and
  • Has stayed in India for at least 730 days in 7 immediately preceding years

So even if you do not meet both the conditions or only meet one of them, then you will be RNOR, but if you meet both, then your tax status changes to ‘Resident’ for the financial year.

If NRI’s return to India and have the RNOR status, they enjoy many tax benefits during this phase.

Taxability of Income of RNOR

The Government gives certain tax benefits to returning NRI’s by making them as RNOR for some time. From a tax point of view, RNOR will have a similar status as that of n NRI.

Their foreign earned income as an RNOR will be continue to be exempted from taxation in India. So a person who is a RNOR will have to pay tax only on income received and accrued in India.

In simple words, the income of a RNOR will be substantially lower. The person with RNOR status does not have to pay tax on:

  • Rent received abroad
  • Capital gains earned abroad
  • Interest on FCNR deposits
  • Interest on NRE deposits if you convert that to Resident Foreign Currency (RFC)
  • Withdrawals from offshore retirement accounts
  • Interest/dividend received from investments in deposits and securities abroad

Once the RNOR becomes a Resident Indian, all income whether earned in India or abroad is taxable. NRIs have the option to convert their NRE account to an NRO or FCNR account before returning to India, meaning they would not pay tax on the interest income for at least two years. Usually, interest on NRO account is higher than that on FCNR account. NRIs can also retain a bank account and investments outside India even after returning home. The only condition is that they should disclose this in their income tax returns in the subsequent years, so that when they get the money from overseas it is easier for them to explain to the tax authorities.

If you are a NRI and your status gets converted to resident Indian, inform the bank so that your bank accounts (NRE and NRO) are designated as resident bank accounts. The deposit accounts in NRE (should be converted to resident) and FCNR accounts can be continued till maturity, transferred to RFC accounts or closed down. Also, on arrival, inform your MF about change in tax status to Resident and also change the bank account linked to the MF to a resident one. Similarly, for stocks, PIS account will need to be closed and the stocks transferred to a resident brokerage account.

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