A situation is arising for many non-resident Indians who have long been resident in the UAE but want to continue enjoying NRI status after returning to India, either in retirement or following the loss of their job.
NRI status comes with benefits such as tax exemptions, incentives and preferential treatment for property and capital market investment quotas and children’s admission to professional courses.
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.
A recent special seminar on NRI status and tax obligations shed light on the new amendments concerning NRI taxation.
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.
How status changes
Tax expert Ramanathan Bupathy, chairman of Geojit Financial Services and former president of Institute of Chartered Accountants of India, gave an update in view of the amendments to the taxation regulations.
The seminar covered topics such as residential status on return to India, taxability of interest on non-resident external (NRE) accounts and foreign currency non-repatriation (FCNR) accounts, retention of bank account and investment outside India after returning to India and procedural compliance and filing of returns.
“If you have been outside India continuously for 10 years with NRI status and returned to India for permanent settlement, you can continue the status of ‘not ordinarily resident’ for two years after arrival. Subsequent to that when you continue to stay in India you will become a resident,” Bupathy said.
Notifying the bank
The taxability of interest on NRE account is the major problem at the time of return to India.
An NRI can maintain NRE accounts with banks in India and the interest income from them is not taxable.
But the account holder has to report to the bank within 30 days of coming back to India for permanent settlement.
Then the bank will reclassify the account from NRE to an NRO (non-resident ordinary) account and from that day onwards the bank will start deducting tax at source as interest income on that account will be chargeable to tax.
NRIs can also maintain a FCNR (foreign currency non-repatriable) account for two years after a return to India.
Interest on FCNR account is not chargeable to tax so long as he is non-resident or not ordinarily resident.
Before they return
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.
Bupathy’s advice is to calculate the differential interest for two years and consider the tax implication.
“If the tax liability is more, put it in FCNR account, which is protected against fluctuation in exchange rate of the foreign currency.”
NRIs can also retain a bank account and investments outside India even after returning home.
For example, people take LIC (life insurance) policies while abroad and they cannot close the policies as they usually mature after they return to India.
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.
In some cases, companies send the termination benefits after the employees go back to India.
If they have maintained their accounts in the host country, they can retain the account and ask the employer to credit that money to their foreign accounts.
Then they can bring it to India.
If they directly receive it in India, there is a possibility that the income received in India is chargeable to tax.
Tax liability
India had amended the NRI status eligibility rules by reducing the minimum period of stay in India from 182 to 120 days for qualifying to be a resident; if the aggregate stay in the preceding four years exceeds 365 days and the aggregate taxable income exceeds INR1.5m ($19,959, £16,148, €18,380) excluding income from foreign sources.
The limit of 120 days was imposed as many residents abused the NRI status to evade taxes in India.
NRIs are taxed for income earned or collected in India, and income accrued from fixed deposits (FDs) and savings accounts, as well as capital gains.
An NRI’s income tax liability in India depends on their residential status for the year. If the status is ‘resident,’ their global income is taxable in India.
There is a general perception that NRIs need not pay income tax or file tax returns in India.
NRI or not, any Indian citizen whose annual income, accrued in India, exceeds INR250,000 is required to file income tax return in India and pay taxes as the case may be.
A large number of NRIs became stuck in India when the government imposed a country-wide lockdown on 24 March, which still continues, and suspended international flights.
Many have exceeded the 120-day stay limit, technically meaning they lose their NRIs status that allows them tax exemptions and other benefits.
If they exceed their stay in India beyond 120 days, the NRIs will technically become residents as per the income tax rules, requiring them to pay tax on their global income.
They will then be required to file tax returns as Indian residents.
Bupathy also reminded those present at the seminar that the revised date for filing tax returns for the year ended 31 March 2019 is 30 September 2020.
