Returning to India? Know your tax liability well

As an NRI returning to India, you can retain all your overseas assets including properties, market investments, stocks etc, provided you acquired them when you were residing outside India

With India becoming a hotbed of financial activity and economic growth, many non-resident Indians (NRI) are now migrating back to India. However, the tax liabilities awaiting them once they are back home may turn it to a bitter sweet pill, as they signal the end to the tax-free years that they have been enjoying abroad in most cases.

So, if you are one among the many looking to return to Indian shores, know your likely taxability.

Taxation bodies for returning NRIs

There are two stipulated taxation bodies that govern all the taxation and foreign investments of NRIs—the Foreign Exchange Management Act (FEMA) and the Indian Income Tax Act. So, as a returning NRI, you will have to comply with both FEMA and Indian IT Act regulations while making your transit.

All your foreign investments and transactions outside India, like real estate, bank accounts, market investments like mutual funds, business income, etc are all covered under FEMA. The taxation aspect for those as well as your Indian assets and money in India are regulated under the Indian Income Tax Act.

Know your residency status

Your tax liabilities in India will depend on your residency status. So, whenever you are making the move back to India, you should know your exact residency status to figure out your tax implications.

•An Indian citizen will be considered as an NRI if he has spent less than 60 days in India during a financial year. This is applicable for Indian crew members as well, who work on an Indian flagged vessel, but are on sail for more than 182 days during a financial year.

•If you are in India for a period of 60 days or more but less than 182 days during a FY, then if you have spent at least 365 days or more in the 4 years immediately preceding the concerned year, you will be considered a resident.

•If you are a resident in India for at least 2 years out of 10 years immediately preceding the concerned year, or if you are staying in India for 730 days or more during the preceding 7 years, you may be placed under another category known as Resident but Not Ordinary Resident (RNOR). Tax implications for NRIs and RNORs are very similar.

Taxation for overseas assets

As an NRI returning to India, you can retain all your overseas assets including properties, market investments, stocks etc, provided you acquired them when you were residing outside India. Even after your return to India, you can continue holding such assets if you like or dispose them and remit the sale proceeds to India. Such transfer of funds will not evoke any tax liability in India.

Taxation for your Indian assets

The most significant thing that you need to do as a returning NRI is to update the official record for your Indian assets. This includes re-designating your bank account status to resident Indian status and updating your securities and investments in India.

•Bank accounts and RFC accounts: You will need to update your bank account status from NRI to Resident Indian. You can transfer your NRE account to a usual savings account or any other like a fixed deposit. Funds or foreign currencies in your overseas accounts can be transferred to a Resident Foreign Currency (RFC) account. RFC accounts as well as savings or term deposit accounts give you interest that is taxable as per the Income Tax Act of 1961.

•Securities and other assets: As a returning NRI, you are liable to inform any mutual fund companies or similar asset management companies if you have invested in any. Your existing demat accounts needs to be closed, and the shares or holdings in it can be transferred to a newly opened account with your new resident status. The onus is on you to make sure that your status is changed from NRI to Resident Indian. The taxability for the same now will be as per IT Act in India.

Understanding your tax liability

As per Indian income tax rules, the moment you become an Indian resident, you will be taxed on your global income. If your overseas income is already being taxed, you can make use of the Double Taxation Avoidance Agreements or DTAA to reduce your tax liability. Also, all your income that originates in India or is received in India will be taxable in India.

The tax obligations for returning NRIs are fairly simple, allowing you to make a successful transition from a NRI to a resident Indian. You can take professional help if you are unsure of managing your financial assets during your transition from NRI to resident Indian.