Taxability in India is dependent on whether an individual qualifies as an Ordinary Indian Resident (ROR), Not Ordinarily Resident (NOR) or Non-Resident (NRI). An ROR is liable to tax on his global income, while a NOR and NRI is liable to tax on the income ‘earned’ in India. NRI benefits are available to a person till the time he holds the NRI status in India; a person loses his NRI status in the same year when he returns to India or within 2-3 years from the date of arrival to India, depending on the number of days of stay in India (explained below).
A returning Indian who has been a Non Resident for 9 years or more, shall be a Not Ordinarily Resident (NOR) for 2 successive years upon permanently returning to India.
Foreign exchange and overseas assets (such as bank accounts, stocks/securities, life insurance policies, loans, company deposits, debentures, bonds etc.) acquired/held/owned by NRI while he was abroad can be continued to be so held and owned even after the NRI returns to India for permanent settlement. Such foreign exchange and overseas assets can accumulate or accrue income outside India and the balances can be utilized for reinvestment or repatriated to India at any time (without attracting Wealth tax in India) within 1 year immediately preceding the date of his return or later. This exemption period is limited to 7 successive years which immediately follow the year in which the NRI permanently returns to India.
NRIs can continue to hold immovable properties outside India. Such properties can be rented out and rentals can be credited to overseas bank accounts. The properties can be sold and the sale proceeds credited to overseas bank accounts. Expenses relating to such properties, such as maintenance, insurance premium etc. can be paid out of the overseas balances.
Important points to keep in mind:
- Immediately on return to India, NRIs should inform their bank to designate their accounts as domestic Resident accounts or transfer the balance in their NRE/FCNR accounts to Resident Foreign Currency (RFC) accounts, if so desired; FCNR accounts can be continued till the date of maturity and upon maturity, can be converted to RFC accounts.
- It is also important to keep in mind the upcoming new Income tax laws – the Direct Tax Code (DTC) that is proposed. There is a proposal under the DTC to remove concept of ‘NOR’. Under DTC, a person may qualify as Resident Indian on account of removal of NOR concept (whereas he would have become NOR under existing provisions); in such a case, it would bring assets situated outside India under the ambit of wealth tax. DTC also proposes to levy wealth tax on net wealth in excess of Rs 1 crore as compared to 30 lakhs of existing provisions.
- Resident Foreign Currency (RFC) Accounts Scheme – This is a Scheme approved by Reserve Bank of India permitting persons of Indian nationality or origin, who have returned to India on or after 18th April 1992 for permanent settlement (Returning Indians), after being resident outside India for a continuous period of not less than 1 year, to open foreign currency accounts with banks in India for holding funds brought by them to India.
Some of the features of an RFC account are:
- RFC account can be held singly or jointly in the names of eligible persons.
- RFC account can be maintained in the form of Savings, Current and term deposit; no cheque books are given for RFC-SB account.
- RFC account can be opened and maintained in US Dollars, Pounds Sterling and Deutsche Marks.
- Only certain permissible credits and remittances in any permitted currency from abroad, pension or any other monetary benefits received from abroad, interest on RFC accounts, foreign currency notes/travellers cheques, transfers from other RFC account of the account holder, balance in NRE/FCNR account at the time of his arrival in India and any other amount specifically permitted by RBI are allowed under RFC. Funds in RFC accounts can be remitted abroad for any bona fide purpose of the account holder and his dependents including exchange required for travel and other personal purposes and investments.
- Returning NRIs are required to re-designate their Non-Resident accounts as Resident Rupee/RFC accounts after their arrival in India.
- If the individual subsequently goes abroad to become an NRI, the balance in the RFC account can be converted to NRE/FCNR account. Interest income from RFC is exempt from income-tax till such time the Returning Indian maintain the status of Resident but Not Ordinarily Resident (NOR). Hence, if the Returning NRI had been non-resident for a continuous period of 2 years, he gets exemption from income-tax for subsequent 9 years.