Tax Planning Strategies for NRIs Returning to India: Case Study

Background:

Our Case study involves an assessee who has been a resident of Amsterdam, Netherlands for the past six financial years and plans to return to India with their spouse in FY 2024-25. The assessee holds the following assets:

1. Shares of his company in Hong Kong
2. House Property in the Netherlands (Purchased in FY 2019-20)
3. Stock portfolio in the US/EU
4. Savings account in a Foreign State

Examination Matters:

The assessee's decision to return to India will affect his residential status, leading to several important queries:

Will tax benefits be planned through planning the date of arrival in India?

The timing of the assessee’s return to India is crucial for determining tax benefits and the optimal time for liquidating assets. If the assessee returns to India before 31 December 2024, he will stay in India for 91 days or longer, meaning that he will be a Resident but Not Ordinarily Resident (RNOR) for one financial year (FY 2025-26) and a Resident and Ordinarily Resident (ROR) after that, because the additional conditions for obtaining RNOR status for more than one year are not satisfied based on his residence in India in the past 10 financial years.

On the other hand, if he returns on March 31, 2025, he will be an RNOR for 2 financial years (FY 2024-25 and FY 2025-26) and a ROR thereafter.

Should the assessee Liquidate shares before or after updating the residential status?

If shares are sold while the assessee is RNOR, no capital gains tax is due in India. However, if shares are sold under ROR, the income must be recorded in India and tax paid after claiming the foreign tax credit for the tax paid in the nation where the shares are sold. Unrealized profits on shares held are not taxed in India. However, in other countries, such as the Netherlands or Hong Kong, they may be subject to tax. In such cases, foreign tax credit cannot be claimed in India since the unrealized gain would not be offered to tax and when the actual sale happens the gain is offered to tax in India but is exempt from tax in the Netherlands or Hong Kong and hence in both these situations he would lose out on Foreign Tax Credit (FTC).

To avoid such situations, the assessee can sell shares to his spouse, ensuring financial movement to demonstrate authenticity, or the spouse may obtain a loan from a third party and pay the assessee or the assessee may sell to a third party and the spouse can purchase from such third party after receiving a loan from the assessee. It is also recommended to sell back to the company and make a new purchase as a non-resident. Dividends received while under RNOR status are not taxed in India. However, the dividend is liable to tax in India while ROR and FTC can be taken. If the assessee becomes a non-resident again and sells the shares during the non-resident period, there is no tax in India.

Does the sale of his foreign residential property attract capital gain tax in India?

If the assessee sells the property during his RNOR status, the capital gain would not attract tax in India. But if the assessee sells the property during ROR status, long-term capital gain shall arise as the property was purchased in 2019. By investing the earnings in another residential property in India or government bonds under section 54EC, the assessee may claim an exemption under section 54. Rent from this property is not taxable during RNOR status but is taxable during ROR status with and standard deduction of 30% and a deduction of interest on the housing loan in the foreign country.

Can the assessee hold US/EU stocks and Foreign Savings Accounts after becoming an Indian resident?

Yes, an NRI returning to India can hold US/EU stocks and maintain a foreign savings account as an Indian resident. However, once the status becomes ROR, any assets kept outside of India must be reported in the Indian income tax return. It is essential to shut any dormant accounts maintained outside of India that are no longer in use to prevent missing out on reporting them on the Indian income tax return, as the penalty for non-disclosure of foreign assets under the Black Money Act is substantial.

Conclusion:

The Assessee must return to India before March 31, 2025, to take full advantage of tax incentives, which include RNOR status for two fiscal years. Liquidating foreign shares and property during this RNOR period can avoid Indian capital gains tax. The assessee must comply with Indian tax regulations and prevent significant penalties for non-disclosure by reporting and managing foreign assets carefully.

At KDP Accountants, we provide tailored tax planning strategies for NRIs. We offer comprehensive guidance on managing international assets, tax efficiency, and compliance with Indian tax regulations.

Kishika Narwani
Author

A CA Finalist working as a senior assistant at Kamdar Desai & Patel LLP primarily engaged in domains of auditing, assurance, income tax compliances, and consultancy serving NRIs and foreign companies who have their operations in India. The desire to broaden her knowledge sphere about international tax provisions, case laws, and concepts in and around the tax world, brings forth articles on crisp topics providing a deep understanding within a manageable reading time.