As the global economy becomes increasingly interconnected, many Indian expats navigate complex tax regulations upon returning to India. This case study explores the unique financial and tax considerations faced by a returning Non-Resident Indian (NRI) during their transition back to India.
This guide covers tax filing, residential status, and financial planning for RNORs (residents but not ordinarily residents) and provides information on capital gains, foreign investments, and salary taxation.
Understanding Residential Status:
When NRIs return to India, their residential status is a major factor in determining their tax obligations. In this case:
- The individual stayed in India for 359 days during the financial year, qualifying him as a Resident but not an Ordinarily Resident (RNOR), as his number of days of stay in India during the preceding financial years did not exceed the limit to qualify him as an ordinary resident.
- An RNOR status provides significant benefits, especially for foreign income. Foreign income earned and received outside India is not taxable during the RNOR period except for certain exceptions.
RNOR Tax Benefits:
- Income accrued or earned outside India is not taxable during the RNOR period.
- Foreign assets and investments are not required to be declared in your tax return.
Although foreign income is generally excluded during the RNOR period (subject to conditions) , salary income received when providing services from India is taxable in India.
A Case Study
In this case, the individual works remotely for a US-based company while residing in India. As per Section 9 of the Indian Income Tax Act, the income is taxable in India since the employment is exercised within India. To avoid double taxation, the client can claim foreign tax credits for US-paid taxes by filing a specific form.
Tax Slabs and Effective Rates:
The person is in the highest tax bracket in India due to their revenue of about ₹1.7 crores.
- Subject to fulfillment of conditions, taxes paid in the US are offset through foreign tax credits to ensure no double taxation.
- The client must pay the remaining amount in India if the Indian tax liability is more than the US tax liability.
The client’s portfolio comprises salary and stock-based income, including Employee Stock Ownership Plans (ESOPs) and other stock-related gains. At the time of vesting, the difference between the market value of the stocks and their acquisition cost is taxable in the country where the vesting occurs.
Gains from the sale of any US stocks made by the client during their RNOR term are not subject to Indian taxation. Any residual investments in foreign equities, however, must be declared in line with Indian tax regulations once the person becomes an Ordinary Resident, and any profits from these stocks would be subject to Indian taxation.
Conversion of Bank Accounts:
Returning NRIs must align their financial accounts with their residential status. The residential status of an individual is viewed from a tax perspective and under the Foreign Exchange Management Act (FEMA). Definition under FEMA is governed by the circumstantial intent of the individual whereas the Income Tax Act determines the status based on ‘number of days spent in India’.
In case under both the abovementioned criteria, your residential status is determined to be resident Indian, you are advised to take the following action under professional guidance -
- Existing NRO/NRE accounts must be converted to resident savings accounts.
- New savings accounts can be opened in India for regular banking purposes.
Conclusion:
This case highlights the importance of tax planning for NRIs returning to India. Individuals can effectively manage their tax liabilities by understanding their residential status and benefits under the RNOR classification. Professional guidance ensures compliance with rules like account conversion and optimizes tax savings on global income.
At KDP Accountants, we provide comprehensive tax and financial planning solutions for NRIs returning to India. Our team of experienced professionals helps customers navigate the Double Taxation Avoidance Agreement (DTAA), maximize tax savings on global income, filing of your tax returns in India and outside, and help you manage the complexities of RNOR status.
From offering personalized advice to managing regulatory compliance, trust us to simplify your tax journey and secure your financial future.
If you have any specific queries on the topic or need assistance with managing your tax liabilities and ensuring compliance with Indian tax regulations, contact our experienced tax planning experts at enquire@kdpaccountants.com.
Disclaimer :
The above note is subject to further study and clarification. This note does not form an opinion from our end and before taking any decision based on the above, it is recommended to consult our experts on the subject. Kamdar, Desai & Patel will not be liable for any damages (including, without limitation, damages for loss of business projects, or loss of profits) arising in contract, tort, or otherwise from the use of or inability to use this article or any of its contents, or from any action taken (or refrained from being taken) as a result of using this article or any such contents.
