Key for Returning NRIs

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Key for Returning NRIs

Residential Status and benefits under Income Tax law:

The Indian Tax law has the special provision on the Residential Status for the Returning NRIs who would generally be assessed as RNOR on his return to India for couple of years.

The impact of RNOR status is that foreign passive incomes like interest, dividend, royalty etc. would not be taxable in India in respect of a person who is RNOR. Even share of profit of a partnership firm or any other business income would not be taxable in India, if the business in respect of which such income arises is not controlled from India. In other words, all foreign sourced income of RNOR is not normally taxable in India unless it is derived from a business controlled in or a profession set up in India.

Hence, Immaculate planning of income tax implications in advance i.e. prior to return to India holds paramount significance for NRIs intending to return to India.

Residential Status under FEMA:

The Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax Act, residential status is determined based on only the number of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person.

Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property, etc.) or current account transaction (e.g. remittance of income on shares, property, etc.) are the cornerstones of Foreign Exchange Management Act (FEMA).

'A' would become a resident for FEMA with effect from the date of arrival in India.

Compliances as per FEMA for Indian Assets:

'A' is required to re-designate all his banking accounts as Resident Accounts by informing the banker of change in residential status. FCNR / NRE Fixed Deposit account may be continued till maturity at the agreed rate of interest till maturity. On maturity, the proceeds of NRE/ FCNR deposits can be converted into RFC account. Interest earned on NRO account till date of return can also be credited to RFC account.

Similarly, one should inform of change in status to companies in which shares/ debentures are held as also to firms in which one is a partner.

Compliances as per FEMA for Overseas Assets:

Foreign currency, foreign security or immoveable property acquired, held or owned by an 'A' while he was abroad or inherited from a person who was resident outside India can be continued to be so held and owned even after the A's return to India for permanent settlement.

There is no specific provision on movable assets like jewellery, motorcar and personal household effects. Accordingly 'A' may continue to hold/ dispose such movable assets without permission of RBI though to avoid any possibility of litigation; he may inform RBI of the same. If required, overseas assets can be repatriated to India. Proceeds of assets held outside India at the time of return, can be credited to RFC account.

RFC Account:

A returning NRI can open a Resident Foreign Currency (RFC) account. Funds in this account are free from all restrictions regarding utilization in India/ abroad including investment (e.g. immoveable property, shares) in any form outside India. The following funds are eligible for being held in RFC account:

  • Transfer from NRE/ FCNR account
  • Funds realized on conversion of overseas assets
  • Income from overseas assets
  • Pension and other benefits from employer abroad
  • Foreign exchange brought in India at the time of return to India

However it needs to be appreciated that the funds held in the RFC account offer a low return compared to other investment avenues in India.

Our team has a vast experience of conducting an advisory session for such returning NRIs to guide them on the provisions of various laws in India and the compliances under these laws to assist them planning their finances and taxes on their return and ensure correct compliances.

If you wish to know more, write to our expert on fema@kdpaccountants.com

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