Income Tax Planning for an NRI planning to return to India
It might so happen that one fine day you decide to pack your bags and come back home. When you do,
there are a few things that Tax planning must take special care of. For starters, your investments and tax
implications. In general, the tax laws for NRIs returning to the country are fairly generous. However, you
must not be complacent.
A bit of careful planning will ensure that you do not run into any surprises when you come to India, as
far as your overseas income and investment are concerned.
Tax Resident Status
Your tax liability on the income largely depends on your residential status. The FEMA (Foreign Exchange
Management Act) and the Income Tax Act govern all these tax rules and regulations. The FEMA keeps a
track of all the transactions taking place outside the country for Indian residents.
These transactions include foreign bank accounts, money transfers, remittances, lending, gifting, etc.
Any investment in real estate or mutual funds is also taken care of by the FEMA.
The income tax act on the other hand, looks after the tax liability arising out of such investments.
As per the FEMA guidelines, an NRI is someone who currently stays out of India but either is a citizen of
India or a person of Indian origin. They must meet either of the following conditions to become a PIO or
a person of Indian origin.
– Has held an Indian passport anytime during their lifetime.
– Has a spouse of Indian origin.
– Was a citizen of India or has grandparents or parents who are Indian citizens.
The FEMA offers strict and clear guidelines for foreign assets. As per the law, an NRI has the liberty to
own, transfer, hold or invest in assets that are outside the country. However, this only comes into the
picture if the person bought the asset during their stay abroad or if they have inherited the assets. And
Should a person choose, they can hold on to their Indian assets during their stay in other countries.
These include bank accounts, investments, assets etc. however, there are special accounts to hold these.
Usually, the two bank account types available for NRIs are FCNR or Foreign Currency Non-Resident and
NRE or Non-Resident External Rupee. You can use these accounts to deposit any earnings from outside
the country to your local bank accounts.
Income Tax Act
The income tax act has clauses with the help of which NRIs can save taxes on their global income for as
many as three fiscal years. On coming back to the country, they must convert their NRE or FCNR
accounts to RFC accounts. Any interests earned on FCNR and NRE accounts are exempted for NRIs and
If an individual was residing in foreign country ordinarily, and brings in money to India, the same is
exempted from taxes up to a period of seven consecutive assessment years. The only condition being
that the wealth tax exemption is not applicable to income tax and assets which are brought during the
stay in India.
For NRIs who receive their pension from former employer post moving to India may be taxable. Of
course, if there is any double taxation agreement between both the countries, it would govern the
NRIs who are moving back to India permanently, need to consider the above points. Being aware of
applicable tax laws and proper planning would ensure a smoother transition phase and allows users to
benefit from tax breaks. Since returning NRIs have quite a few tax breaks available for them.