Returning back to one’s native after a considerable stint in a foreign country can be a major decision of one’s life and needs a lot of considerations. Nevertheless, once you have decided to come back, the next step is to check all the modalities that need to complied with for this shift.
In India, the two major economic laws that returning Indians need to take care of are Foreign Exchange Management Act (FEMA) and the Income tax act (‘IT Act’).
This article discusses necessary steps to be taken care of under the above statues.
Residential status as per FEMA and Income tax Act:
Determining residential status under FEMA and Income tax Act is the first and foremost step in the process and sometimes it may not be as simple as it seems so.
A person becomes ‘resident’ under FEMA once he returns back to India for good. Residential status under FEMA can change with immediate effect on returning to India. Hence, an individual can be ‘resident outside India’ for the first few months and thereafter a resident in India.
Under the Income tax Act, residential status of an individual is determined based on his physical stay in India through out the financial year. In any case, if your stay in India for a financial year is less than 60 days, you will be treated as a non-resident. There are certain primary and secondary conditions also which need to be checked.
Residential status under Income tax Act is further divided into three categories. A brief description of these categories and their implications is given in table below:
|Residential status||Tax impact|
|Resident and ordinarily resident
|Worldwide income is taxable
(i.e income earned in India and also outside India)
|Resident but not ordinarily resident
|Only income earned in India taxable|
|Non resident||Only income earned in India taxable|
Many a time we have seen cases where an individual is a resident under FEMA but a non-resident under Indian Income tax Act. It is always advisable to take an expert advice in this connection.
Compliances required in India:
- Inform your bank about change in your residential status for your NRE / NRO accounts / FCNR deposits to be re-designated as resident savings bank account or resident deposits. Alternatively, the FCNR deposits can be credited to RFC account.
- Interest income from NRE account will be taxable once you become resident under FEMA.
- Inform your depository participant about change in the residential status (under FEMA)
- Change your FATCA /CRS form once you become resident as per Income tax Act.
- You can continue to hold assets outside India without any restriction. Once you become a resident and ordinarily resident in India under the Income tax Act, your worldwide income will be taxed in India. You may be entitled to tax credit as per the relevant Double Taxation Avoidance Agreement (DTAA). Proceeds from your pension funds, social security accounts etc. will be taxed as per the relevant laws of both the countries and relevant DTAA.
- If large debt Investments are to be made in India then it can be done while overseas to take advantage of section 115H of the Income tax Act (20% tax rate on Interest).
- One also needs to see the transfer of residence rules for customs duty exemption
- One of the other issues that require due deliberation is whether to revoke or continue the citizenship of the other country. While tax implication can be one of the considerations in many countries especially USA, it cannot be the only reason. One also needs to see the overall impact of this decision.
- One needs to check whether any inheritance planning was done while in foreign country, for instance, registering WILL abroad, creating private Trust etc.
Frequently asked questions:
Am I supposed to inform RBI / Income tax department about my residential status?
You are not required to inform RBI. The fact that you have informed your AD bank and re-designated your NRE / NRO account into domestic bank accounts is sufficient.
As regards the income tax, there is no separate requirement to inform the income tax department. While filing the return of income you will have to mention your status as resident.
Can I continue to hold assets outside India? What would be the income tax implications of assets held abroad after I become resident in India?
Yes. As discussed above, you can continue to hold assets outside India without any restriction.
These assets would have to be disclosed in the income tax return filed in India. Also, income from such assets like interest, dividends, capital gains will be charged to tax as per Indian domestic laws subject to double tax avoidance agreement.