Returning Indians (RI) are those Indians who are likely to return to India for good from the country where they are resident.
RI may be earning income and holding assets/liabilities both in India as well as outside India. Such assets and income will be have implications under both Foreign Exchange Management Act, 1999 (FEMA) and Income-tax Act, 1961(‘the Act’) when they return to India.
Accordingly, a RI should know and understand various aspects of FEMA, Income-tax Act,1961 and Banking Regulations in order to rearrange his/her financial affairs on return to India.
FOREIGN EXCHANGE MANAGEMENT ACT, 1999
- IMPACT ON ASSETS HELD:
The assets held in India and overseas will have impact under FEMA as under:
A RI may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such assets were acquired, held or owned by him/her when he/she was a non-resident or were inherited from a non-resident person.
- Indian Assets:
- Non-Resident Bank accounts:
A RI, upon his/her return to India for good, have to inform Authorised Dealer (AD) Bank with whom he/she holds banking accounts, about the change in residential status and have to deal with such bank accounts in the following manner:
- Non-Resident Ordinary Bank Account (NRO a/c): To be re-designated to Resident rupee account.
- Non-Resident External Bank Account (NRE a/c): To be re-designated to Resident rupee account or transfer the balance to Resident Foreign Currency Account (RFC a/c).
- Foreign Currency Non-Resident Account (FCNR a/c): Permissible to hold upto maturity and then to be converted into Resident rupee account or Resident Foreign Currency (RFC) a/c.
Shares and Securities etc.
- IMPACT ON LIABILITIES:
RI will continue to be liable for any liability including loan taken from overseas bank or person resident outside India. Repayment of liability and interest payable on such liabilities may be made out of funds held outside India.
From our practical experience, we are of the view that repayment of overseas liability can be made from funds held in India by obtaining Reserve Bank of India (RBI) approval.
- RFC a/c:
RIs, on becoming residents can open RFC a/c, which is denominated in forex.
- Realisation proceeds received on sale of overseas assets can be credited to such account.
- The funds held in RFC a/c are fully repatriable and can be remitted outside India for any bonafide purpose of the account holder or his/her dependents.
- Funds in RFC A/c can be withdrawn freely for local payments in rupees.
- Interest on RFC A/c will be exempt from tax till his/her residential status under Income Tax Act, 1961 is ‘Non-Resident’ or ‘Resident but not and Ordinarily Resident’.
- REPORTING REQUIREMENT TO RBI:
RI is not required to report about change in residential status to RBI.
- RI is neither required to take any permission from RBI for retaining his/her overseas assets after return to India nor he/she is required to report such overseas assets to RBI.
INCOME -TAX ACT, 1961
The scope of taxable income for a Financial Year (FY) to be offered to tax in India and reporting of assets and liabilities may significantly undergo a change for RI. Thus, RI needs to know his obligations from tax perspective.
IMPACT ON INCOME OF RI OUTSIDE INDIA
The scope of taxable income for a Financial Year (FY) would depend upon the Residential Status (RS) of RI under the Act. The residential status in turn depends on the physical presence of the RI in India during the FY and prior 10 FYs.
A RI needs to know that:
- if his RS is as a Non Resident (NR) in the year of return to India, then income earned outside India shall not be taxable in India in that year.
- if his RS is as a Resident but not Ordinarily resident (RNOR) then income earned outside India shall not be taxable in India as long as his RNOR status is achieved in the year of return and later years by restricting number of days stay in India (Generally one can achieve RNOR status for a period of two years subsequent to the year of return.)
- if his RS is as a resident and ordinarily resident (ROR) in the year of return to India then income earned in India and outside India shall be taxable in India the year of return.
RI should carefully plan his stay in India in the year of return and subsequent years to take the benefit of NR/ RNOR status and protect the exposure to tax in India of the income outside India.
IMPACT ON ASSET and LIABILITY OF RI OUTSIDE INDIA
Under the Indian Tax Laws, the specified overseas assets and liabilities held are required to be reported under two separate schedules:
Assets and Liability (AL) Schedule – AL is a Schedule of the Return of Income (ROI) which is required to be mandatorily filled by Individuals and HUFs, if their total income exceeds Rs. 50,00,000/- in a FY. The said Schedule requires reporting of specified Indian Assets and corresponding Liabilities at the end of the FY. Thus, RI will need to comply with such reporting requirements if their income exceeds Rs. 50,00,000/- in a FY.
Foreign Asset (FA) reporting schedule – As per the FA schedule provided in the ROI, the Foreign Assets held as a Legal owner / Beneficial owner / Beneficiary are to be reported by all RORs. Thus, RI upon becoming ROR would need to comply with such reporting requirements in relation to the FA held during the FY.
- IMPACT ON TAXABILITY OF CERTAIN TYPICAL INCOME – in the hands of RI.
RI while being outside India mostly qualify as NR as per the Act and are eligible for exemption / concessional rate of tax on certain category of income. Upon returning to India, RI needs to know the impact in relation to taxability of certain typical income
Interest income on NRO A/c / term deposits in NRO A/c – There is no change in tax treatment on interest income earned in NRO A/c for a RI.
Interest income on NRE A/c/ term deposits in NRE A/c- The interest income from NRE A/c is exempt in the hands of person resident outside India as per FEMA. As the RI (person who has come to India for good) will no longer be person resident outside India as per FEMA, accordingly interest earned on NRE A/c and or deposits will be taxable from the year of return.
Interest income on RFC A/c – RFC A/c held in foreign currency can be maintained only by a person resident in India as per FEMA.
Interest earned on RFC A/c deposits (approved by Reserve Bank of India) is exempt from taxes till the time the RI qualifies as RNOR as per the Act.
Thus RI may convert his NRE deposit A/c to RFC deposits and extend his status of RNOR to avail the above benefit of exemption on interest earned on RFC A/c.
Interest income on Foreign Currency Non-Resident Account (FCNR A/c) – Interest earned on FCNR deposit is exempt from tax in the hands of RI till the time the RI is NR or RNOR as per the Act. RI Upon becoming ROR, it shall be at the discretion of RIs to avail the benefits of concessional rate of tax on meeting all the prescribed conditions.
Concessional rate of tax on foreign exchange assets – NRIs are taxed at concessional rate on certain specified assets subject to specified conditions. The RI may continue to get the benefit of such concessional tax rate till the transfer / conversion (otherwise than by transfer) into money of such assets i.e., on maturity or closure of the deposit by premature withdrawal.
- Additional Registration
Resident Indians are mandatorily required to quote Aadhar Number/ Enrolment ID of Aadhar in ROI in India and hence must obtain the same before the due date for filing the ROI.
- Important aspects to be kept in mind by a RI are explained below:
- RI may hold may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India and also can dispose the liability out of funds outside India.
- RI needs to appropriately redesignate the bank accounts and deposits held and also inform the appropriate authorities for change in the residential status. RI is required to obtain Aadhar number upon becoming a Resident.
- RI needs to appropriately plan the return to India and stay in immediately succeeding years in India to protect the taxability and reporting of overseas assets and income in India.
- RI upon becoming ROR need to ensure that the income and assets are appropriately reported to avoid any penalty and prosecution.
- RI should consider certain beneficial provisions that may still be applicable along with any tax treaty benefits to avoid double taxation of income.
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