Returning Indian – Tax obligations

Returning Indians (RI) are those Indians who are likely to return to India for good from the country where they are resident. RI should know and understand various aspects Income Tax Act 1961(‘the Act’), in order to rearrange his/her financial affairs on return to India. 
The scope of taxable income for a Financial Year (FY) to be offered to tax in India and reporting of assets and liabilities may undergo a change for RI. Thus, RI needs to know his/ her tax obligations. 

  1. IMPACT ON INCOME OF RI OUTSIDE INDIA 
    The scope of taxable income in a Financial Year (FY) depends upon Residential Status (RS) of RI under the Act which in turn depends on physical presence of RI in India during the FY and prior 10 FYs. RI should carefully plan his stay in India upon returning to take the benefit of NR/ RNOR status and protect the exposure to tax in India of income outside India. RI needs to know that: 

    1. If his residential status is Non Resident (NR), then income earned outside India shall not be taxable in India in that FY.
    2.  

    3. If his residential status 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 year of return.)
    4.  

    5. If his residential status is as a resident and ordinarily resident (ROR) in India then income earned in India and outside India shall be taxable in India the year of return. 
  2. IMPACT ON ASSET and LIABILITY OF RI OUTSIDE INDIA 
    Under the Act, the specified overseas assets and liabilities held are required to be reported under two separate schedules: 

    1. 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 end of the FY. 
    2.  

    3. Foreign Asset (FA) reporting schedule – 
       As per FA schedule provided in the ROI, 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. 
    4.  

  3. IMPACT ON TAXABILITY OF CERTAIN TYPICAL INCOME – in the hands of RI
    Upon returning to India, Returning Indian needs to know the impact in relation to taxability of certain typical income which were either exempt / taxed at concessional rate when they were NR.

    There is no change in tax treatment on interest income earned in NRO A/c for a RI.

    Interest income from NRE Account 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 account and or deposits will be taxable from the year of return.

    RFC account held in foreign currency can be maintained only by a person resident in India as per FEMA, Interest earned on RFC account deposits (approved by Reserve Bank of India) is exempt from taxes till the time RI qualifies as RNOR as per the Act.

    Thus Returning Indian may convert his NRE deposit account to RFC deposits and extend his status of RNOR to avail the above benefit of exemption on interest earned on RFC account.

    Interest earned on FCNR deposit is exempt from tax in the hands of RI(Returning Indian) till the time the RI(Returning Indian) is NR or RNOR as per the Act. RI(Returning Indian) Upon becoming ROR, it shall be at the discretion of RIs to avail the benefits of concessional rate of tax on meeting all prescribed conditions.

    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) of assets into money.

  4. ADDITIONAL REGISTRATION

    Resident Indians who are residents in India as per Aadhaar Act, are mandatorily required to quote Aadhar Number/ Enrolment ID of Aadhaar in ROI in India and hence must obtain the same before the due date for filing the ROI.

    Our next content will briefly cover Aspects to be kept in mind by RI from Foreign Exchange Management Act, 1999 perspective.

Content Partner- For any assistance / information on Tax, FEMA or related matters, you may write to our empaneled professional at nrihelp@gpkapadia.com

           Checkout various options for NRIs to invest in India

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