According to a 2018 report by the Ministry of External Affairs, the number of overseas Indians in the US has reached 44,60,000, of which 12,80,000 are NRIs. On the other hand, recent years have seen a large number of NRIs returning to India. The main reasons for this are said to be the protectionist policies, job redundancies and geopolitics of the current US administration.
In this article...
Who is an NRI
‘Non-resident Indian’ is an individual who is a citizen of India or a person of Indian origin and who is not a resident of India.
When will you lose your NRI status after returning to India?
In order to determine whether an Individual is a non-resident Indian or not, his residential status is required to be determined under Section 6. As per section 6 of the Income-tax Act, an individual is said to be non-resident in India if he is not a resident in India and an individual is deemed to be resident in India in any previous year if he satisfies any of the following conditions:
1. If he is in India for a period of 182 days or more during the previous year; or
2. If he is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
However, condition No. 2 does not apply where an individual being citizen of India or a person of Indian origin, who being outside India, comes on a visit to India during the previous year.
A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.
Source (Income Tax India)
What is RNOR Status?
It stands for “Resident but not Ordinary Resident” and is a category of non-resident Indians. You become an RNOR if you satisfy either of two conditions:
- If you have stayed in India for less than a total of 729 days in the previous seven financial years.
- If you were a Non-Resident for 9 out of the 10 previous fiscal years.
RNOR Status Tax Benefits
RNOR status comes with a number of tax benefits. RNORs are exempt from paying income tax on the following types of income:
- Interest or dividend earned from deposits or securities abroad
- Rent money from properties owned overseas
- Capital gains from sale of shares and properties held overseas.
On the basis of your return in India, you will be eligible to get these benefits for 2 to 3 years. However, any income generated in India will be taxable.
What Happens After Losing RNOR Status?
When you stop satisfying any one of the two conditions for RNOR, you will become a permanent resident of India. This means that your global income will also be taxed, along with your income in India. In case your global income is already taxed abroad, you can claim certain tax benefits.
The Double Tax Avoidance Agreement has been put in place for this purpose. As a result, you do not need to pay double taxes on global income once you return to India.
Note: If you are thinking of selling an overseas property or debit money from a retirement account, do it while you are an NRI or RNOR. Doing so will help you avoid taxation in India.
Next Steps for NRIs Returning to India
On returning to India, here are some of the things that you must do:
Reset your bank accounts as Domestic Resident Accounts. You can also transfer the money in your FCNR/NRE accounts to Resident Foreign Currency (RFC) accounts.
Note: If you do not convert your accounts to Domestic Resident Accounts, you will violate FEMA. This will cause many problems and it is recommended to change the accounts as soon as possible. Even after becoming a resident, if you continue your FDs and NRE accounts, then the interest from these will be taxable.
You also need to open a resident demat account and transfer shares from your NRI demat account. Close the NRI demat account after this.
In case of investments in mutual funds as an NRI, you need to update your status with the resident bank details. Along with this, change the residential status from NRI to resident in the mutual fund investments.
In short, a permanent citizen has to pay taxes on global income, while an NRI needs to pay tax only on income earned in India. You will reap tax benefits till you are an NRI, but once your residential status changes, you will have to follow the regular tax rules.