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Returning home: How to plan your return to India as an NRI?
Many Non-Resident Indians who had to leave the country for different reasons are now choosing to return to India. If you’re an NRI returning to India permanently after a long stint in a foreign country, there are a lot of things that you need to account for. To make your return as smooth and hassle-free as possible, proper planning is key. And that’s exactly what we’re going to be looking at in this penultimate chapter of this module.
But before we take a look at what an NRI moving back to India should plan for, let’s quickly take a look at what happens to their tax status according to the Income Tax Act, 1961.
What is the NRI status after returning to India?
When a Non-Resident Indian returns to India for good, their status changes from being ‘non-resident’ to ‘Resident but Not Ordinarily Resident (RNOR)’. RNOR is basically a transitional status that’s given to an NRI returning to India before they become a full-fledged resident.
To claim the RNOR status, you should satisfy either of the following two conditions.
- You should have been an NRI for 9 out of the previous 10 financial years; or
- You should have stayed in India for a total of 729 days or less in the previous 7 financial years.
You can claim the RNOR tax status for up to 3 years from the date of your return to India. Beyond that, you automatically become a full-fledged resident of India and are taxed accordingly.
One of the major advantages of the Resident but Not Ordinarily Resident tax category is that individuals in this bracket are treated like Non-Residents for income tax purposes. During the 3-year period, you can shift your overseas assets to India freely, without incurring huge taxes.
The only difference between an NRI and an RNOR is that income from a business that’s set up or controlled from India is taxable for an RNOR even if it is received or accrued outside India, whereas for NRIs, it is not.
Things you should plan for before returning to India
Okay so, now that you’re aware of the NRI status after returning to India, here’s an overview of the things that you should plan for before returning to India.
1. Bank accounts
Your bank accounts should be one of the first things that you should plan for. If you possess an NRE account, know that you cannot maintain it once your tax status turns to RNOR from NRI. Instead you would have to convert them or redesignate them into regular resident accounts within a reasonable amount of time.
Failure to do so is a serious offence under the Foreign Exchange Management Act (FEMA) and can lead you into trouble. Therefore, ensure that you plan accordingly for conversion of your NRE account beforehand.
2. Fixed deposits
Similarly, if you possess any fixed deposits in your NRE account, you are again required to convert them into regular resident fixed deposit accounts within a reasonable amount of time. Not doing so is again a FEMA violation that can have severe legal repercussions. Alternatively, you can choose to prematurely close the FD account as well. Here’s something to note. Prematurely withdrawing your FD can lead to penalties being levied by the bank.
So, if you’re an NRI returning to India permanently, ensure that you have a plan for your fixed deposit accounts since you can’t hold NRE FDs till maturity. That said, if you possess an FD in an FCNR account, you can hold it till maturity even though your status has changed from NRI to RNOR.
3. Demat accounts
Just like bank accounts, even demat accounts are required to be converted to resident accounts. If you have an NRI demat account, you can apply for conversion into a resident demat account. And you will have to do the same for your trading account as well.
Alternatively, if you prefer to not convert, then you will have to open a new resident demat and trading account, transfer all of the shares and securities, and close your NRI demat and trading account. Since most of your investments are likely to be contained within your demat account, this is something that you should plan for before moving back to India.
4. Mutual fund investments
As with the demat account, if you have any mutual fund investments as an NRI, you cannot maintain them once your status shifts to RNOR. And so, if you’re an NRI moving back to India, it is advisable to update your residential status and your bank account details with those of your resident account as soon as possible. This way, you can ensure that any changes to your mutual fund investments like liquidation or top-ups go as planned without any hitches whatsoever.
5. Overseas assets
As an NRI returning to India, you may have a few overseas assets like land, buildings, and the like. If that’s the case, then there’s some good news for you. According to section 6(4) of FEMA, you can continue to retain your overseas assets even when you turn fully resident without having to obtain any permissions from the Reserve Bank of India or any other regulatory authority. In such situations, you don’t have to plan anything.
However, if you wish to liquidate your overseas assets, then you will have to plan it in such a way that you do it before you lose your RNOR status. This way, you can reduce the income tax impact significantly.
Financial steps NRIs returning to India must take right away
Here is what you should do right away if you are an NRI returning to India.
- Convert your NRO and NRE accounts into resident savings accounts
- Close your Portfolio Investment Services (PIS) account if you have one
- Open a resident Demat account in India if you want to continue investing in stocks
- Let your bank know about the change in your residential status
With this, we’ve come to the end of this chapter. However, there’s one more that we still need to address. Until then, stay tuned and keep reading Smart Money.
A quick recap
- When a Non-Resident Indian returns to India for good, their status changes from being ‘non-resident’ to ‘Resident but Not Ordinarily Resident (RNOR)’.
- RNOR is basically a transitional status that’s given to an NRI returning to India before they become a full-fledged resident.
- One of the major advantages of the Resident but Not Ordinarily Resident tax category is that individuals in this bracket are treated like Non-Residents for income tax purposes.
- When you return to India, you need to plan for your bank accounts, fixed deposits, demat accounts, mutual fund investments and overseas assets.
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