Residential status refers to a citizen’s physical presence inside the Indian Territory. The Income-Tax Act outlines the provision governing determining a person’s residence status. Individuals’ taxability is heavily reliant on their residence status within a given fiscal year. 

Income Tax Consequences From NRI Consultants in Pune’s Point of View for a Returning Non-resident Indian 

What do they believe they should do to lessen their financial burden upon returning to India…? 

How about comprehending the tax consequences for a returning NRI…? 

To minimize tax liability and relieve an NRI’s financial burden upon return to India, it is critical to grasp the Income Tax consequences for a returning NRI. 

For an NRI resident in India, income generated in India is taxed. However, for an NRI, income generated outside India is not taxed in India. 

This means that the taxability of their foreign income (such as rental income, capital gains, bank interest, and dividends) derived from their foreign assets (such as bank accounts, stock market/securities, life insurance policies, loans, company deposits, debentures, bonds, and residential properties, among others) is highly dependent on their Indian residency status. 

  • Consider the following scenario:  

As an NRI/RNOR returning to India, they want to purchase a new home in India via the sale of one of their abroad holdings. 

If they sell their foreign assets and deposit the profits (money) in an offshore bank account, they avoid paying taxes in India. 

However, they must have the selling profits (money) in an Indian account in order to purchase their new home in India. If they can transfer funds from their foreign bank account to their Indian bank account, they would avoid paying any taxes in India. 

Income Tax regulations applicable to an NRI returning to India: 

  • According to the applicable income tax slab, income earned, received on their behalf, or accrued in India during a fiscal year by a NOR/NRI is fully taxable. 
  • Income earned or derived outside India and received outside India in a fiscal year by a NOR/NRI from any other source is not taxed in India
  • Income earned or derived outside India, received outside India within a fiscal year, and paid to India during that fiscal year is not taxable for both NOR/NRI. 

Income Tax Benefits for Non-Resident Indians/RNORs which NRI Advisor firms in Pune can offer: 

  • As an NRI/RNOR, they will be tax-free in India on the following incomes:
  • Gain on the sale of foreign-held fixed and financial assets (like properties and shares)
  • Interest earned on deposits with FCNR and RFC 
  • Withdrawals or pensions from an offshore retirement account or pension programme 
  • Depending on their return date to India, they will benefit from these tax advantages for two to three years. However, all of their money earned in India will be taxed. 

What a non-resident Indian should do upon their return to India: 

What should their next course of action be after they return to India?

i) Upon their return to India, they should either re-designate their bank accounts as domestic Resident accounts or transfer the amount in their NRE/FCNR accounts to Resident Foreign Currency (RFC) accounts. 

ii) FCNR accounts may be maintained until maturity and converted to RFC accounts. 

iii) Additionally, they must register a resident Demat account in order to transfer shares from their NRI Demat account and must liquidate their NRI Demat account. 

iv) If they have invested in mutual funds as an NRI, they must update them with their resident bank information and alter the residential status of mutual fund investments from NRI to the resident upon their return to India. 

To summarise, an Ordinary Resident (ROR) is taxed on his worldwide income, while an NRI is taxed on money ‘earned’ in India.

They may use the foregoing tax incentives while claiming to be an NRI, but if they declare their residence status as a Resident, they will lose all perks. They would be treated as a full-time resident of India, subject to the standard tax structure.

They will continue to benefit from NRI income tax advantages as long as they maintain NRI status in India.

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