India: Mandatory Financial Changes For NRIs Returning back home
The worldwide COVID-19 crisis has pushed up unemployment rates especially those engaged in the service sectors like hospitality, travel or other client-facing businesses have seen pay cuts and layoffs across countries, hitting not only their own citizens but also the migrant population, including non-resident Indians (NRIs).
According to news reports, several NRIs are now planning to return to India either because they are facing job losses or because they want to be with their families in these uncertain times.
If you are one of these NRIs who has decided to move back to India, remember that it may not be that simple. Apart from lifestyle changes, you will also have to deal with changes in your financial life.
Here are 3 financial changes that you will need to take care of:
If you are going back to India permanently, it is advisable to liquidate your foreign assets, especially physical ones. If you own or have purchased a property on loan abroad, you may decide to rent it or sell it before you leave. It will get difficult to manage it remotely from India, especially with the travel restrictions due to the pandemic.
As for buying a home in India, do not walk into online deals at the moment just because rates are attractive due to the pandemic. It would be wise to stay on rent for you few months and decide on your sources of income, employment opportunities and schooling for your children before you decide to make a big purchase like buying a home.
The insurance policy that you may have bought in a foreign country will not cover you in India. So assess you life and health insurance needs on your return. Buy a health family floater as soon as you come to India. For life insurance, take a term plan, which provides maximum cover at a lower cost. It is best to plan in advance. Take the help of experts to avoid any last-minute complication.
Long term investments or Pension plans
If your employer at your previous country of residence provided you with retirement savings plan, it might be difficult to liquidate assets such as 401K (retirement savings product offered by employers) of the US, you might want to continue investing in it, especially if you are close to retirement, as withdrawal may have huge tax implications and a lock-in period.
Do keep in mind any income that you earn from a property abroad or through pension from investments like 401K will be taxable in India after you become a resident Indian.
Also, if you are an existing investor in a mutual fund or any other investment in India, you will have to inform the fund house about the change in the residential status.The same goes for any stock brokerage services/demat account services that you may have employed. It’s best to seek help from a professional adviser to sort these out.
After moving abroad, you may have converted your ordinary bank account in India to a non-resident ordinary (NRO) or non-resident external (NRE) as NRI’s account can’t hold regular bank accounts in India and have to open either of the above bank accounts.
NRO account is used to manage income earned in India and the deposit is taxable and non-repatriable, while in case of NRE and FCNR accounts, the money is repatriable and tax-free. The accounts are used to transfer foreign income in India.
However, once you are back in India and decide to stay, you will have to convert your existing NRE and NRO account into resident savings account within a couple of months of your arrival. If you fail to do so, it would be considered a violation under the Foreign Exchange Management Act (Fema).
If you have any FCNR (Foreign Currency Non-Resident) deposits, you can continue with the same until maturity but at a contracted rate of interest. Once the deposit matures, you need to convert them to resident rupee deposit accounts or a resident foreign currency (RFC) accounts-if you wish to continue to hold foreign currency.
The interest rate earned on deposits in RFC accounts is not taxable until you enjoy the RNOR (Resident but Not Ordinarily Resident) status. More on residential status for tax purposes below.
Also, you may want to inform your bank in the country you previously resided in, about your move to India. You may be asked to maintain a minimum balance in the bank account as per their norms.
There are certain tax breaks that you may enjoy as an NRI, but not as a resident Indian.
For instance, the global income of NRIs is not taxed in India. But after you come back to India and you lose the NRI status, the taxation of your income will depend on your residential status.
NRIs returning to India can be classified into two categories—resident and ordinarily resident (ROR) and resident but not ordinarily resident (RNOR). You will be an ROR if you stay in India for 182 days or more in that financial year (FY) or if you have stayed for 60 days or more in the FY and 365 days or more in the preceding four FYs. To qualify as an RNOR, you have to either retain the NRI status in nine out of 10 FYs preceding the relevant FY or stay in India for 729 days or less in the seven FYs preceding the relevant FY.
It is important to know that as an ordinary resident, your global income will also be taxable for the particular year, and you will be required to report all foreign assets in filing your income-tax return (ITR). Note that due to Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, make sure to carefully report all foreign assets or income earned abroad in the ITR without any omission or inaccurate particulars, to avoid penal consequences.
The RNOR will help save you from paying taxes on any foreign income as long as the status prevails. Also, FCNR deposits continue to remain tax-exempt in India till you enjoy the RNOR status.
If are able to live abroad longer, you can plan your return in a way that you can enjoy the NRI status for the maximum period. You can seek advice from a professional tax adviser to plan your arrival.