Amidst the ongoing global disturbance by the hands of COVID-19, many NRIs are returning to India, mostly for good. With the government launching mass evacuation strategies like the Vande Bharat Mission it is essential that the NRIs returning to India are aware about the conditions in the country specifically focusing on the Financial Changes. In this article, we will understand the Financial domain and discuss the 3 major financial changes that the NRIs will encounter post their return.
The 3 Major Financial Changes for NRIs returning to India
The changes we are going to discuss revolves around Banking, Taxation and Investments. We will take up these aspects one by one and get to the gist of it.
- Banking: As we know that NRIs can’t operate a Resident Savings Account in India. They must have an Non-Resident External (NRE) Account for foreign earnings and an Non-Resident Ordinary (NRO) Account for all earnings in India. For foreign currency investments, some NRIs also opt for a Foreign Currency Non-Resident Bank [FCNR(B)] Account.
Now, post return to India, NRIs need to completely change/convert their Bank Accounts. It is also associated with the Resident Status of the individual. We must understand what happens to the Residential Status when an NRI returns to India:
NRI Status after returning to India
After returning to India, An NRI can become a resident. Now, there are two different definitions revolving around Residential Status we need to understand concerning an NRI returning to India. The terms we need to understand here are RNOR (Resident But Not Ordinarily Resident) and Resident and Ordinarily Resident (ROR).
To understand these terms, follow the flowchart:
The RNOR status is given to the Indian Residents. There are certain criteria that defines this status, which are:
- If the Individual has NOT been a resident in at least 2 out of the last 10 years
- If the Individual has been in India for a period of 729 days or less during the last 7 years
The RNOR Status gives you certain benefits around taxation in India which we will discuss in the next financial change NRIs will encounter. As of now, what you need to know about the NRI Deposits that you had in India is listed here:
- The NRE Savings Accounts need not be converted to resident accounts after your return to India. NRE Deposits can remain as-is till maturity while the NRI converts to a resident
- Withdrawals can only be done in Indian Rupees
- For NRE FDs broken before maturity, interest is calculated on the number of days the FD was held with the bank. The minimum holding period of NRE Deposit is 1 year
- Premature breaking of NRE FDs are subject to penalties that vary from bank to bank
- Post maturity, NRE Deposit Accounts can be converted into Resident Foreign Currency (RFC) Accounts. All freely convertible currencies are allowed for RFC Accounts such as US Dollar, British Pound, Euro, Yen
- The interest earned on NRE Deposits that have been converted to RFC Accounts will be exempt from tax if the status of the returning NRI is RNOR (Resident but Nor Ordinarily Resident)
The bottomline is that an NRI can’t hold resident accounts. So, if you are returning permanently, only then get your accounts converted to resident accounts. If not returning permanently, then changes can be done as per your Resident Status.
Also, you need to inform your bank in your country of residence about moving back to India as you might need to close that account or maintain a minimum balance as per their norms.
- Taxation: Taxation again, is initially influenced by your Residential Status. We discussed the RNOR Status in the previous point. Let’s explore its benefits:
What are the benefits of RNOR?
The benefit associated with being an RNOR is gifted in terms of taxation. For RNORs, the income that is generated outside India is not taxable in India. Taxes are only paid on the income generated in India.
Along with that there are other benefits that can help RNORs save taxes in India, which are:
- They don’t have to pay taxes on the interest earned on Foreign Currency Non Resident (FCNR) and Non Resident External (NRE) Deposits
- No taxes paid on withdrawals from offshore retirement accounts
- No taxes on rent and capital gains from abroad
- No taxes on interest on dividends received from investments done abroad
The RNOR Status will give you these benefits for a certain period while you amend your banking accounts for the future in India:
- If the NRI has been outside of India for 9 out of last 10 years, he/she can be an RNOR for 1 year
- If the NRI has been in India for 729 days or less in the last 7 financial years, he/she can be an RNOR for 3 years
Here again, the bottomline is that until you are a RNOR, you can reap the benefits out of the status but as soon as you become a Resident again, your global income in India becomes taxable. You can find the income tax slabs in India for your reference below:
|Income Tax Slab||Tax Rate|
|Up to 2.5 Lakhs||Nil|
|2.5 Lakhs to 5 Lakhs||5%|
|5 Lakhs to 7.5 Lakhs||10%|
|7.5 Lakhs to 10 Lakhs||15%|
|10 Lakhs to 12.5 Lakhs||20%|
|12.5 Lakhs to 15 Lakhs||25%|
|15 Lakhs and above||30%|
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- Investments: Investments can be subdivided into two categories: Investments abroad and Investments in India. We will understand these one by one.
- Investments Abroad: In whichever country you have been residing as an NRI, you might have invested in Real Estate, Pension/Insurance Plans and other long-term and short-term investment vehicles. Every investment needs to be dealt with differently. For Real Estate, it might be a good option to either rent or sell it as managing it remotely from India can be difficult. Other investments like pension plans can be continued. Especially if you are approaching retirement as withdrawals can bring in huge tax implications. Life Insurance Plans might not cover your stay in India so you need to sort that too. Your advisor can guide you through the multiple asset classes individually.
- Investments in India: For all investments in India such as Real Estate, Mutual Funds and other asset classes, the first thing would be to update your c-kyc form for informing the fund houses and the other parties involved about the change in your Residential Status. If returning permanently, post your RNOR phase, you will be a resident so you need to plan everything out in accordance to your changing residential status. Concerning Real Estate, if you already have a house back in India, that’s great but if in case you don’t, don’t rush into buying one immediately. Try to spend some time staying on rent and planning other important things such as employment opportunities, schooling for children and finding a fixed source of income. There is already a spike in South Indian Real Estate as a result of returning NRIs. You can also browse through the top 10 places to retire in India that we have assorted for you.
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