There are many questions which worry the returning NRIs who are planning to return back to India.
What will happen to the properties acquired abroad? Can they hold them or they have to dispose them? What about the NRO, NRE and FCNR accounts and deposits? Can they still continue holding such accounts and deposits or they will have to convert them to resident accounts? What will be the tax implications? And are there any other things that they should worry about?
The answers to all the worry are as follows:
Firstly, the NRIs firstly should inform the bank about the change in the residential status.
Secondly, the NRO Account/deposit should be re-designated as resident rupee account i.e., savings account or fixed deposit.
Thirdly, the NRE savings account should be re-designated as a resident rupee account.
Fourthly, the FCNR and NRE deposits should be closed immediately or can be allowed to run up to maturity.
What happens to the NRO, NRE and FCNR accounts?
If the NRI choose to continue till maturity then the NRI will still receive the contracted rate of interest till maturity. As per the terms, premature withdrawals/closure can charge a penalty for the deposit.
For FCNR deposits and NRE account/deposit, the NRI can also have an option to transfer the balance from the FCNR AND NRE account/deposit to a Resident Foreign Currency Account (RFC), where there is not be charged any penalty for premature withdrawal of NRE/FCNR accounts in such cases.
How will my existing NRI accounts be taxed?
Interest on NRO account was taxable even when he/she was an NRI and it will remain taxable on his/her return.
Interest on NRE accounts/deposits after re-designated as resident rupee account/deposit will still become taxable on his/her return. If he/she transfers the balance to the RFC account then the interest income will become taxable or excluded as per rules for RFC account.
If the returning NRI remains RNOR (Resident but not Ordinarily Resident) then the interest on FCNR deposit will remain tax-free. The FCNR deposit becomes taxable as and when the NRI Becomes ROR (Resident and Ordinarily Resident).
Interest on RFC account/deposit is excluded from tax as long as he/she are RNOR.
What is a Resident Foreign Currency Account?
The RFC Account can be useful to those NRIs who are returning back to India and the account can be maintained by a resident in Foreign Currency.
The RFC Accounts are different from RFC (Domestic) accounts that can be opened by residents. RFC (D) accounts are non-interest bearing accounts and are different from RFC accounts.
Who can open RFC account?
Under the FEMA, Persons who have been NRI for a continuous period of not less than 1 year and have become persons resident in India on or after April 18, 1992 can open RFC account. RFC accounts can be designated in any freely convertible foreign currency.
RFC Accounts can be held in the form of savings, current and term deposits accounts.
Benefits of Resident Foreign Currency (RFC) Account
1. Funds in the RFC accounts can be utilized freely for any bona fide remittance outside India through normal banking channel.
2. Balance in RFC account is fully repatriable, both principal and interest are fully repatriable.
3. Both principal and interest are payable in foreign currency. Hence, there is no risk in exchange.
4. Interest rates on RFC accounts or deposits are denationalised and will vary across banks.
5. RFC accounts/ deposits are typically available in freely convertible currencies such as USD, GBP, Euro, AUD and CAD. However, not every bank will offer RFC account in all currencies.
6. Funds in the RFC account can be freely remitted abroad or credited to fresh NRE/FCNR account if you regain non-resident status.
Eligible Credits to RFC account
1. Proceeds from sale of Eligible Properties outside India.
2. Transfer from other RFC/NRE/FCNR accounts.
3. Remittance of funds from bank accounts outside India, which qualify as an Eligible Property.
4. Pension/other monetary from employer outside India.
5. Income such as dividend, interest, profit, rent etc earned on Eligible Properties.
6. Interest earned on RFC account.
Eligible Debits to RFC Account
1. Transfer to NRE/FCNR accounts while regaining NRI status.
2. Any bona fide remittance outside India through normal banking channel including for investments abroad.
3. For local payments in INR in India.
Interest on RFC account is taxable. However, if he/she qualify as RNOR (Resident but not Ordinarily Resident), then he/she are excluded from paying tax on interest income from RFC account.
Who is RNOR (Resident but not Ordinarily Resident)?
RNOR status is essentially a transition phase from being non-resident to being a resident (ROR).
As per the Section 6 of the Income Tax Act, there can be two types of residents.
1. Resident and Ordinarily Resident (ROR)
2. Resident but not Ordinarily Resident (RNOR)
He/she are RNOR if he/she satisfy any of the following two conditions:
1. He/She has been a non-resident (NRI) in 9 out of 10 previous years preceding that year.
2. He/She has during the previous 7 years preceding that year, been in India for more or less a period of 729 days.
So, essentially, he/she first determine whether he/she is a resident or non-resident. If he/she is a resident then he/she must determine whether he/she is ROR or RNOR.
FEMA has only two classifications: Resident and Non-Resident (Resident outside India).
IncomeTax Act has three classifications: ROR, RNOR and NRI.
Does RNOR status affect taxation?
RNOR are almost treated like NRIs when it comes to taxation.
Hence, interest on FCNR deposits will continue to be excluded from tax as long as he/she remain RNOR. Similarly, interest earned on RFC account will be excluded from income tax as long as he/she is RNOR.
Since RNOR get favourable tax treatment as compared to ROR, he/she can file his/her return in such a way that he/she stays RNOR for as long as possible.
RNOR Status
If he/she is returning back to India after being NRI for 5 continuous years or less, he/she become a resident (ROR) immediately as per the Income Tax Act.
If he/she is returning back to India after being NRI for 6 continuous years then he/she can become RNOR for one year. Subsequently, he/she become ROR.
If he/she is returning back to India after being NRI for say 20 continuous years then he/she can become RNOR for two years. Subsequently, he/she become ROR.
In extreme cases, if he/she is returning back to India after being NRI for 5 years or more (and did not visit India during those years) and then return back to India after 2nd April, he/she can be RNOR for maximum three years.
TaxAssist is a professional income tax consultancy in India for both corporate houses and individual tax payers; the latter comprising Salaried Individuals, Seafarers, Professionals and Non Resident Indians.
With the help of Tax Assist and its team of income tax professionals, taxpayers can minimize their Income Tax liability, maximize their net income and create opportunities to save for current and future needs while maintaining proper accounting standards and income tax returns which are compliant with the Law.
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