Returning to India from Malaysia - A Guide for NRIs

Far more than a change of address, for NRIs moving back to India after spending many years in Malaysia is a major transition. It's an event in life in which you need to adjust emotionally, financially, and professionally. Thoughtful prepration is a must when relocating to India, despite where you have been living in Malaysia.

You will need to plan for finances, taxes, documentation, and lifestyle adjustments well in advance. Some questions may arise in an NRI's mind, such as "Will my Malaysian income be taxable in India?" What to do with my NRE or NRO accounts?' and much more.

Keep reading this guide to get answers to all such questions and enjoy a smooth and well-planned transition back to India from Malaysia.

Why NRIs Return to India from Malaysia?

It's worth exploring the reasons behind an NRI deciding to move back to India after spending years in Malaysia. From family ties, professional opportunities, to emotional fulfillment, the reasons may differ from person to person.

Common Reasons for Returning

• Reconnecting with Family: The main reason for moving back to India is the wish to reconnect with family members. Many NRIs wish to live close to their parents or raise their children in India's cultural environment.
• Career and Business Options: India's fast-paced economy offers a wide range of options in various fields like technology, entrepreneurship, consulting, and finance. This aspect often attracts experienced professionals to move back to India.
• Lower Living Costs: Although Malaysia offers a luxury lifestyle, living costs like international schooling and housing can be expensive. On the contrary, India provides a high standard of living at a lower cost, mainly for retirees.
• Retirement and Familiarity: Many NRIs decide to return to India to plan their retirement. They wish to enjoy cultural familiarity, reconnect with roots, and live amongst their family and friends.

Understanding Your Residential Status After Returning

Your residential status in India determines how your income will be taxed. According to the Indian Income Tax Act, an individual is classified depending on the number of days they spend in India during a financial year.

What is Residency for Tax in India?

An individual falls into three categories under the Indian Income Tax Act, 1961:

• Non-Resident (NR): Taxed only on income sourced in India.
• Resident but Not Ordinarily Resident (RNOR): Taxed on Indian income and limited foreign income.
• Resident and Ordinarily Resident (ROR): Taxed on the worldwide income.

For example, if you have been staying in Malaysia for a considerable time, you will probably qualify as an RNOR for up to two years after your return. During this duration, your Malaysian income will not be taxed immediately in India.

Key Rules and Timelines

You will be deemed a resident if:

• You stay in India for 182 days or more in a financial year, or
• You spend 60 days or more in India in the current year and 365 days or more during the preceding four years.

You qualify as an RNOR if:

• You were a non-resident in nine out of the last ten years, or
• You were in India for 729 days or fewer in the past seven years.

How Does this Apply to NRIs in Malaysia?

If you have been working in Malaysia, you must have been paying taxes to the Inland Revenue Board of Malaysia (IRBM). Fortunately, you can prevent paying taxes twice on the same income through the DTAA between India and Malaysia.

Once you arrive in India, you can claim a foreign tax credit in India for the taxes you have already paid in Malaysia. This will ensure that you align with the tax regulations of both nations without being taxed twice.

Tax Implications for Returning NRIs from Malaysia

Relocating to India can make your tax liabilities more complex, specifically if you own property, investments, or EPF (Employment Provident Funds) savings in Malaysia.

What Happens to Foreign Income and Global Assets?

Your overseas income is tax-exempt in India during your RNOR period. It includes your salary, dividends, or rental earnings received from Malaysia. Your global income will be taxable under Indian laws after you become an ROR.

For example, if you own a rental apartment in Kuala Lumpur or hold shares in a Malaysian company. Then, the income generated from these must be declared and taxed in India after the RNOR period concludes.

Using the DTAA Between India and Malaysia

The DTAA helps avoid double taxation and permits you to claim credit for taxes paid in Malaysia while filing your Indian tax return. This will ensure smooth financial management and compliance with both nations' tax systems.

Banking, Repatriation, and Account Conversion

Your banking setup must also be updated in line with the regulations of the RBI once your residential status changes.

What Happens to Your NRE, NRO, FCNR, and RFC Accounts?

When you become a resident, you should:

• Convert your NRE and FCNR accounts into resident rupee (savings) accounts.
• You can hold your NRO account to manage Indian income, such as rent, pension, or dividends.
• You may open a resident foreign currency (RFC) account to hold funds in foreign currency, like Malaysian Ringgit (MYR) or USD.

RFC accounts are ideal for people who still have an overseas income or future travel plans.

Tips for Repatriating Funds from Malaysia to India

You must follow both Indian and Malaysian financial regulations when repatriating funds. Consider using authorized banking channels like SWIFT to ensure transparency and compliance.

Tips for Smooth Repatriation

• Keep detailed records of all transactions and taxes paid in Malaysia.
• Before your status changes to 'resident', try to complete large transfers for easier documentation.
• Consult a tax professional before transferring funds from the Malaysian EPF or property sales for improved tax efficiency. 

Investments, Property, and Estate Planning Upon Returning

Your financial planning doesn't stop after returning home. You should manage your foreign assets and discover new investment opportunities in India.

Managing Foreign Investments

If you hold a property or investment in Malaysia, you can either retain it or sell it before returning. If you sell them before relocating, you can simplify taxation.

However, if you continue to receive rent from it, then the income acquired will be taxed in India after you gain the ROR status.

Additionally, withdrawals from Malaysia's EPF are subject to local tax, but it can be adjusted through the DTAA while filing taxes in India.

New Investment Options in India

After resettling in India, consider:

• Mutual funds and SIPs for growth-oriented investment.
• Real estate in emerging cities that has strong development prospects.
• Tax-efficient investments, such as PPF, NPS, or fixed deposits, for steady returns.

Residency and Inheritance Planning

It's advised to update your will, nominations, and power of attorney (POA) to show your residential status. Include both Indian and Malaysian assets in your estate planning to ensure a smooth transfer to the successor.

Practical Checklist Before and After the Return

Here is a pre-return and post-return checklist to consider so that you stay well-prepared and compliant while going through this transition.

Pre-Return Checklist (Malaysia to India)

You should make sure to do the following things before you move back to India:

• Close unnecessary bank accounts and local services.
• File your final Malaysian tax return and clear dues.
• Review or withdraw your EPF balance (if applicable).
• Gather property deeds, tax filings, and financial statements.
• Inform banks and LHDN (Lembaga Hasil Dalam Negeri) regarding your relocation.

Post-Return Checklist (After Arriving in India)

After arriving in India, ensure to:

• Convert NRE/NRO/FCNR accounts to resident accounts.
• File your first Indian tax return after returning to India.
• Update PAN, Aadhar, and KYC information across financial institutions.
• If you qualify as an ROR, report foreign assets on your tax return.
• Notify the banks, employers, and the income tax department about your new address.

The Bottom Line

Moving back to India from Malaysia can be both exciting and challenging. You get a chance to reunite with your roots, explore new opportunities, and stay close to family. However, this transition also needs careful financial and tax planning.

You can make this transition much easier by preparing in advance and understanding your obligations. Additionally, for more accurate compliance and an easy transition, seek expert guidance from Savetaxs.

At Savetaxs, we specialize in assisting NRIs with tax compliance and financial planning. Our team of experts can guide you through everything, from determining residency status to claiming DTAA benefits and filing tax returns. Contact us right away, and we will handle your tax issues so that you can focus on starting your new chapter in India without any worries.