NRI to Resident: What Happens to Your Business?

A change in your residential status can affect everything, be it your tax obligation or compliance requirements. If you are an NRI owning a business in India, a change in your residential status under Indian laws can significantly trigger major changes. Whether you are a freelancer, startup founder, or investor, you must understand these changes to avoid non-compliance issues and significant consequences.

In this blog, we will walk you through everything you need to know after NRI status changes as per Indian tax rules. We will also cover the FEMA compliance rules for NRIs and the actionable steps you need to take.

Understanding NRI Status Under Indian Law

To determine your tax liability in India, the Income Tax Act 1961 considers your residential status instead of your citizenship. Based on your physical presence in India, your residency status can fall into three categories:

• NRI (Non-Resident Indian): As per Section 6 of the Income-tax Act, 1961, an individual is treated as an NRI if they do not satisfy the conditions for residency. If you spend less than 182 days in India in a financial year, you will be considered an NRI. Alternatively, if you stay less than 60 days in the current year and less than 365 days over four prior years, you will be considered an NRI. However, there are some exceptions for Indian citizens leaving for employment.
• RNOR (Resident but Not Ordinarily Resident): A person who has lived in India for 729 days or less in the 7 years before the current year will be considered an RNOR. Alternatively, if they have been a non-resident in 9 out of the 10 preceding financial years, they will be considered an RNOR.
• ROR (Resident and Ordinarily Resident): A resident individual is classified as ROR if they satisfy both conditions: being a resident in at least 2 out of the 10 preceding financial years and having stayed in India for 730 days or more in the 7 preceding years.

When and Why NRI Status Changes in India?

As per the Income-tax Act, 1961, your NRI status is not permanent; it depends mainly on the duration of your stay in India during a financial year. You will be considered a resident for tax purposes if you spend 182 days or more in India. This change can happen even if you didn't want it.

Mostly, people don't plan for a change in status, and it usually happens because of real-life situations, such as:

Returning to India permanently

• Many NRIs return to India to find jobs, pursue business opportunities, or visit family. Your status will change automatically if your stay in India exceeds the specific duration of stay.

Managing or Expanding a Business in India

• You may cross the residency threshold unintentionally if your business requires your physical presence in India.

Staying Longer than Expected

• Sometimes you might visit India for a shorter duration, but may end up staying for a longer time period due to:
• Medical emergencies
• Travel or visa issues
• Remote work flexibility

Even if your extended stay is unplanned, it can trigger a change in your residential status. This change can directly affect your tax obligations and business compliance.

Impact of Status Change on Your Business

A change in NRI status has an immediate and wide-ranging impact on business. Apart from affecting your personal tax liability, it also impacts how your business operates both legally and financially. Here's what changes immediately when your NRI status changes after starting a business:

• The way your income is taxed.
• Rules related to your bank accounts and money transfer.
• The type of filings and compliance required.

These changes can happen within the same financial year, leading to many NRIs being unprepared. Moreover, you must inform your bank and update your Tax Filings and business records about your status change immediately. Failing to do so can attract penalties and issues with compliance.

Impact of Status Change on Taxation

One major factor that the change in NRI status affects is tax implications. Here's how you will be taxed when you are an NRI and after you become a resident:

As an NRI

• You are taxed only on the income earned or received in India.
• Your foreign income is not subject to taxation in India, such as salary, business income, investments, etc.

After Becoming a Resident

• When your status changes from an NRI to a resident (especially ROR), your tax liability extends.
• You will be liable to pay on your global income. It includes foreign salary, overseas business income, and international investments.
• Additionally, you need to disclose foreign assets, make payments for advance tax, and ensure detailed reporting in tax returns.

As an RNOR

• The RNOR (Resident but not ordinarily resident) is a transitional phase that lasts for around 2–3 years. It continues until the individual satisfies the conditions to become a Resident and Ordinarily Resident (ROR). Your foreign income is usually not taxed during this period. Also, only Indian income and certain foreign income linked to India are taxed.

Relief Through DTAA

To prevent paying taxes twice, India has signed an agreement with several countries. This agreement is known as the Double Taxation Avoidance Agreement (DTAA). You can claim a tax credit or exemption and ensure the same income is not taxed in both countries.

In short, NRIs have limited tax liability (India only), RNOR gets partial relief, and ROR is liable to pay tax on global taxation. Moreover, if you have paid tax in one country, you can claim relief in India by using the DTAA provisions.

Impact of Status Change on Banking and Repatriation

Once your status changes, your banking structure will change significantly. Let's understand how a status change affects your banking and repatriation:

Banking

As an NRI, you can usually hold:

• NRE account (fully repatriable) and NRO accounts.

After becoming a resident:

• Convert these bank accounts into regular resident accounts.
• Notify your bank immediately about the status change.

Repatriation

Repatriation refers to sending money abroad. The biggest change happens here:

As an NRI:

• You are allowed to send money abroad freely without facing any major restrictions. NRIs can repatriate funds freely through NRE accounts, while Repatriation from NRO accounts is subject to limits (currently up to USD 1 million per financial year) and documentation requirements.

As a Resident:

• You will face certain limits and regulatory controls under Indian law.

So, after transitioning to a resident, you face some restrictions and regulatory issues while moving funds abroad. You may also need approvals or fall under limits set by the RBI (Reserve Bank of India).

Impact of Status Change on Different Business Types

The impact of a change in status on your business will depend on the type of business you own.

Sole Proprietorship

A sole proprietorship is a business type where the business and owner are the same. In such a business type:

• Your personal tax status affects business income directly.
• Once you become a resident, your global business income may be subject to taxation in India.

This business structure is impacted the most directly.

Partnership Firms/ LLPs

In partnership firms/LLPs, your share of profit is taxed based on your residential status. So, if any partner becomes a resident:

• Requirements for compliance may increase, and several agreements may need to be revised.

If foreign investments are involved, FEMA implications may also arise.

Private Limited Company

A company is a separate legal entity. Hence, the company's taxability remains unaffected. However:

• The status of the director must be updated.
• Compliance filings will increase.

For individuals:

• Salary, dividends, and other income will be taxed according to your new status.

Freelancers/ Consultants

Freelancers/consultants face major changes:

• Foreign income may become subject to taxation in India.
• If the turnover exceeds Rs. 20 lakhs, GST may be applicable.
• Compliance and record-keeping become more comprehensive.

Due to global income being subject to taxation, many freelancers may face unexpected tax liabilities.

FEMA & Regulatory Impact on Business

Once you become a resident, your status under the Foreign Exchange Management Act also changes. FEMA decides how your foreign money, investments, and transactions are managed. Here's what changes after your status changes:

• You are treated as a 'person resident in India'.
• There will be limits on foreign investments.
• Special benefits that were available to you as an NRI will no longer be provided.
• There will be restrictions on sending money abroad.
• You will face additional reporting requirements for foreign assets.

For example:

The investments you made as an NRI will be treated differently now. Also, you may need approvals for certain transactions.

Once you become a resident, complying with FEMA becomes more rigid and regulated.

Compliance Requirements After Status Change

Your responsibilities related to compliance increase significantly when your status changes. Follow the steps below to ensure compliance:

• File the Relevant ITR Form: The changes related to your return filing depend on your status and source of income.
• Update your Residential Status: Ensure to update your residential status in your income tax filings and records.
• Report Foreign Assets and Income: Disclose your foreign bank accounts, investments, and assets held outside India.
• Updates Related to the Director or Business: If you are a company director, update your residential status in official records.

Following these steps is crucial as non-compliance can attract income tax notices, hefty penalties, and increased scrutiny from the authorities.

Real-Life Example

 To make this situation easier to understand, here are two examples of Amit and Priya:

Example 1: Amit, an NRI living in the US

Amit is an NRI who holds an NRE account with Rs. 50 lakh savings. He receives rental income in India and has investments in US stocks. Now, he decides to move back to India permanently, which means his NRI status will change. Hence, 

• He must convert his NRE account into a resident account.
• He will not be allowed to repatriate funds freely anymore.
• His US stock income will become subject to taxation in India (If ROR).

To claim relief from double taxation, he can claim the double taxation avoidance agreement (DTAA). This will help him prevent taxation twice on US income.

Restructure your banking and investment structures right away after your status changes. Now, let's look at an example of Priya.

Example 2: Priya, an Indian startup owner living in Singapore

Priya lives in Singapore, but she owns a startup that is registered in India. Due to this, she frequently travels to India. However, she stayed in India for 190 days in a financial year unintentionally. It led to her NRI status changing to a resident. Now, this is how this transition will impact her liability and compliance:

• The foreign salary that she receives from Singapore will become subject to taxation in India.
• She must disclose her foreign bank accounts and file a detailed ITR with global income.
• As a director, she also needs to update her residential status in the company records.

In short, even unintentional long stays or unplanned travel can affect your residency. Also, it will directly increase your tax and compliance burden immediately.

To Conclude

A change in your NRI status brings a complete shift in your financial and regulatory matters. It affects your tax obligations, compliance, banking, and even business operations. One major challenge with NRI status change is that this transition often happens unintentionally. It makes many individuals unprepared to face issues. To address this, you must keep track of your duration of stay in India. Additionally, you must also be aware of the ROR transition benefits, restructure your banking setup, and ensure full compliance with FEMA and tax regulations.

Whether you are a freelancer, investor, or business owner, Savetaxs can help you be prepared for this transitions. At Savetaxs, we have a team of experts who can help you stay aware and knowledgeable of your residential status. Our team will ensure you avoid significant penalties and tax burden, and maintain smooth business continuity. Connect with us right away, as we are actively working 24/7 across all time zones.