Tax Planning Before Permanently Moving Back to India

Moving to India permanently after living overseas for many years is a big decision. While you have thought about it emotionally, have you ever considered the financial obligations involved?

If you are an NRI returning to India, you must consider the rules and regulations that come with it. Tax rules, investment treatment, and compliance obligations may change depending on your residential status and circumstances. Additionally, you may make expensive mistakes not because you ignore the rules, but because you do not realize when they change.

So how can you overcome these issues? Quick answer: by doing tax planning before permanently moving back to India. Want to know how? Read the guide and get your answers.

How Does Your Return Date Affect Indian Tax Residency?

In India, your residential status is determined each financial year, from April 1 to March 31. As a result, you can be an NRI for one financial year and become a resident the next year. The outcome depends on how many days you were physically present in India during the tax year, your past stay in India, and the specific residential-status rules applicable to your circumstances. 

So, as an NRI returning to India, you need to consider your return date and check the tax obligation associated with it. Confused? Let's better understand this with an example. 

Suppose you plan to return to India on October 1. For that financial year (April to March), the extra days you spend in India may affect your residential status. Additionally, it may also affect your taxable income in India.

However, this does not mean that returning late to India in a financial year is a better option. When planning your return date, consider the following things also:

• Foreign salary and bonus payments
• Pension withdrawals
• Overseas property sales
• Family and employment requirements
• Vesting or exercise of employee stock options
• Foreign tax residency rules
• Applicable DTAA tax treaties

So, when planning your return to India, consider your tax days in India along with the points above.

NRI, RNOR and ROR Status After Returning

Once you return to India, your residential status under Indian income-tax law may be Non-Resident, Resident but Not Ordinarily Resident (RNOR), or Resident and Ordinarily Resident (ROR), depending on the applicable rules:

RNOR is a separate residential classification that may apply after you become resident in India, depending on the applicable conditions. However, it is not available to every returning NRI. This depends on your past travel history in India. So, the statement "every returning NRI receives three years of RNOR status" is not true; it varies depending on your travel history. 

For instance, someone who has lived overseas for many years may be eligible for RNOR status, but someone with a different travel history may qualify only for NRI status. 

Considering this, to get a clear idea of your residential status in India, prepare a year-wise travel record stating:

• Your departure date from India
• Your arrival date in India
• Date of your every departure from India
• Number of days you were physically present in India for each financial year
• Your past residential status when filing a tax return in India

With this data, you can easily determine whether you are eligible for RNOR status after returning to India.

Income-Tax Residency vs FEMA Residency

Income tax residency in India determines how you will report and pay tax on your income in India. In contrast, FEMA residency helps in identifying:

• Overseas investments
• Permitted bank accounts
• Indian investments held by you as an NRI
• Holding and transferring foreign exchange
• Fund repatriation

These two are separate legal classifications that serve different purposes, apply different criteria, and impose different requirements simultaneously. 

For instance, under Indian tax residency laws, you may qualify for RNOR status, but for FEMA purposes you are considered an Indian resident. In this situation, your tax liability and bank account obligations are separately reviewed. This is especially important if you hold NRE, NRO, and FCNR accounts and overseas investments. 

This was all about how your return date affects Indian tax residency. Moving ahead, let's know how foreign income is taxed once an NRI returns to India permanently.

How Is Foreign Income Taxed After Returning to India?

The taxation of foreign income in India depends on the following factors:

• Your residential status after returning to India
• Where the income arises
• Where you receive the income
• Whether it is related to a business operated in India
• You already paid taxes on it in the source country
• Applicable Double Taxation Avoidance Agreement

Transferring money to India alone does not make it taxable here. For instance, you receive the income first in your foreign bank account, then transfer it to your Indian bank account. Here, you did not directly receive the foreign income in India. So, before reporting foreign income in India, first review its nature, source, and how you originally received it. 

Now, let's look at the foreign income types that NRIs generally receive after returning to India:

• Salary and final employment payments
• Foreign dividends
• Interest from overseas bank accounts
• Rental income from overseas property
• Business or consulting income
• Capital gains generated from overseas investments
• Employee stock compensation
• Pension and retirement account withdrawals

Foreign Income During RNOR Status

Generally, RNOR status limits the taxation of foreign income in India. However, foreign income may still be taxable in India if it is received or deemed to be received in India, accrues or arises or is deemed to accrue or arise in India, or is derived from a business controlled in India or a profession set up in India:

• Accruing or deemed to accrue in India
• Received or deemed to be received in India
• Derived from a business controlled from India
• Derived from a profession set up in India

Let's understand this with an example. Suppose you return to India and run your consulting business continuously. Because of commercial decisions, you shift your business to India and take control of it from here. In this scenario, you are liable to pay tax on this foreign income because the business is controlled from India. 

Given the above scenario, it is advisable to classify each foreign income source separately.

Global Income After Becoming ROR

Once your residential status changes from RNOR to ROR, you must pay tax in India on your global income. This includes:

• Interest earned in foreign bank accounts
• Dividends from foreign companies
• Overseas rental income
• Capital gains from foreign investments
• Taxable pension distributions
• Foreign salary or consulting income
• Income from foreign business

Paying tax on your global income does not mean you are liable to pay tax on the same income twice, i.e., once in the source country and once in India.

If you are liable to pay foreign income tax after returning to India on income you already paid tax on, you can claim a foreign tax credit under the DTAA. The available credit amount depends on your income type, treaty, foreign tax paid, and supporting documents.

To avoid this kind of hassle, as an NRI returning to India permanently, it is advisable to prepare for the possibility of becoming ROR and gather your tax certificates, foreign bank statements, and cost records in advance. 

So, this was all about how foreign income is taxed after returning to India. Now, moving further, let's know whether NRIs should sell foreign assets before returning to India. 

Should You Sell Foreign Assets Before Returning to India?

There is no direct answer to it. It entirely depends on your financial goals, circumstances, and preferences. Before making the decision to sell foreign assets before returning to India, consider the following things:

• Your residential status in India during the sale of your foreign asset
• Tax in the foreign country you are liable to pay
• Indian capital-gains treatment
• Currency conversion rules
• Availability for foreign tax credit
• Your long-term financial goals
• Exit charges or early withdrawal penalties

Selling a foreign asset before returning to India may look beneficial, but when you try to escape Indian taxes, you may face capital gains tax or an exit tax in the foreign country. In practical terms, retaining your foreign assets during your RNOR status may be considered after reviewing the applicable tax, investment, and compliance implications.

However, rules on selling foreign assets before returning to India also vary by country and asset. 

Foreign Investments and Bank Accounts

Generally, an NRI returning to India permanently holds the following foreign investments and bank accounts:

• Mutual funds
• Foreign shares
• Employer stock
• Exchange-traded funds
• Savings accounts
• Brokerage accounts
• Fixed deposits
• Privately held business interests

Considering this, before moving back to India, collect the following documents associated with your foreign investments and bank accounts:

• Original purchase price
• Purchase date
• Reinvested distributions
• Brokerage charges
• Paid foreign taxes
• Fair market value around relevant dates
• Currency you used for every transaction

After returning to India, you may have difficulty recovering these documents, so it is advisable to gather them before you return. This is because, when the asset is taxable in India, these records may be needed to calculate Indian capital gains.

Also, contact the foreign banks and institutions and ask whether they allow you to operate your foreign investments and accounts from India once you become an ROR. This is because some foreign investment platforms restrict residents of certain countries or limit new asset purchases.

Further, do not close your foreign account only to avoid Indian tax obligations without checking the following things:

• Penalties for making withdrawals before time
• Transfer charges
• Loss of investor protection
• Local capital-gains tax
• Availability of the same investment in India

Overseas Property and Capital Gains

When holding an overseas investment, you may come across several questions such as:

• Should you sell property before or after moving to India?
• Which country will tax the rental income?
• What records do you need to establish the purchase and improvement cost?
• In which country are you liable to pay capital gains tax at the time of property sale?
• Is a foreign tax credit available in India if you are liable to pay tax in both countries?
• Will currency fluctuations impact the Indian calculation?

If you sell your overseas property while you are an NRI or RNOR and the income arises outside India and is first received outside India, it is generally outside the Indian tax scope, subject to the applicable residential-status, source, receipt and income-tax rules. However, once your residential status changes to ROR, the foreign capital gain may also become taxable in India.

In case you preserve or retain your overseas property, you need the following documents:

• Purchase agreement
• Mortgage and loan records
• Improvement invoices
• Rental statements
• Local property-tax statements
• Sale-related expenses
• Where relevant, depreciation records
• Foreign tax returns

Whether you sell or retain your overseas property, decide by considering the tax rules of both countries rather than depending on the "sell before returning" formula.

For a quick overview of how to plan your retirement in India, read our blog on "Returning NRI tax checklist." Moving forward, let's know how your foreign pension and retirement accounts are taxed after returning to India. 

How Are Foreign Pension and Retirement Accounts Taxed After Returning?

You need to plan separately for your foreign pension and retirement accounts before returning to India. This is because tax obligations may differ by foreign pension account type and country. Common examples include:

• Employer pension plans
• 401(k) accounts
• Superannuation funds
• Traditional and Roth IRAs
• UK pensions
• Canadian retirement accounts
• Provident or social security arrangements abroad

Additionally, before transferring or withdrawing an amount from your foreign retirement account, review:

• Are you liable to pay tax on your withdrawal in a foreign country?
• Liable to pay tax in India on your growth, contribution, or distribution
• Does your foreign retirement account come under a DTAA treaty?
• Is a foreign tax credit available?
• Do early withdrawal penalties apply to you?
• Does the applicable Indian tax law or DTAA provide any specific timing treatment for your foreign retirement account?
• Does the foreign institution allow you to continue your retirement account when you become a resident Indian?

Also, you cannot consider a foreign pension withdrawal tax-free in India only because you receive it during your RNOR status. Your tax obligation depends on where you receive the amount, its legal character, and whether it is connected with employment in India. 

Considering this, keep a separate record for:

• Employer contribution
• Employee contribution
• Rollovers and transfers
• Investment growth
• Withdrawals
• Foreign tax returns
• Withheld foreign tax

Also, making a lump-sum withdrawal from your foreign retirement account without reviewing cross-border taxation rules can trigger tax and avoidable tax penalties. Generally, you can continue holding your foreign pension and retirement accounts in India. However, once your status changes to ROR, you must report them in your ITR.

This was all about how foreign pension and retirement accounts are taxed after returning to India. Now, moving ahead, let's know what happens to NRE, NRO, FCNR, and foreign bank accounts after moving to India.

What Happens to NRE, NRO, FCNR, and Foreign Bank Accounts?

An NRI returning to India permanently faces a different scenario with their NRI and foreign accounts under FEMA. As an NRI returning to India, you need to inform your Indian banks where you hold accounts and ask them to appropriately redesignate your NRE and NRO accounts under FEMA. This is because FEMA does not allow you to hold NRI accounts once you return to India permanently.

Unlike Indian tax laws, which determine residential status under the income-tax rules for each tax year, FEMA determines residential status using its own statutory criteria, including the circumstances and intention to stay in India for an uncertain period. So don't postpone contacting your bank because of your RNOR status.

With this in mind, FEMA offers two options to NRIs:

• An RFC account for returning NRIs to redesignate their NRE and NRO accounts. 
• Close the account permanently

However, the tax treatment of interest on an RFC account depends on the applicable income-tax exemption and the account holder’s circumstances; it should not be treated as automatically taxable merely because your residential status changes to ROR.

Additionally, you can retain your foreign bank accounts, but you must report them in your ITR once your status changes to ROR. However, check the following things:

• The foreign bank account contains your Indian residential address
• It has taxable interest
• You need to report your foreign account in ITR (ROR status)
• The account balance provides exchange rate or estate planning exposure
• You are liable to pay tax on the interest on your foreign bank account in the country where you held it

So, NRIs returning to India permanently need to appropriately redesignate their NRE and NRO accounts under FEMA. NRE funds may, where eligible, be transferred to an RFC account, while NRO accounts may be redesignated as resident accounts. Additionally, they can hold FCNR and foreign accounts in India without conversion. Now, moving further, let's know when you must report your foreign income and assets in India. 

When Must You Report Foreign Income and Assets in India?

Reporting foreign income and assets in ITR after moving back to India permanently depends on your residential status under Indian tax laws. As an NRI returning to India, you cannot assume you must report your foreign income and assets from day one. Also, don't assume you must report them during your RNOR status without annual verification. In simple terms, check your foreign reporting position each year.

First Indian ITR After Returning

When filing your first Indian ITR after returning to India, confirm the following things:

• Your residential status for that financial year as per the number of days you were physically present in India
• Indian-source income
• Capital gains
• Foreign income taxable in India
• Bank account details
• Applicable DTAA treaty relief
• Foreign tax credit
• Appropriate ITR form

You cannot use your NRI status from the previous year to file your tax return in India. Under Indian tax laws, an individual must calculate their residential status for tax purposes each financial year.

Let us know the documents you need when filing your first ITR after returning to India:

• Passport and travel history
• Form 26AS
• Taxpayer information summary
• Annual information statement
• Indian bank interest certificates
• Foreign tax returns
• Capital gains statements
• Foreign tax payment evidence
• Rental income proof
• Pension statements

Further, choose the correct ITR form depending on your income profile.

Schedule FA and Foreign-Asset Reporting

Once your residential status changes to ROR, you must report your foreign assets and income in Schedule FA (Foreign Assets) in your ITR. Additionally, under it, you need to mention report the following foreign assets:

• Foreign bank accounts
• Custodial accounts
• Overseas property
• Foreign shares and securities
• Financial interests in foreign entities
• Signing authority over foreign accounts
• Foreign trusts
• Other foreign assets

When Schedule FA becomes applicable, you need to do the following things:

• Report all your foreign assets and investments
• Mention the maximum and closing values of each asset
• Review the reporting period
• Using the appropriate foreign exchange rate, convert foreign values into INR
• Reconcile foreign income with relevant income schedules
• Maintain your ownership and tax records

Foreign asset reporting is not limited to assets that produce income. Depending on the scenario, you may need to report a foreign non-income-producing asset or a dormant account. 

DTAA Relief and Foreign Tax Credit

Being an Indian resident does not automatically make you eligible for DTAA relief. It depends on whether India has a DTAA agreement with that foreign country and whether you are liable to pay tax on the same income in both countries. If so, the DTAA relief applies through:

• A tax exemption method under the DTAA treaty
• Foreign tax credit
• Domestic Indian tax relief provisions

Generally, the foreign tax credit applies to the income that is taxable in both countries. To claim a foreign tax credit, you must complete Form 67. Additionally, submit the following documents to serve as evidence of the taxes you have already paid:

• Foreign tax return
• Withholding certificate
• Tax assessment
• Payment proof
• Income statement
• Calculation of exchange rate
• Applicable treaty article

Further, a foreign tax credit may be restricted to Indian tax obligations on the same foreign income. Also, foreign tax penalties or certain disputed taxes may not qualify in the same way as your final income tax obligation.

So, when your residential status changes to ROR, you need to report your foreign assets and income in Schedule FA of your Indian ITR. Moving forward, let's take a quick overview of NRI tax planning before permanently moving back to India through a checklist in the next section.

Tax Planning Checklist Before and After Returning to India

The table below provides you with a quick overview of tax planning for returning NRIs through a checklist:

Further, good tax planning before permanently moving back to India is not only about transferring your foreign assets or completing every transaction. It is about how one decision can change your residential status and tax obligations in India. 

Final Thoughts

Lastly, as an NRI returning to India, it is not only about changing your address; it is also about cross-border transactions that require proper planning. The date you choose to move to India determines your residential status and tax obligations in India. Once your residential status changes from NRI or RNOR to ROR, you become liable to pay tax in India on your global income. Additionally, you may need to report your foreign assets and investments in Schedule FA in your ITR. The tax implications for NRIs returning to India depend on their travel history, income sources, assets, foreign country rules, and long-term plans.

If you are planning to return to India and looking for assistance, connect with Savetaxs. Our team of cross-border experts will help you determine your residential status based on your return date and manage your investment and tax obligations smoothly.