A Financial Guide For NRIs Returning to India

Shifting back to India permanently can be an exciting as well as emotional milestone for an NRI (Non-Resident Indian). However, this decision comes with several financial considerations. One essential aspect is handling your existing bank accounts. This can specifically include NRE, NRO, and FCNR accounts.

If you fail to convert these accounts on time, you may face tax implications and even legal issues under FEMA (Foreign Exchange Management Act). If you are an NRI planning to move back to India, keep reading our blog. We will walk you through a few tips to ensure a quick and smooth financial transition as you settle back in India.

What are Some Banking To-Do's for NRIs?

You may hold various bank accounts in India as an NRI. It includes Non-Resident Ordinary (NRO), Non-Resident External (NRE), Foreign Currency Non-Resident Bank (FCNR (B)), or international bank accounts. You need to understand what happens to these accounts when you return permanently to India:

1. Revisit Your Bank Accounts Held In India

According to the RBI (Reserve Bank of India), you are not allowed to hold your NRO/NRE bank accounts when you relocate to India permanently. Here are a few options available to you for these accounts:

• NRO Account: Either you must convert your NRO account to a resident savings account or close the account. 
• NRE Account: You must mandatorily convert your NRE account to a resident savings account. Otherwise, transfer the funds held in your NRE account to a Resident Foreign Currency (RFC) account.
• FCNR (B) Account: You can hold your FCNR (B) fixed deposits until they mature. After maturity, you are required to transfer the proceeds into a resident savings account (kept in Indian rupees) or an RFC account. This applies if you wish to maintain holding the foreign currency.

**Are You Aware?

An RFC account is an Indian bank account that is maintained in foreign currency. It enables those NRIs who are returning to India to maintain their foreign earnings. There is no limit on fund repatriation held in your RFC accounts. You may be able to transfer the funds held in this account to an NRE/FCNR (B) account if you become an NRI again.

2. Evaluate Usage of Your International Bank Accounts

According to the RBI (Reserve Bank of India), you can retain your international bank accounts, which you had opened abroad when you were an NRI. Nevertheless, you may need to determine if the regulations of the country in which you hold the account permit you to continue holding these accounts.

How To Manage Your Existing Investments?

You must check and assess the implications on your existing investments in India and overseas when shifting to a new residency status in India. The following are the things you need to consider to manage your existing investment:

a) Investments in India

You need to manage the existing investments you hold in India, made when you were an NRI. It is because your investment rules and regulations may vary when you plan to shift permanently to India:

• Demat Account

You need to inform the bank and broker regarding your new residency status. You must open a new resident demat account. Also, transfer your existing securities that are held in your NRI demat account to the newly opened account.

After that, you must close your NRI demat account and the NRE Portfolio Investment Scheme (PINS) account. Additionally, you will be required to do a new KYC (Know Your Customer).

Update your Foreign Account Tax Compliance Act (FATCA) declaration as relevant for the United States (US) or Common Reporting Standards (CRS) for the United Kingdom (UK), Canada, or any of the 100+ countries that have approved CRS.

• Mutual Funds

You should notify those through whom you have invested in mutual funds regarding the change in your residency status. It can include your bank, broker, asset management company (AMC), etc. You must also inform them whether you have updated your linked NRI bank accounts to a resident savings account. Additionally, you might also need to update your KYC and FATCA/CRS status.

• Fixed Deposits (FD)

In case you hold an FD account like NRE/NRO FD, you must convert it to a resident FD account. However, you will still acquire interest, and the same will be subject to taxation at the applicable tax rates.

b) Investment in Overseas Assets

As per the rules of the Foreign Exchange Management Act (FEMA), you are allowed to continue retaining your overseas assets after becoming a resident Indian. Overseas assets include those in which you had invested when you were an NRI.

You should check with your country of residence whether you can hold these assets after moving back to India.

Insurance Policies

NRIs moving back to India can retain their insurance policies purchased in India, such as health insurance, motor insurance, etc. This applies until they continue with the said policy when they had the NRI status. Life insurance policies purchased from India will be valid when you return, provided you don't have any due premiums to pay.

You must inform the insurer about the change in your residential status and update the information on your bank account. Also, it is vital to submit the requested documents to enjoy an efficient process. The insurance policies purchased in a foreign country may not be considered valid once you move back to India.

When you come back to India as a resident Indian, you will be available with all the investment options. This will also include those that were restricted for you when you were an NRI. Such as opening a new public provident fund (PPF) account, investing in Tier II National Pension Scheme (NPS), all types of mutual funds, and intraday trading in stocks.

It also includes Sovereign Gold Bonds (SGBs), agricultural land, plantation, trading in currency derivatives and commodities, RBI floating rate savings bond, etc. You must contact your bank or investment advisor to get further details.

What are the Tax Implications After Returning to India?

Your residency status will change when you return to India. You will be eligible to become a "resident" in any Financial Year (April to March), if you fulfill any one of the conditions stated in the table below:

Based on the above-mentioned residency conditions, if you qualify as a "resident" after returning to India. Then, you may be considered either a Resident and Ordinarily Resident (ROR or OR), or Resident but Not Ordinarily Resident (RNOR or NOR), depending on the below-mentioned conditions:

You will change from being an RNOR to an ROR mainly over a period of two to three Financial Years. Let's understand this with an example:

In January 2012, Ajay, who was an Indian citizen, left India and went to the United States for the first time for employment purposes. On the 1st of August 2022, he came back to India permanently. Now, let's understand how this will affect his residency status over the next few Financial Years:

► In FY 2022-2023 and FY 2023-2024:

He will be considered a resident as his stay in India will exceed the 182-day limit during the Financial Year. Moreover, as a resident, he will qualify as an RNOR because:

• He isn't a resident for at least 9 out of 10 immediately preceding FYs; and
• His total period of stay during the immediately preceding 7 years is below 730 days.

► In FY 2024-2025:

He is eligible to be a resident. Although he hasn't been a non-resident in at least 9 out of 10 immediately preceding FYs, he will still be considered an RNOR. It's because his overall stay has not exceeded the 729-day limit yet during the preceding 7 years.

► In FY 2025-2026

He will be considered an RNOR because:

• He has spent more than 182 days in India in the financial year.
• His overall stay in India during the immediately preceding 7 years is more than 730 days; and
• He has not been a non-resident in at least 9 out of the 10 years preceding Financial Year 2025-2026.

Your tax liability will be decided based on whether you qualify to be an RNOR or an ROR. Consider the table mentioned below to determine your taxability:

Consider the following table to get a more detailed understanding of your tax liability based on your residential status: 

The main difference between the tax liability of an RNOR and a non-resident is that income acquired outside India will be taxed for an RNOR only when it is received from a business or a profession that is controlled from India. On the contrary, NRIs are not subject to taxation on such income.

Ajay will keep earning foreign income from the investment he has made abroad. Also, he will not be liable to pay tax on his foreign income in India for FY 23 and FY 24 because he qualifies to be an RNOR. The following are some examples of foreign income on which he doesn't have any tax liability in India:

• Withdrawals from offshore retirement accounts.
• Gains acquired from capital assets located abroad.
• Interest earned on an RFC and FCNR (B) accounts.
• Dividend or interest acquired from foreign shares and securities in foreign banks.
• Rental income received in a foreign bank from a property located overseas.

Now, at the beginning of FY26, Ajay's foreign income will become subject to taxation in India once he gains the ROR status. Nevertheless, in case his foreign income is subject to double taxation, he will be allowed to claim benefits under the DTAA (Double Tax Avoidance Agreement).

This applies if there is a DTAA tax treaty signed between India and the country where the income originated. Additionally, your tax rates will depend on the current income tax laws in India.

The Bottom Line

NRIs moving back to India permanently must carefully manage their banking as well as investments to ensure compliance. You must quickly inform your bank, broker, AMC, and insurance service providers about the change in your residency status. You need to convert your NRE and NRO accounts to resident savings accounts. Also, close NRI demat accounts to ensure adherence to Indian regulations.

The tax implications of your current investment will change based on your residency status. You need to determine your tax liability to prevent any potential penalties or repercussions. To get more assistance with the same, contact the experts at Savetaxs.

Savetaxs is an NRI-specific taxation assistance firm that has been helping NRIs for decades. Our experts carry more than 30 years of experience, ensuring you get the best-quality assistance and answers to all your queries. Contact us right away as our team is actively working 24*7 across all time zones.