Nowadays, it has become common for Indians to gain NRI status and work and live outside the country. However, you may return to your motherland after spending some years abroad.
Returning to India requires meticulous financial planning, including tax* planning and planning for investments like an NRI insurance policy. To help NRIs with this, the Reserve Bank of India has issued clear guidelines for various financial matters for NRIs who plan to stay abroad or return to India.
Generally, the tax provisions for NRIs who plan to return to India are generous. However, you must clearly understand the NRI taxation, and tax planning for NRIs, if you plan to return to the country.
Read further for complete information on tax planning and tax rules for NRIs planning to return to India.
NRI Definition Income Tax Act
Usually, a person working abroad is understood as an NRI. However, this does not hold for how the Income Tax Act defines an NRI. The term "Non-Resident" means that the concerned person does not reside in India on a permanent basis. NRIs typically hold Indian citizenship or are of Indian origin but have obtained citizenship of another country.
NRIs maintain connections to India and can invest in the country and be a part of the cultural activities here. Therefore, there are clear provisions for the taxability of NRIs in India.
It is essential to understand who falls under the NRI category for taxation purposes. As per the section 6 of the income tax law, an individual falls into either of these 3 categories:
Non-resident
Resident but Not Ordinary Resident in India (NOR)
Resident and Ordinary Resident in India (ROR)
Non-resident: An individual is said to be Non-Resident in India if he is not a resident in India. According to the Finance Act, 2020, w.e.f., Assessment Year 2021-22 an individual is deemed to be resident in India in any of the previous years if he satisfies any of the following conditions:
If he is in India for a period of 182 days or more during the previous year; or
If he is in India for a period of 120 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
NOR: According to Section 6(6)(a) of the Income Tax Act, an Individual is considered a NOR for a particular financial year he is returning to India and the succeeding 2 years if:
He has been a non-resident Indian in 9 out of 10 years preceding that year; or
He has been in India for a period of 729 days or less during the 7 financial years preceding that year.
Your NRI status is considered a NOR status for 2-3 years after you return to the country. After this, your status is that of a ROR and the taxation rules applicable to all resident Indians will be applicable to you as well.
Non-resident Indian Income Tax Planning and Rules
On returning to India, once your NOR status converts to a ROR status, you will lose several tax benefits applicable to NRIs and NORs. Therefore, you must do your tax planning before the status change happens. Some of these tax benefits a NRI or an NOR enjoys are:
Tax exemption on capital gains earned outside India on fixed or financial assets held abroad.
Tax exemption on interest received from Foreign Currency Non-resident and Resident Foreign Currency deposits.
Tax exemption on a withdrawal or pension from a pension scheme/ retirement account held abroad.
Tax exemption on interest or dividends earned on deposits/ securities held abroad.
Tax exemption on rental income earned on a property held abroad.
An NRI’s income earned in India is taxable in the country. However, the income earned abroad is not liable to tax in India.
Income earned outside India by an NRI or a NOR in a given financial year and remitted to India during the same year is not taxable in India.
What Happens When I Lose My NRI/ NOR Status?
Once an NRI returns to India, his status changes to NOR, which changes to ROR after a few years. Till you enjoy the NRI/ NOR status, you can benefit from the Double Tax Avoidance Agreement that India has with over 75 other countries globally.
However, once your NRI status changes to ROR, you will not be eligible for the returning NRI taxation benefits under DTAA. Moreover, even your global income will be taxable in India henceforth.
As part of your income tax planning, if you plan to sell a property you own abroad or withdraw from an overseas retirement account, it is advisable to do it before your status changes to ROR. It will help you avoid paying taxes on it in India.
Tax Regulations and Implications for NRIs Returning to India
Account Type | RBI Guidelines | Income Tax Provisions |
NOR Deposits | Should be converted to resident accounts | Taxable. TDS applicable as NRI till the NRO status existed. Now as per the resident. |
NRE Deposits | Should be converted to resident accounts or funds to be transferred to RFC. | Taxable as an NRE account cannot be held as a resident. |
FCNR Deposits | Can be maintained till the deposit matures. After that, it should be converted to resident accounts or funds to be transferred to RFC. | Tax exempted till NRI has NOR status after returning. |
Resident Foreign Currency Account (RFC) | NRE and FCNR deposits and foreign inward remittances to be received in this account. | Interest income is exempted from tax till NOR status remains. |
What Should an NRI Do on Returning to India?
Inform the financial institution and convert your NRE/FCNR account to a resident account.
Similarly, get your status updated as a resident for your mutual fund investments and open a resident demat account to transfer shares from the existing NRI demat account, if applicable.
An NRE FD can be converted into a domestic resident FD for the same interest rate.
Can NRIs save Income Tax in India With NRI Life Insurance Plans?
NRIs can purchase an NRI insurance policyto get tax benefits along with life coverage benefits to secure their loved ones even when they do not stay in India. An NRI can avail of tax benefits in the following 2 ways with an NRI life insurance plan:
Deduction under Section 80C: Deduction of up to ₹1.5 lakhs under Section 80C of the Income Tax Act, 1961, for the premium paid towards NRI life insurance plans.
Tax-exempt proceeds: The maturity amount or death benefit received from an NRI life insurance plan is tax-exempt under Section 10(10D) of the Income Tax Act.
You can buy a Tata AIA life insurance policy through a quick, digital process. Conveniently purchase from overseas and enjoy a life cover for up to 100 years, along with tax benefits.
However, as the tax laws can change at any time, it is advisable to consult with a tax advisor or financial professional to stay up-to-date with the latest tax provisions based on your circ*mstances.
Wrapping Up
An NRI is not liable to pay tax on income earned outside India. However, an NRI returning to India gets a NOR status, eventually converted to a ROR status. A resident Indian is liable to pay tax on global income under the income tax laws. Therefore, one must understand the taxation implications when returning to India.
