NRI tax decisions: Smart financial tips for homecoming

Priya, a successful professional after years of working abroad, decided to return to her roots in India. However, amidst the excitement of homecoming, Priya struggled to understand the complexities of the Non-Resident Indian (NRI) tax implications. The implications of tax planning, understanding tax residency status and exploring investment options can be overwhelming for returning NRIs.

In this article, we aim to simplify this journey for individuals like Priya, providing a clear roadmap for returning NRIs to navigate the intricacies of India’s NRI tax landscape. But before delving in, let's first understand the different types of NRI accounts.

Types of NRI accounts
 

A Non-Resident External (NRE) account can be used to deposit and manage foreign income in Indian rupees. In India, NRIs are not taxed on the interest earned in their NRE account. However, if an NRI becomes an Indian resident within a fiscal year, the total interest is taxable unless the taxpayer obtains prior authorisation from the Reserve Bank of India (RBI).

In comparison, a Non-Resident Ordinary (NRO) account can be used as a savings account for an NRI’s income earned in Indian rupees. This can include pensions, rental income, dividends, and so on. Also, interest earned in an NRO account is taxable in India. A TDS (Tax Deducted at Source) of 30.9% is levied on this interest, the tax rate being 30% plus surcharge and cess as applicable. The bank subtracts TDS from NRO interest and deposits the remainder into the NRO account.

Also read - NRIs visiting India this holiday season? Travelling tips to reduce expenses, save more, and bank smarter!

Resolving tax residency dilemmas
 

Now, let's discuss some of the most common challenges that NRIs face with their taxes - 

• Tax deducted at source (TDS)

TDS is essential to Indian taxation. NRIs need to understand when and how TDS applies to their earnings. Failure to comply with -NRI TDS regulations may result in penalties and legal issues.

• Income tax liability -

NRIs are liable to pay taxes on their income in India. This includes various income sources such as salaries, rental income, capital gains, and business profits. Calculating and submitting NRI tax correctly can be difficult, especially when the income is subject to various tax rates and exemptions.

• Investment and financial planning -

NRIs may struggle to manage their investment portfolio and finances in India. Making informed investment decisions in light of the shifting regulatory situation is crucial.

• Double taxation -

NRIs frequently face double taxation, which requires them to pay taxes in both India and their home country. To help ease this cost, India has inked Double Taxation Avoidance Agreements (DTAA) with numerous nations. However, understanding and enforcing these agreements can be challenging.

• Foreign assets reporting -

Individuals must register their foreign income, financial assets, and NRI banking accounts with Indian tax authorities. Non-compliance might lead to significant fines and legal consequences.

Moreover, an NRI tax consultant can be highly beneficial when faced with such issues. These professionals can represent NRIs in tax audits, appeals, and discussions with tax authorities, aiming to resolve problems promptly.

Inheritance and estate planning considerations
 

Real estate is the most important worry for NRIs and is challenging to deal with. However, knowing these details can help - 

• Property inheritance -

Under the Foreign Exchange Management Act (FEMA), an NRI can inherit property in India with zero inheritance tax. However, if the property value exceeds ₹30 lakhs, the new owner will be liable to pay wealth tax. Local municipal taxes are payable on the property, regardless of ownership or use.

• Selling the property -

If NRIs intend to sell inherited property because they do not plan to stay in the nation, the proceeds are taxed, and calculating net gains is complicated. There are also limits on the amount that can be repatriated in a given fiscal year.

• Other inherited assets -

The next most commonly inherited asset classifications are bank accounts, insurance claims, stock and mutual fund ownership, provident funds, and postal savings. Each has slightly different procedures for filing a claim and requires unique documentation. NRIs may need to prove the validity of claims based on wills or nominations.

Buying or selling of assets initiates capital gains taxes. Failing to file can impact legal status and result in criminal proceedings.

Tax-efficient repatriation of foreign assets
 

Indian resident sellers must pay a TDS of 1% of the sale revenues from a property under section 194IA, but this does not apply to NRI sellers. However, if a buyer purchases a property from an NRI, the buyer must deduct 20.66% as TDS on the property’s sale price. This is if the capital gains are Long-term Capital Gains (LTCG) or 33.99% in the case of Short-term Capital Gains (STCG) and deposit the TDS with the Income Tax Department under section 195.

While the seller is only required to pay tax on the capital tax part of the sale, the buyer will deduct TDS from the property’s sale price if the amount exceeds ₹50 lakhs.

Impact on foreign investment and retirement account
 

Returning to India as an NRI requires an understanding of NRI tax changes for effective retirement planning. One crucial aspect is the Resident Not Ordinarily Resident (RNOR) status, providing tax benefits during a specific period. During this phase, organise and manage your overseas finances and assets.

It is crucial to understand the eligibility criteria and duration of RNOR status based on your years spent outside India. While RNOR status offers advantages, not all foreign income and assets may be exempt from taxation. So, consult with an NRI tax professional to navigate specific rules and limitations applicable to your situation.

Proactive strategies for NRI tax-efficient returns
 

Here are a few other strategies that you can follow for tax-efficient returns - 

• Revisit your bank accounts in India -

According to the RBI, you cannot keep your NRO/NRE bank accounts if you permanently relocate to India. If you have an NRO account, convert it to a resident savings account or close it immediately. Meanwhile, if you have an NRE account, you must convert it to a resident savings account or move the funds to a Resident Foreign Currency (RFC) account.

• Evaluate the use of your international bank accounts -

According to the RBI, you can keep the international bank accounts that you opened overseas while an NRI. However, you should check to see if the legislation in the country where you hold the account allows you to keep these accounts open.

• Understand insurance policies -

Insurance policies purchased in a foreign nation may not be valid when you return to India. Policies purchased in India, particularly life insurance, should be valid when you return, provided you have paid all outstanding premiums. You must also update your bank account details and let the insurer know if your residence status changes.

Also read - Discover IDFC FIRST Bank NRI Banking Service under 3 minutes!

NRI tax planning with IDFC FIRST Bank
 

Your financial situation changes as you convert from an NRI to a resident. Following these fundamental financial bits of advice while returning from abroad can help you easily understand NRI tax and the implications of tax planning.

To ensure seamless inward remittances and effective financial transfers, you can choose IDFC FIRST Bank. Among various benefits, immediate access to the transferred funds in your IDFC FIRST Bank NRI Account is a major one. Moreover, IDFC FIRST Bank does not charge any fees for inbound wire transfers. So, apply for an IDFC FIRST Bank NRI Account now to ensure a smooth financial shift.