Consider 32-year-old Dhavnish Shukla, who worked in insurance in the UK for over four years before deciding to return to India. Upon his return, Shukla faced the complex task of bringing back his money, converting his non-resident Indian (NRI) bank account, and managing various other financial adjustments.
From changing account statuses to managing foreign income and assets, returning to India after living abroad comes with a host of financial considerations for NRIs.
Here’s a comprehensive guide, crafted with expert insights, to help NRIs smoothly transition back to life in India. Please note that this article is for illustrative purposes and you should seek professional advice before making any decisions.
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Tax implications: ROR vs RNOR
When an NRI comes back to settle in India, they can either be classified as a Resident and Ordinarily Resident (ROR) or a Resident but Not Ordinarily Resident (RNOR) for tax purposes. This classification significantly impacts how they are taxed.
If an NRI becomes an ROR, they are liable to be taxed on their global income, similar to other Indian residents. Conversely, if they hold RNOR status, their foreign income is exempt from taxation in India. The distinction is crucial, especially if the taxation in the foreign country is less than in India. For instance, if a foreign country levies a 20% tax while India levies 30%, an RNOR can benefit by paying only the foreign tax rate.
“RNOR is a no-brainer if a foreign country levies less or no tax,” said Harshal Bhuta, a chartered accountant who mostly works with NRI clients. “The UAE takes no personal income tax and the US doesn’t take capital gains tax from non-residents. So no tax in both if RNOR status is taken.” The condition of becoming ROR or RNOR is based on how many days you’ve spent in India in the past.
To avoid double taxation, RORs who have paid taxes abroad can use the Double Tax Avoidance Agreement (DTAA) to get credit for taxes paid in foreign jurisdictions.
Bringing back assets from abroad
Many NRIs accumulate significant savings in foreign accounts while working abroad. They can continue to hold these accounts (or any other securities) by disclosing them in the ITR filing under Schedule FA. Not making these disclosures can lead to scrutiny under the Black Money Act. This disclosure rule does not apply to RNORs.
If NRIs wish to bring back their money to India, they can either convert the foreign currency to Indian rupees or transfer it to a Resident Foreign Currency (RFC) account to maintain it in the foreign currency. Be mindful of the prevailing exchange rate and conversion charges if converting foreign currency to rupees.
Changing account status
NRIs returning to India need to change the status of various accounts held in India from NRI to resident accounts. This includes NRE/NRO bank accounts, NRI brokerage accounts, and mutual funds.
First, the NRE and NRO bank account status should be converted to resident status. If both accounts are held in the same bank, it’s easier to convert the NRO account and transfer the funds from the NRE account into it. “Onus is on the customer to declare to the bank that he’s come back to India and is no longer an NRI,” said Kaushal Ved, national sales head, NRI business at IDFC First Bank.
Foreign Currency Non-Resident (FCNR) fixed deposits can be held until maturity even when the holder becomes a resident. Upon maturity, these funds can be transferred to an RFC Account if the holder wants to maintain them in a foreign currency.
For mutual funds, the process of converting from NRI to resident status requires updating documents with each Asset Management Company (AMC) where units are held. “When someone becomes an NRI, we can only update our status with one AMC, and it will get updated with all AMCs through KRA. However, when someone comes back to India, they have to go and tell each AMC they have investments in,” said Urvil Modi, a registered investment advisor and founder of Samriddhi Wealth Management.
Lastly, NRI brokerage accounts need to be changed to resident accounts.
Kazi Rahman, head of NRI-sales at Zerodha, an online stock brokerage, explained that one needs to close the account and open a new one if changing brokers. If keeping the same broker, the status can be changed without closing the earlier account.
If one is changing brokers and transferring their holdings to a new account, one must obtain the buying price and purchase date to avoid tax complications. If not, the buying price in the new account will be reflected as nil and the date of purchase of securities as the transfer date, attracting a higher capital gain tax.
For Portfolio Investment Scheme (PIS) accounts, one can obtain details from the bank on the buying price, and the date of purchase, and for non-PIS, this information can be taken from the brokers directly. PIS accounts have a repatriation facility.
Key considerations
Retirement Planning: Many NRIs don’t budget for their retirement considering their high living standards abroad. “A UAE NRI might want to continue driving a Mercedes CLS, but the price of that in India is much more. Most NRIs are used to a high standard of living and it’s important for them to budget their retirement early so they can maintain their lifestyle,” said Ajay R. Vaswani, a chartered accountant who deals with NRI clients.
Health Insurance: NRIs returning at an older age might find it difficult to get health insurance due to high premiums. Mahavir Chopra, founder of Beshak.org, advised, “NRIs planning to return to India should buy health insurance while still abroad. This reduces the risk of being denied coverage upon arrival at an older age. Additionally, the waiting periods in health insurance will be exhausted, ensuring full coverage from day one in India.”
Avoiding high-commission products: NRIs visiting bank branches to convert their account status are often sold Unit Linked Insurance Plans (ULIPs) with long lock-in periods and high commissions. It’s generally advisable to not invest in such schemes.
Navigating the financial landscape when returning to India as an NRI requires thorough planning and understanding of various regulations. By being informed and taking the necessary steps, NRIs can ensure a smooth transition and maintain their financial well-being back home.