Moving back to India? What are the key tax implications?

The current pandemic has triggered a significant move back to India by Non-Resident Indians (NRIs). While the reasons could be varied in terms of whether they want to be with their familiesorare using this opportunity to settle back in India, the fact remains that this move will requirethem to look at their tax positions in India.

The important question here is what will be the impact on their residential status, will they be taxed on their foreign income in India, can they continue to hold foreign assets, can they continue to hold NRE (Non-Resident External) accounts etc.? In short, they need to look at the provisions of both the Foreign Exchange Management Act (FEMA) as well as the tax provisions governed by the Income Tax Act.

Determination of residential status is important, and these are different under the above two regulations.

As per FEMA, aperson is resident in India if his stay in India in the last financial year (FY) was more than 182 days.For example, a person shall be considered as resident in India for FY 2020-21 if his stay in India during last FY 2019-20 was more than 182 days.

However, this stay criteria does not apply fora person coming to India for taking up employment or for carrying on a business/ vocation, for any other purpose, with an intention to stay in India for an uncertain period. In these cases, the individual shall be considered as resident in India even if his stay in India during the preceding FY did not exceed 182 days. Take an example of an individual who left his job overseas and came back to India permanently during the current year; he shall be considered as resident as per the Foreign Exchange Management Act from his date of move to India, even though he was not present in India during last FY 2019-20.

From a taxation perspective, an individual is considered as a Resident in India, if the individual meets either of the “basic conditions” of presence in India as below:

(i) 182 days or more during the currentFY; or

(ii) 60 days or more during the current FY and 365 days or more in totalduring four preceding FYs.

For an Indian citizen/ Person of Indian origin visiting India, while based overseas, the 60-day threshold is extended to 182 days to attain the status of resident as per Income Tax Act.

Further, a resident individual would be considered as a Resident and ordinarily resident (ROR) in India if along with the basic conditions, the following conditions are also satisfied:

• Present in India for more than 729 days (in aggregate) during preceding 7 FYs, and

• Resident in India for 2 or more FYs out of preceding 10 FYs.

In case the above conditions are not met, the individual will qualify as Resident butnot ordinarily resident (RNOR) in India.

As per recent changes in tax laws, from FY 2020-21, the 60-day threshold (as mentioned in the basic conditions) for Indian citizens/ Persons of Indian origin visiting India is extended to 120 days (instead of earlier requirement of 182 days) if the individual has income (excluding foreign sourced income) exceeding ₹15 lakhs.

Additionally, an individual will be considered as a RNOR in India from FY 2020-21 onwards, being a citizen of India whose total income (other than foreign sourced income) exceeds ₹15 lakhs and is not liable to tax in any other country by reason of his domicile or residence or any other criteria of similar nature.

Having determined the residential status, let us look at the impact of the same on the assets being held by such returning NRIs.

Returning Indians who are residents as per FEMA, may continue to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India, if such currency, security or property was acquiredby such person when he was resident outside India. However, they would have to re-designate NRE/NRO bank accounts in India as resident accounts. This means that the tax exemption available for NRE account related incomes, will not be available.

Intimation of change of residential status for other investments held in India is also important, otherwise higher tax withholding applicable to non-residents, would continue to apply. Restrictions on acquiring immovable propertyetc. abroad may apply.

The taxability of overseas income in India would depend on residential status as per the Income Tax Act. For NR/RNOR individuals, income received outside India from foreign assets would not be taxable in India. However, taxpayers who are ordinarily resident in India would be subject to tax in India on the overseas income and will need to disclose the details of overseas assets in the tax return. Hence, it is important for taxpayers to plan the disposal of overseas assets etc. before they acquire the ordinarily residency status in India to minimise taxation of overseas income in India. Relief available under the double taxation avoidance agreements with the relevant country will need to be examined, including the availability of credit for taxes paid overseas.

Returning individuals should therefore focus on understanding the change in residential status, the impact on India taxation, and plan their taxation matters accordingly.

Saraswathi Kasturirangan is Partner with Deloitte India,Vijay Bharechis a Senior Manager with Deloitte Haskins and Sells LLP