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A tax checklist for returning NRIs
Disclose foreign assets, redesignate NRO a/c and open a Resident Foreign Currency a/c to park forex earnings

India remains one of the fastest growing economies in the world. For those who are planning to return and settle in India and wish to build a focussed investment portfolio, there's no better time. However, adequate care has to be taken to ensure that your hard-earned wealth is properly diversified to minimise risk, is tax efficient and is compliant in all ways with the extant legal framework.

CLOSE/RE-DESIGNATE ACCOUNTS

If you have returned to India with the intention to stay back, inform your bank for a change in your residential status in their records and re-designate your existing Non Resident Ordinary (NRO) account to resident Savings account. Also, your existing NRI demat account under the Portfolio Investment Scheme (PIS) cannot be continued anymore and a separate resident demat account should be opened and shares/units in that account should be transferred to the new account. Your Foreign Currency Non-Resident (FCNR) deposits can run till maturity but your earnings in Non Resident External (NRE) savings account will have to be transferred to resident savings account, or you have an option to transfer it to Resident Foreign Currency (RFC) account.

OPEN RFC ACCOUNT

The account is a safe way to park your foreign exchange earnings in India. As per the extant RBI regulations, you are allowed to open a Resident Foreign Currency (RFC) Account and credit your foreign exchange earnings. Persons of Indian Origin (PIO) who, having been resident outside India for not less than 1 year, and have become resident on or after April 18, 1992, are eligible to open the account. Persons who returned to India prior to April 18, 1992 after having been resident outside India for not less than one year provided they hold Returning Indians Foreign Exchange Entitlement (RIFEE) permit are eligible as well. Interest is taxable and there is a penalty on early foreclosure of RFC deposit. Repatriation is allowed and both funds and interest thereon is free from all restrictions and can be transferred to NRE/FCNR accounts or investment outside India (see table).

REDUCING TAX LIABILITY

As per the Indian income tax law, the moment you become a resident Indian (which given the income tax rules generally happens a couple of years after you're back in India), you start getting taxed on your 'global income'. Of course, the benefit of Double Taxation Avoidance Agreements, or DTAA, may be availed if the overseas income is also getting taxed locally. One good way you can hold the global tax liability as stated above is to plan your stay in India in such a way as to try to maintain Resident and Not Ordinary Resident (RNOR) status for the maximum possible time. In such a scenario, except for some incomes, rest of your foreign incomes will remain exempt from tax.

As per RBI norms, you are free to hold, own, transfer assets outside India if such assets were acquired by such person when he was resident outside India or inherited from a person resident outside India. However, note that if you plan to sell those assets after becoming resident Indian, there might be a capital gains tax liability under the Indian tax laws. To avoid that, it's wiser to explore the possibility of disposing off those assets before you earn Indian resident status. Also, note that the Supreme Court has clarified in the case of Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 that income received outside India and remitted to India will not be considered 'receipt' and shall not be taxed in India. Some more ways to reduce tax liability on your return to India are:
> Spreading income through gifting assets to parents/major children

> Creating a separate tax file for Hindu Undivided Family (HUF) and taking advantage of separate exemption limit available to HUF

> Investing in tax-free bond issues announced from time to time

OTHER POINTS TO REMEMBER

> Inform the respective companies from which you have purchased insurance or investments in India of the change in your status and new communication address. This will help the company to stop deducting the mandatory Tax Deduction at Source (TDS) on payouts at the rate of 30.9 per cent and there will be no glitches at the time of servicing.

> If your income is above exemption limit, you will have to file your tax return. In case you hold foreign assets, you need to disclose details in your tax returns. Note that the Undisclosed Foreign Income and Assets (Imposition of New Tax) Bill, 2015 imposes stringent penalties for not doing so.

> Look at your portfolio afresh, including insurance needs. Think before buying a residential house as it can lock a major portion of your savings towards retirement.

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Any gain arising from a sale of property located in India is taxable in the year of transfer and is subject to capital gains tax

I am a non-resident Indian (NRI) and a resident of the US. I want to buy a property in India and I want to know what will be the tax liability when I sell the property.

—Ramesh Gupta

Any gain arising from a sale of property located in India is taxable in the year of transfer and is subject to capital gains tax. Depending on the period of holding the property, capital gain will be considered as either long-term capital gain (LTCG—if holding period is over 36 months); or short-term capital gain (STCG—if holding period is 36 months or less).

LTCG is subject to a tax rate of 20% (excluding surcharge and education cess) after indexation of cost. It can be claimed as exempt to the extent it is re-invested in India (before filing of India tax return) in specified bonds or a residential house (to be either purchased within 2 years or constructed within 3 years of transfer of the land). There are certain restrictions, however, on the sale of the new asset bought and the quantum of investment made in bonds. If due to some reason, the capital gains remain un-invested until the due date of filing of India tax return (i.e., 31 July), the money could be deposited in a capital gains account scheme with a bank and subsequently withdrawn for re-investment. STCG is taxable at progressive rates of 10-30% (excluding surcharge and education cess).

Method of calculation of capital gains: Tax is payable on net consideration, which is full value of consideration that would be received on transfer minus cost of acquisition (indexed cost in case of LTCG), cost of improvement (indexed cost in case of LTCG), and cost incurred to execute the transfer. Any loss on sale of property can be carried forward up to eight years from the year of sale by filing a tax return. The loss can be offset against LTCG or STCG. Therefore, any gain on sale of house property would be subject to tax depending on the period you hold the property for.

I live in New York and hold a non-resident rupee account. I want to gift a house to my sister who lives in India. I wanted to know what will be the tax implications for both of us?

—Karunya Talwar

There is no gift tax in India. However, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration (i.e., without a quid pro quo), except gifts received from a relative. Any income from such property or any gains on the sale of such property in India will be taxable on its receipt in the hands of the legal owner.
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However, any income from the property (for example, rental income) or subsequent gain from sale of the property shall be taxable in India

I have been working with an airline company in Dubai for a few years now. I have a few fixed deposits in India. Will the interest earned on these deposits be taxed?

—Manas Gupta

Any income earned or received in India is taxable in India. Therefore, interest earned on the fixed deposits in India is taxable in India.

However, there are certain exemptions available under the Income-tax Act, 1961. Any interest earned on the deposit in an non-resident external (NRE) account (savings or fixed deposit) is exempt under section 10(4)(ii) of the Act for an individual who is a person resident outside India as per the Foreign Exchange Management Act,1999 (Fema) or a person who has been permitted by the Reserve Bank of India (RBI) to maintain the aforesaid account.

Interest on a non-resident ordinary (NRO) account or other resident accounts is fully taxable (special exemptions apply for NRE and foreign currency non-resident, FCNR, accounts only). Interest is taxable at progressive rates of 10-30% (excluding surcharge and education cess).

We would recommend that you check the type of account you hold in India and your residential status in India under Fema rules to determine the taxability of the interest income.

I am a non-resident Indian (NRI) based out of Sweden. I have been living here for the past 25 years. I want to buy a house in my father’s name in India. Will either of us be taxed for it if I do so? I also wanted to know the tax aspect of the same.

—Gurpreet Singh

If you buy a house in your father’s name, it will be termed as gift. Gift of any immovable property, where the stamp duty value of the property exceeds Rs.50,000, is taxable as “Income from other sources” in the hands of the recipient of the gift. However, certain gifts are not subject to tax.

In case the property is gifted to a relative, then there would be no tax implications, on the recipient or on the giver. The term ‘relative’ is defined under the income tax laws. This definition includes one’s parents.

Therefore, immovable property gifted by you to your father will fall under the exception and will not be subject to tax in India at the time of purchase.

However, any income from the property (for example, rental income) or subsequent gain from sale of the property shall be taxable in India.

Under the income tax laws, the term relative includes spouse, siblings, spouse of siblings, brothers or sisters of either of the parents

I work in a bank in Kuwait and have a rupee fixed deposit in India. The interest is credited to my savings account and tax is deducted at source (TDS). Do I need to file a tax return?

—Kamal R.

It is mandatory for an individual to file her income tax return if total income before claiming tax deductions under sections 80C to 80U of the Income-tax Act, 1961, exceed Rs.2.5 lakh in a given financial year. This can include investments made in Public Provident Fund (PPF), life insurance contributions, interest on education loan, and donations made to specified charitable institutions. The limit is Rs.3 lakh for senior citizens (60-80 years) and Rs.5 lakh for super senior citizens (above 80 years). If the total income (before claiming deductions) in India does not exceed the limits specified above, the individual is not required to file a tax return in India. If TDS is more than the actual tax liability, a tax return may be filed to claim tax refund.

What are the TDS linked regulatory requirements with respect to purchase of immovable property costing more than Rs.1 crore when the buyer is a non-resident Indian (NRI)?

—Jayesh Pradhan

On purchase of immovable property (other than agricultural land) worth Rs.50 lakh or more, the buyer is required to deduct (and deposit) withholding tax at the rate of 1% from the consideration payable to the resident seller. Withholding tax deducted by the buyer needs to be paid to the credit of the central government within seven days from the end of the month in which the tax deduction is made. Tax can be paid online or offline along with Form 26QB. The seller of the property must furnish her permanent account number to the buyer.

I want to buy an office space for my sister in India, and I’m an NRI. Will either of us be taxed for this?

—Kanv Khatri

There is no gift tax in India. Accordingly, there will be no tax liability for you. However, income tax is payable by the recipient of the gift on any sum of money, movable property or immovable property received without consideration (i.e., without a quid pro quo), except if gift is received from a relative.

Under the income tax laws, the term relative includes spouse, siblings, spouse of siblings, brothers or sisters of either of the parents, and so on.

Therefore, a gift of office space that is located in India to your sister will not be subject to tax in India.
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PIOs are allowed to repatriate up to $1 million per financial year out of the sale proceeds of assets in India acquired by her by way of inheritance

I am a non-resident Indian, and had invested in sovereign bonds (G-secs) in India 11 years ago. I want to withdraw the matured money. Will I be taxed?

—Christopher Samuel

Amount received on maturity of G-secs is not taxable in India if they are notified tax-free bonds. From your question, we infer that the bonds have already matured and the money is lying in your bank account in India. If you intend to withdraw the matured money, there should not be any tax deducted at source (TDS).

Can a Person of Indian Origin (PIO) sell inherited property in India and repatriate the amount? What are the tax liabilities for the same?

—Chandan Prakash

PIOs are allowed to repatriate up to $1 million per financial year out of the sale proceeds of assets in India acquired by her by way of inheritance. This is subject to production of documentary evidence in support of inheritance of asset and a certificate from a chartered accountant in the prescribed format. Remittances exceeding $1 million in any financial year require prior permission of the Reserve Bank of India. Sale of property situated in India will be taxable in the year of sale.

An immovable property held for more than 36 months is classified as a long-term capital asset. Capital gains on sale of these assets are subject to tax of 20% (excluding surcharge and education cess). For an inherited property, holding period is calculated from the date of acquisition by the original owner. Taxable capital gain will be net sale proceeds less indexed cost of acquisition (i.e., adjusted as per cost of inflation index or CII) less cost of improvement. Capital gains can be claimed exempt to the extent the money is re-invested in India in specified bonds or a residential house (to be either purchased within two years or constructed within three years of transfer of the land). If the capital gains remain uninvested until the due date of filing of India tax return (31 July), you can also put the amount into a Capital Gains Account Scheme (CGAS) not later than the due date of filing your India tax return. You can subsequently withdraw this amount for reinvestment.

If the entire amount is not reinvested or not deposited in CGAS, the remaining portion of the gain will be taxable. A provision is available to non-resident Indians (NRI) with investment income and long-term capital gains as the only sources of income. They are exempt from filing tax return in India if tax is deducted at source (TDS) on such income.

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In case of LTCG, the difference between the sale price and indexed cost of acquisition will be taxable as LTCG at the flat tax rate of 20%

I’m a non-resident Indian (NRI) living in Germany and have inherited a piece of non-agricultural land in India. I am going to sell it soon. Can I repatriate the sale proceeds?

—Ashish Sinha

An NRI may remit an amount up to $1 million per financial year (i.e., 1 April to 31 March), out of the balances held in her Non-Resident Ordinary (NRO) rupee account, including sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement), for all bona fide purposes, subject to payment of applicable taxes in India, if any.

So you can remit the sale proceeds from sale of non-agricultural land subject to satisfaction of following conditions:

(a) income-tax, if any, has been deposited

(b) documentary evidence of inheritance is provided.

Further, any gain arising from the sale of property is taxable in the year of transfer and is subject to capital gains tax.

Depending on the period of holding of the property, capital gain will be considered as either: long-term capital gain (LTCG), if period of holding is more than 36 months; or short-term capital gain (STCG), if period of holding is 36 months or less.

As you had inherited the property, the period of holding of the previous owner would also be taken into consideration.

The cost of acquisition will be the cost incurred by the previous owner to acquire the property.

In case of LTCG, the difference between the sale price and indexed cost of acquisition will be taxable as LTCG at the flat tax rate of 20% (plus applicable surcharge and education cess). LTCG can be claimed as exempt from tax to the extent that it is re-invested in India in another residential property or specified bonds, subject to certain specified conditions.

If due to some reason the capital gains remain uninvested till 31 July—the due date for filing of tax returns in India—then the amount of capital gains could be deposited in a capital gains account scheme with a bank (not later than the due date of filing your tax return in India) and subsequently withdrawn for specified reinvestment.

In case of STCG, the difference between the sale price and cost of acquisition will be taxable at applicable slab rates (plus the applicable surcharge and education cess).

Any loss on the sale of property can be carried forward up to eight years from the year of sale by filing a tax return and be offset against long-term or short-term capital gains.
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An Indian citizen or a person of Indian origin residing out of India is termed a Non resident Indian (NRI).

NRIs are allowed to invest in mutual funds in India on a repatriable or non-repatriable basis subject to regulations prescribed under the Foreign Exchange Management Act (FEMA).

Application form filled and signed by the NRI must be submitted at official points of acceptance.

It must be accompanied by payment instrument drawn in favour of scheme. The applicant must indicate whether the investment is being made on a repatriable or non-repatriable basis.

KYC papers and copy of PAN must be given.

A power of attorney (POA) holder can open and operate a mutual fund account on behalf of an NRI. To operate the mutual fund account, the POA has to be registered with the mutual fund.

The POA holder has to submit the original copy of the POA or a duly notarised copy of the POA.

The POA must be duly executed with signatures of both the NRI as well as the POA holder.

If investment is on a repatriable basis, the payment instrument must be drawn on NRE or FCNR account of the investor.

Investments on non-repatriable basis can be made by drawing payment instrument on NRE/ FCNR/NRO account of investor.

Redemption proceeds (after deduction of taxes) are paid in rupees by cheque to the account number provided. Some banks also offer direct credit of redemption proceeds to the NRE/NRO account.

If investments are made on non repatriable basis, redemption proceeds shall be credited to NRO account.

Tax is deducted at source on capital gains made on investments by NRIs. Investments in equity funds held over 1 year are exempt from tax and hence no tax is deducted at source.

A digitally signed TDS certificate is sent along with the redemption proceeds.

The investments carry the right of repatriation of capital invested and capital appreciation only till the investor remains an NRI

Overseas address is a mandatory field that requires to be filled in the mutual fund application made by a NRI.
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