NRIs returning to India: Avail the benefits given under tax laws

Home-coming would be easier on pocket with proper understanding & utilisation of benefits given under Indian tax laws

It is praise worthy weakness of a man to love the places where he played in his childhood, where he was educated, where he dwelt and call back to the mind his childhood pleasure. The recent fears of recession in the west compounded by the growth story in India, as well as the lure of returning to one's own motherland may change the minds of many Indians who have settled abroad to return to India permanently.

This may mean that they could be looking at resettling in India by selling their property abroad which they would have acquired whilst being there. This decision may not be just an emotional one but would have to factor other perspectives like taxation, exchange control regulations etc, which may significantly impact the decision of shifting back to India and its timing.

Subin, a person of Indian origin, was employed in the US for the past several years. He wants to return to India permanently. He owns several assets in the US such as a residential property, a car, and investment in shares in US based companies. He has also invested in mutual funds there. He is pondering on whether to sell his property in US before he returns to India permanently, but wants to get his car to India and if permitted, retain his investments in the US.

While discussing his idea of coming back to India permanently with a friend, he found out that there were certain advantages that he could derive in case he qualifies as a Non-Resident (NR) in India under the Indian tax laws. He also found out that the simplest way to qualify as a NR in India is to spend less than 60 days in India in any particular tax year, which runs from April 01 to March 31 of the subsequent calendar year. Accordingly, Subin has planned his return in such a way that he qualifies as a NR in India in the year in which he returns to India.

His decision to return to India would have both direct and indirect tax implications, such as income tax, wealth tax and customs duty. He would also need to take note of implications from an exchange control regulations perspective.

The implications under each of the above mentioned laws need to be understood distinctly. As per the Indian income-tax laws, NRs are taxable in India only on income which accrues in India or is received in India. In the case of an NR, once an income is earned and received outside India and it is brought to India at a later date, it would not be taxable in India.

This would mean that Subin could sell his residential property in US, while he is an NR or a Not Ordinarily Resident (NOR) in India, and he would not be taxable in India on the gain that he makes from the sale. Similarly, he would not be taxable in India on the income earned and received by him in the US from his investments till he qualifies as a NR or NOR in India. Once Subin loses the status of a NR or NOR and qualifies as an Ordinary Resident in India, he would be taxable in India on his global income.

This would typically happen in the third or fourth year from the time Subin shifts to India (depending on how extensively he has stayed in India prior to shifting to India permanently). However, in case Subin is paying taxes on any income in the US which is taxable in India as well, he may be able to avail relief under the Double Taxation Avoidance Agreement which India has entered into with the US, for avoiding double taxation of the same income in both the countries.

The provisions for determining residency under the wealth tax laws are the same as that of the Income Tax laws. In the case of NRs and NORs, the current wealth tax provisions provide that any assets located outside India would be excluded from the ambit of wealth tax in India. Hence, Subin will not be required to pay wealth tax in India on the assets that are located outside India, as long as he qualifies as a NR or NOR in India.

If he intends to reside in India permanently, he would not be required to pay wealth tax on money and the other assets brought by him into India from the US, within one year immediately preceding the date of his return or later. This exemption is limited to seven successive years which immediately follow the year in which Subin returns to India.

Also, as per Baggage Rules, 1998, since, Subin had used his car in the US for personal purposes for more than a year and he is transferring residence to India now, he could bring his car with him but would be required to pay customs duty on the same. However, considering the quantum of custom duty liability likely to arise due to the import, it may be a better idea to buy a new car in India subsequent to shift of his residence. In addition to the car, he would be able to get certain specified used personal effects upto a specified threshold without payment of customs duty.

With regards to exchange control implications, Subin would be able to open a Resident Foreign Currency Bank (RFC) account. He could then transfer, through appropriate banking channels, the amount that he has in his US Bank account into such RFC account without any limit.

He can continue to hold his other investments in the US, since he had acquired these when he was a resident outside India. The dividend from the US companies and mutual funds and interest income from his US bank account which he receives from his investment that he continues to hold in the US can also be credited to the RFC account.

Also, he needs to watch out for the upcoming Direct Tax Code (DTC) which has certain significant proposed changes relating to wealth tax.

For Subin or any other NRI, the decision to return to India may not be just an emotional one, but also needs to be made taking into account the current regulatory environment and proposed changes being made to them. With a proper understanding, efficient planning and utilisation of the benefits provided under the tax laws in India, home-coming would not only feel good on the heart but also relatively easier on the pocket.

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