Recently, while advising a returning NRI client, I came across a situation where he had to overstay in India in this financial year because of his mother’s illness and he wanted to check whether he qualified as a resident as per Indian tax law – and if he did so, what will be the implications – will he have to file taxes in India, what about income from his investments abroad, will he have to disclose and pay tax on those in India, can he continue his non-resident accounts, what about his NRE FDs and so on!
That particular NRI is not alone.
If you are an NRI, you must be well aware of the 182 day rule which says if you come back for a visit and stay for > 182 days or more in a particular financial year in India, you will qualify as a resident.
But things don’t always go as per plan, do they?
After coming to India, God forbid, NRI can meet with an accident/illness, has a sick family member whom he cannot ignore and just leave to meet the criteria, some pending property work may be required and so on…
In this post, I will be taking all those issues into consideration and explaining the implications of change in status in a particular year.
Implications under Income Tax Act (ITA)
Depending on the number of days of stay in India in a particular year, you may qualify either as Non-Resident, Resident and NOT Ordinarily Resident (RNOR) or Resident and Ordinarily Resident (ROR). Taxability of income in India and tax filing requirements will depend on this so it is very important that you get a fix on what your residential status is/will be for this year.
I have written a detailed post on this + also given a tax residency calculator please read it to get more clarity: How NRI/PIOs can decode the Indian tax residency rules & save tax
Remember: Not every stay in India qualifies as a “visit”
Now, a question arises – you return back to India for a proper visit (you had planned to visit say Kerala and other places) & when you came back, you found that your mother is not well and had to stay back for say 3 months to take care of her – now, the question is – will that constitute a “visit”?
Reason for this question is Section 6 of the ITA which says that if you come to India for a visit, then you continue to remain Non Resident if your stay in India is < 182 days.
And if your return does not qualify as a “visit”, you will qualify as “Resident” if stay during the previous year => 60 days AND if stay in past 4 years => 365 days.
The problem is that the word “visit” is not defined anywhere in the ITA.
In example given above, in my view and interpretation of law, the stay in India CANNOT be considered as a “visit” and if this interpretation is taken, it will be a very aggressive interpretation and a lot of convincing will required as to why the visit extended for months at stretch. And in such situations, Assessing Officer can invoke 60 day rule and hold you as a “Resident”
Recent AAR judgement on this issue
Recently, in the case of AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI vs. Mrs. Smita Anand, China [2014] 42 taxmann.com 366 (AAR – New Delhi), the assessee had returned back to India after resigning from job and her stay in India was for 119 days & her query was that will she continue to be assessed as “Non Resident”.
She also told that she and her husband had planned to visit various places in India during the visit, she had to close property work in India during this period and she also was looking for alternative job opportunities outside India during the period.
AAR held NO and held that assessee will qualify as a “Resident”. Below is an extract of the order:
“……….Regarding the arguments relating to Explanation (b) to section 6(1)(c) of the Act, the test is whether the applicant had come on a visit to India in the previous year 2010-11 as a non-resident. There is no denying of the fact that the applicant had come to India from China after resigning from her employment. It cannot be said that the applicant is a non-resident in that particular year as this is the point in dispute now. If she is not a non resident, one limb of the Explanation falls. The other issue is whether she came to India only for a visit. The learned counsel for the applicant argued that was so and the Revenue submitted that she did not come to India only for a visit as her return to India is after resigning from her employment in China. The facts and circumstances of the case make us to believe that the applicant did not come to India only for a visit. The learned counsel’s argument that the applicant’s employer card was valid upto 31.3.2012, the applicant was considerably exploring possibility of job outside India, the residential house property owned by the applicant jointly with her husband had been let out till June, 2011, the applicant visited her friends and relatives in different parts of India and also travelled different locations on holidays, the children of the applicant were staying abroad at the time when applicant came to India etc., are not sufficient to conclude that the applicant came to India on a visit only. The applicant could very well resign even during the validity period of the employer’s card and that is what she has done. The activities mentioned by the learned counsel need not be necessarily proof of a visit, even a person staying permanently in India also does those activities. If a person returns to India after a long period of absence there is all the more reason he or she will like to go to visit relatives and friends in different places. Those activities are not necessarily indicators of a visit. When the applicant resigns from her employment in China, the reason for return to India does not seem to be only for a visit. The learned counsel could not give us information whether the applicant left India thereafter for any employment. In such circumstances we do not agree with the learned counsel that the applicant came to India only for a visit. On facts and circumstances of the case we hold that Explanation (b) to section 6(1)(c) of the Act is also not applicable in the applicant’s case.” (emphasis added)
Note: Though this is an AAR order which is only binding on the assessee and ITD, however it still holds persuasive value in helping other courts decide on the similar issues.
Basis the above conclusion, I am listing out following scenarios which can happen in case of your return to India.
Scenario # 1: Stay < = 60 days
Don’t worry!
You continue to be a resident. No tax implication. No requirement to file tax return if your income falls below exemption limit. No requirement to disclose foreign income in Indian tax return.
However, I advise NRIs to keep filing return in India irrespective of income level: Do read this post – Why Returning NRIs should continue filing tax returns even if no taxable income
Scenario # 2: Stay => 60 days in that financial year AND < 365 days in previous 4 financial years
Don’t worry! It is exactly the same as Scenario # 1.
Scenario # 3: Stay => 60 days in that financial year AND => 365 days in previous 4 financial years
You will qualify as a “Resident” in this case.
However, you can decide taxability only when you fulfil BOTH of the Step 2 conditions as given in my post on residential status: How NRI/PIOs can decode the Indian tax residency rules & save tax
For this, you will need to sit input your passport entries of past 15 years and then find out whether you are an ROR or RNOR. For example, if you’re calculating residential status for FY 2016-17, you need stay data from FY 2002-03 – no, I do not want to spoil your Sunday but this is a requirementJ
If you qualify as a RNOR:
Don’t worry!
If you do not have business/profession income from a business set up and controlled from India, answer is same as Scenario # 1.
If you do, said business income will be taxable in India. If income exceeds exemption limit, you will also have to file a tax return in India.
If you qualify as a ROR:
This is the situation where everything changes.
You will be liable for taxation on your GLOBAL income. That means, even if you are at home and on an extended leave, your foreign earnings will have to be offered to tax in India.
As regards tax return filing, if you have a single rupee/USD outside India (even though your Indian income is zero) you will have to file tax return in India and disclose foreign income and assets and pay tax on those.
Also note that as per the draconian provisions of Black Money Act, if you fail to disclose foreign income/assets, there is a hefty penalty and also upto a 10 year jail term.
Read these posts to get more clarity:
What to do with my 401K on Return to India?
NRO, NRE, FCNR, RFC: Tax and FEMA Implications for Returning NRI
How NRI should disclose their foreign income/ assets in Indian tax return
Note that in this case, since your income may suffer double taxation in India as well as in foreign country, India will either exempt disclosure of the foreign income (if India has a DTAA with such foreign country) or you can claim a credit of taxes paid in foreign country to part-nullify the double tax.
Special note on Tax Implication on NRE FD
Almost every NRI for whom I’ve made a financial plan holds NRE FDs in his investment portfolio as it gives a safe tax free return in India.
However, NRE FD can be taxable if you have become a person resident as per FEMA. The reason for this is that NRE FD taxation is linked not with the residential status as per ITA but as per FEMA.
NRE FDs may start getting taxable if you pick up employment on return to India – in such situations, you are allowed to continue your NRE FDs till maturity but you have to offer proportionate tax on the amount for the time that you are a resident as per FEMA.
In case you continue to be person resident out of India as per FEMA, NRE FD is not taxable to you in India even if – in such a case, if you are filing a tax return, it is advisable to disclose this income in
Lot of returning NRIs I’ve come across make this mistake especially because they’re unaware of the tax provision as a result, face problem when their case is picked up in scrutiny by Income Tax Department. Since bank does not deduct TDS on these FDs even after they return to India, they live in a mistaken illusion that interest continues to be tax free on return to India
Also read: TDS on payment to Non Residents: Analysis and Issues
Important note: If you’ve returned to India for short duration e.g. some work assignment and picked up a job in India (even under the Indian arm of the same employer), in my view, it is a better option to play conservatively and start offering the interest income from tax – this is because if you return back to India and pick up employment, even if your intention is not to settle down back in India, it will be very difficult to prove it in a tax assessment and claim that you are a “person resident out of India” as per FEMA. I have discussed this issue in this post in detail: Financial strategy for NRI/PIOs returning for short duration to India
Implications under Foreign Exchange Management Act (FEMA)
If there is a change in your residential status, it can also have implications under FEMA apart from ITA and this is what many returning NRIs are simply unaware of or ignore.
Calculation of residential status under FEMA is completely different from ITA (in fact, much simpler). In ITA, we check “no. of days of stay” for the whole of the financial year – in FEMA, what needs to be checked is the “intention” of the person – if he does not have any plan to settle down in India, then irrespective of the time of his stay, he will continue to be qualified as non-resident from the day of his return to India – in case he does settle down in India permanently, then he qualifies as a resident from the day of his return to India.
I have discussed this in detail in this post: NRI Definition: FEMA Act VS Income Tax Act
Status = Resident Out of India (ROI)
As we discussed in previous examples, if you overstay in India due to reasons beyond your control but you do not have an intention to stay back to India and will want to return back, you continue to qualify as a Resident out of India (ROI).
Following are the implications in such a situation:
- You can continue to hold your non-resident accounts – there is no need to convert those accounts into resident accounts
- You can continue to mention “non-resident” status in your investments – no need to do a fresh MF KYC, or stop transacting through NRE PIS demat account etc.
- You can continue your NRE FDs.
- You CANNOT open a fresh PPF account/small savings schemes in India. However, you can continue to invest in PPF if you had opened earlier.
- You can continue your NRE FD investments in India – no need to convert them to FCNR/RFC
- You can continue to invest outside India without any restrictions. Some restrictions apply in gift/loan transactions with residents of India – read these posts to get better clarity: FEMA Posts on this website
Status = Resident in India (RII)
If you return to India and pick up employment, you will qualify as a RII and the implications will be as follows:
- You CANNOT continue to hold your non-resident accounts – you need to immediately close or convert your non-resident accounts into resident accounts
- Your NRE FDs can run till maturity but it will start becoming taxable from the date of your return to India. You also have the option to convert your money in NRE FD/savings account to an RFC account which is a foreign currency account.
- You need to modify your residential status as “resident” in all your investments – for mutual funds, you will have to do a fresh KYC, transfer your demat holdins from NRE PIS demat account to a normal demat account and close the PIS account etc.
- You can open a fresh PPF account/small savings account in India. You can even extend the PPF if it is nearing maturity.
- You can purchase any property, even an agricultural one. You will have to deduct applicable TDS – read more in this post: TDS Deposit and Return Filing Procedures in Property Transactions
- You can send money outside India only upto the LRS limit – read more here: Liberalised Remittance Scheme (LRS) under FEMA: Analysis & Issues
Investment implications on change in residential status
I have already discussed tax implications on change in residential status. Since taxation is an important factor in product selection for investment portfolio, a change in tax incidence may ask for re-look w.r.t. product suitability in the client’s portfolio.
For example, in case of an NRI (from jurisdictions other than those that tax foreign income), NRE FD is a highly recommended investment option. However, in case person become RII as per FEMA, the same FD becomes a taxable FD – in such a situation, a liquid fund will be a much better option as compared to FD given its tax deferral advantage and especially where the client falls in the 30% tax bracket.
Also read: NRIs: Do not go overboard on NRE FDs
Change in residential status will also impact the applicable TDS rate and though there is a positive side here, it should not impact your investment selection – while for NRIs, any income (which is not tax exempt like an equity MF) is generally taxed at maximum rate, in case of residents, TDS rate can be lower – this is not really a benefit because irrespective of residential status, anyway you can file a tax return in India and claim a credit for such TDS.
Important thing is: Not to take any knee jerk reaction just because your residential status gets changed. One should try to do some advance planning to foresee the implications of status change and then position investments in such a way so as to keep the focus on financial goals and be compliant in every way with applicable laws in India.
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