Video transcript (auto-transcription can cause some errors):
Hello, and welcome. In this video, I’m, talking about certain, common, NRI financial confusions and misconceptions that I come across in, the various in the forums that I participate in, answer the questions, and in dealing with the clients. Right? So I’ve just listed down some. It’s not all.
And, definitely, do please share other, issues, things which you want videos on. So I’ll make videos on those issues. So first, the misconception or the confusion is, that the NRE FD on return continues to be tax free. Right? So, basically, NRE FD is treated as tax free.
That is a big misconception. Even if it is tax free in India, it will be, most likely be taxed in the country of residence. Right? Because the host country, the country where you are a resident, will tax the NRE FD. So NRE FD, thinking that it is a tax free investment is a big kind of mistake.
Right? Now even in India, when you return back to India, you can continue the NREFDs, till maturity. However, as per the exemption provisions, which is given under the income tax act section 10, the exemption is linked to the person’s, nonresident status in FEMA. And as per FEMA law that you when you return back to India, you become a resident and you take up a business or a profession in India. You become a resident from the day one of your return.
So when you return back to India in such case, you the NRE FD, the exemption provision gets lost. So that NRE FD starts becoming taxable from the day of your return to India. This very few people know because, see, the bank will continue to keep it tax free for you till the time you maintain the NRE FDs. Bank will not have a problem because bank is not required to deduct any tax on the NRE FDs, but it you as a as a resident as per FEMA cannot avail the, the the exemption given by the income tax law, and you have to so when you file your tax return from the day of your return in India, you need to calculate the proportionate tax and offer that tax, in your tax return for that particular year. Right?
So you need to be a bit careful about the NRE FD thing. And the NRE FD income till the time you were in US, you or any other country, you should have been offering the, the, the income FD income to tax in that country. Okay. Then another misconception is that, I can continue my nonresident accounts till the are not settled in India. This is a this is a wrong, notion.
See, and, basically, the residential status as per income tax act is different. As per FMI, it is different. Right? Now where from the requirement is? The requirement to re designate nonresident accounts to resident accounts arise under which law?
FEMA law. Right? Now r NOR is a status under which law? Income tax law. So what you are doing, you are trying to mix both things.
Right? That is wrong approach. So as I said, when you are a non resident and you return to India for the purpose of business or for the purpose of employment or for any other purpose, which indicates your intention to stay back in India and not return back. Right? You become a non you become a resident from the day one of your return.
So the responsibility to redesignate the account start from that particular day, and the FEMA law gives you a reasonable time to make the changes. That means you have to make the make the change, make the n, the, NRO/NRE accounts back to resident accounts. You need to close your, nonresident, demat account, open a resident demat accounts, update the changes across all mutual funds, all those places. So you have to do all this within a reasonable time. Now what is reasonable time has not been defined, but the penalties have been defined.
Right? So it’s not that till it is, there till you are r naught, you can continue your non resident accounts. No. It is not like that. The r naught status you may have, 1 to 3 years till 3 years also, you may get the r naught status.
Doesn’t that doesn’t mean that you can push it to 3 years. Right? You need to restart the process of conversion. Once you are back and once your family has shifted and you have taken care of the logistics and everything, then you need to get down to business in terms of your financial things and starts, kind of, you know, closing 1 by 1 things. Residential status as per ITR and FEMA is the same.
This is again a confusion. So just, briefly, I have made separate video on, residential status as per income tax act. Right, and residential status as per FEMA, I have not made the video, so I’ll make a video on that. So India says that there are 3 residential status, nonresident, resident and not ordinary resident, and resident and ordinary resident. Right?
There are 3, basically, statuses in, Income Tax Act. Now these statuses are mostly on the days of stay, the number of days stay in India. Right? And then there are other criteria also that, you know, some income criterias are there and some deemed residency criterias have been included now. As per FEMA, it is basically again, there is a days, this thing, 182 days and above, but the wordings of the if you would see the FEMA act, the wording is that resident is a person who is, like, 182 days or more in the preceding year, right, in the preceding year, but it does not include a person who has come for business, who is in India for business, professional, vocation.
So if you read the FEMA law, the FEMA definition, it is more on the intent of that person. Also, the FEMA law uses the word reside. It doesn’t use the word stay. The stay is there in the Income Tax Act. The case laws say that stay and reside have different meanings.
Reside means some permanency has to be there. Right? So FEMA is more on the person’s intention. Right? So for all practical purposes and for ease of understanding, understand the day you move out to from India, you become a nonresident, the day you move back to India for the purpose of business, you become a resident.
So both the definitions are different. Right? Money see, I understand, though. It’s a complicated thing, you know, because the provisions there is interplay of income tax act, FEMA, then there is the black money act, then there are, you know, other, you know, 4, 5 acts are there. So I’m trying to make things as simple as possible a bit even if I make simpler the purpose of the video we serve.
I just hope that I don’t make things more confusing than what it may already be in your mind. So, if you still have confusions on any things, please do share in the comment section. I will reply. Right? Okay.
Money sent to India may be taxed. Now a lot of people, they have this thing that if for example, I’m sending I’m a NRI. I’m sending money to India. It may be held taxable or not. See.
Let understand this. As a basic principle of law, India can tax only the income. India doesn’t tax remittances. Right? There may be certain countries who do tax remittances, but India is not amongst those countries.
So India taxes it on income. Only one provision is there where India says that if, Indian Income Tax Act says that if the money is directly received in an Indian bank account, it will be held taxable in India. Right? So that is a one thing that you need to ensure, that you don’t transfer the income directly into an Indian bank account. Right?
You receive the income in a US bank account or whichever country you are living in, and then from there, you can transfer from that bank account to Indian bank account. Remittances are not taxable. Even for the provision of when you talk about transfer of income now, in case of seafarers, there has been a given a, a favorable kind of a concession by the department where they see that, if a seafarer for a seafarer who is operating in, like, foreign waters, he doesn’t have a bank account. You don’t have a bank account in your foreign waters. So and there, you travel a lot of countries.
Right? And, so what they do is that they credit into the NRE account of that person. So there were some judgments in 2016, 17. There was a big controversy where they started saying that it is taxable in India because of that provision, that it is taxable in India. No.
Then CBT issued a circular number 3 slash 2017, which said that for only seafarers, they gave the concession that if the salaries are transferred in the person’s, NRE account, it will not be taxed in India. Right? Because it’s not a Indian salary. It’s a work that was done in foreign waters. You cannot tax it in India.
So that exemption is there, but it is only for seafarers, not for people like you and me. Right? So never transfer an income into an Indian bank account. Take it outside India, shift to India, but always preserve the documentation of the source of funds. Indian tax authorities have full right to check and ask what is the source of funds.
Any credits to an Indian bank account, they have the right to ask. Right? Okay. Investing in India in residential. So now some people, they there are certain restrictions under FEMA that you can buy this, you cannot buy this, and what people do is that they invest.
Now there are certain restrictions in under the US tax law, if you see there is a PFIC, taxation, where if, the person who is a US resident investing in Indian mutual funds or pooled investments will be subject to, very high tax and, reporting requirements and everything. So what they do is that they, transfer the money to parents and then and from parents account, it gets invested. So, basically, per se, it’s a wrong practice because see, understand this, India wants that whatever non a non resident why India requires a non resident to convert your resident accounts to non resident? Because it wants to track how much money is coming through non resident, how much money is going out of the country. Right?
They want to track that. And if you try to circumvent all this by investing through resident parents’ names and all, you are basically exposing yourself to a risk of scrutiny. Some illegal scrutiny can open up, if you do this, maybe significant amount or maybe your luck is bad. Right? Then then understand one thing.
If your return gets opened in a scrutiny, that’s scrutiny, it there is no prohibition that, prosecution or any other kind of a penalty cannot be imposed on the other laws. Right? So you don’t kind of get any protection from that. So, per se, it’s a wrong practice. It’s a very, very prevalent practice.
Many people do it. Many people make the mistake that they do it. They don’t even file the parents’ returns. Then the parents get the notices of because the there are significant transactions as per the applicable rules of the income tax act, and the details get reported to the income tax authorities. They check that against that parent’s name.
The parent is not employed anywhere. He’s not earning any income, but he’s making so many investments in mutual fund. Then the parents get noticed. Then the parent has to explain that it is a transfer of gift from my child to me, and all that thing happens. So, ideally, I will request you to desist from these practices because of the regulatory scrutiny and the risk, in that, but final choice is yours.
Not understanding host tax rules on Indian investments. Now, for example, best example as I discussed is the PFIC rules that US has for any foreign pooled investments and not doing any pre immigration planning. Pre immigration planning is that if you’re going to US, you should know how US taxes Indian investments. And if you have, like, mutual fund investments, you can you can completely eliminate those mutual fund investments before moving to US so that you don’t have any tax unrealized tax implications on that mutual fund. You don’t have to report form 8621 every year for every mutual fund.
Right? You’re saved from all that hassle. If you plan your investment, if you consult the right persons beforehand, before moving to any country, right, So because from that time you get informed that you have to move to a country, you generally get at least 1, 2 months. So you can do some planning there. You can even convert your accounts from resident to nonresident if you have the visa and all that available, and you can if the bank or the institution allows you, you can even do that work before moving out of India.
No need to preserve documentation. So the so you should preserve documentation for foreign income and assets because that can be asked and preserve them indefinitely along with the tax paid documentation. Income tax Indian tax inform thought this would question the fund transfers. So please understand here, this is again a misconception. If the only fact that you are a non resident doesn’t allow you it doesn’t give you any immunity in terms of that the Indian tax authorities won’t question any fund transfers to your account in India.
As soon as the money hits to any Indian bank account, it may be an NRO, NRE account also. Right? It the they have the right to question it. Also, there is a significant transaction reporting because of above a certain amount, the transaction has to get reported to the income tax department. So you need to preserve the explanation of the source of funds, even if the income arises outside India.
Right? Okay. In case of double tax so so here see, understand the general principle here is that mostly and this is the general rule. There are exceptions. Generally, if an income tax department says that this income that you have transferred, say, 25 lakhs in your NRE account, it should be taxed in India.
The onus is on the assessor to prove that it is not. And how will the assessor prove? 1st is by the way of the passport entries. Right, that I was not a nonresident for that period. You can see my, you know, details.
Then the employment contract, then the income, the the the the w two that the or the salary statement, the bank statement. Right? So all that you need to have to prove that the income has arisen because of your employment out of India, and your status was that of a nonresident. That’s why it should not be taxable to you in India. You cannot then say that, no, the onus is on the department to prove that it is taxable to me in India.
Right? So, okay, in case of double taxation, this is a misconception that you can claim a credit of the foreign country tax in India and the DTAA relief. Now understand that that, see, there are foreign tax credit provisions, in case of double taxation, which arises. If you’re a resident of US and your income is in India, India will tax the income. US will not tax the same income.
There is double tax, and there is a DTAA, and there are the foreign tax provisions of each country. So there please understand there are lot of ifs ifs and buts in the DTA, and there are lots of ifs and buts in the foreign tax provisions of the country’s internal tax law. You may think that income on which the tax has been paid, it may be the tax will be the double tax will be removed. No. Practically, it doesn’t happen because both the countries’ law, like India gives the credit of the lower of the Indian tax and the US tax.
US, in turn, gives creator of only the proportionate amount of the Indian, tax, which to the proportion of the India tax versus the total India income versus the total income you in US. So all those ifs and buts you need to keep in mind. Right? So you have to align your finances in such a way that double taxation should not arise, can be reduced, and if it then arises, then you need to take recourse to the, in the best way, either the foreign tax credit provisions or the DTA provisions. No need to declare foreign income assets in Indian tax return, which qualifies a foreign country tax resident as per DT.
So this is, again, a this is a complex situation that arose in one of the cases is that if you are a resident I’ll make a I’ve made a separate video on this. I will post it. Basically, you are a assume you are a tax resident of US. You also have spent more than 182 days in India, so you become a tax resident of India. So in India tax return, you have to file the income to tax.
But what if, as per the DTA article 4, you there’s a tie breaker clause. You tie break to US. Right? Your residency is US. Does that mean that in the Indian tax return you file as nonresident?
No. Because India has a black money law section. Black money law in Indian black money law, it says you have to an Indian resident as per section 6 of the income tax act, not at the DTA. As per section 6 of the act, you are a resident and ordinary resident. You have to disclose foreign incomes and assets in schedule, if FSI and FA.
If you don’t disclose, there’s a flat 10 lakhs penalty. So you need to take into account those cases where if you’re tax resident of both countries and you type it to a particular country, in the other country, you still may still have to file everything and then claim the benefits within the tax returns. So it’s a tricky case, but this is again these kind of confusions are there in case of multi country incomes. Now this is what I very commonly see is that people for these kind of complex tax and financial queries, relying on online articles. See, everything cannot be resolved online.
Everything cannot be resolved by online, you know, searching for articles or chat. Some people even they check answers in ChatGPT, and they post on forums also ChatGPT answers. And then I I see them from the face of it. I can see that it’s from a ChatGPT, and the answer is also completely incorrect. I don’t know how ChatGPT also has got it must have checked some ten sources and got the answer completely incorrect.
So please don’t for these things, for these complex queries, please consult proper professionals who are experts, who know about the cross border implications. Right? And then you there were this one more thing that you may be always having a CA who is, like, when you were a resident, he was filing your tax return. But then when you talk about moving to US and lot of things are involved in cross border thing, So that CA may not be knowing, those provisions. So you need to check, CA or a CPA, whoever you consult with, whether that person has expert Expertise in the, that particular cross border aspects and everything.
Right? So not everyone will have full expertise of everything, but at least someone can be more knowledgeable on a particular aspect, as compared to other person. So you need to search the professional also that you are consulting. You need to be you know, search that them well and not rely on that same CA or the same person who was filing your tax return earlier, because now the complications are more. No need to keep in mind foreign country tech country taxes after return.
No. So if you return to India, you keep your in US investments. I made a separate video on, how to points to keep in mind on keeping US investments, after return to India. So you need to also stay updated with the foreign country tax rules or have a CPA have a CPA in that country whom you can call up and speak before making any financial decision on your investment because even after return to India, those provisions will still apply, and the added complexity of will be of the Indian provisions. So you need to have a CA in India who is who has an expertise in the cross border task aspects.
You also need to have a CPA in that particular country where your investments are located. Right? If you don’t want that headache or if you’re not ready to pay the fee, what my suggestion will be to have all your investments in India. Bring all the money in India, have the Indian investments rather than making those costly tax mistakes and paying extra tax. Well, I find a lot of people making those mistakes, not filing w eight b and having backup withholding tax deducted in US and the amount of money going down the drain because there are certain things you cannot claim back in India also.
You have to file those 10.40 an hour, and then there is another process for that. Right? So think about these things. On becoming one misconception is on becoming ROR, India will tax income from foreign investments on the same lines as the foreign country does. Don’t have that misconception because India will totally disregard the tax advantage nature of investments like 401 k IRA, Roth IRA.
So, for example, traditional IRA, in income is taxable on withdrawal. Right? India doesn’t subscribe to that for Roth IRA. It’s invested through post tax dollars, and then the there is no, kind of taxation on withdrawal. India does it we don’t care what is the Roth tax, Roth IRA provisions in US.
We will tax as per our local law. So every country follows the same approach. US will totally ignore Indian p e p f, EPF, NPS, all the tax advantage nature of those instruments, NRE FDs. US will say, pay tax. Right?
I will not I will not kind of consider whether your that country gives a exemption. Only exam only thing is you can check the DTA, whether in DTA, certain investments get like, US, UK, US, Canada, they have a tax relief for the Canadian RRSP. Right? But in India, the India US DTA is very weak. Right?
So you need to clear that misconception. Then final point is that not understanding real estate investment risk. Right? So real estate investments, people think it’s a very good option, but please also see the stress and the hassle with respect to managing the investments in India, the black money, that is involved, right, when you sell, when you purchase at both times, other compliances that come through. Right?
Then there are other risks, just currency risk, immigration risk, estate risk in financial planning. So all those things you need to keep in mind before having these kind of, you know, multi country type of investments. So these were only some of the points. I hope some of the points clicked with you, gave you some perspective. If you have any comments, thoughts, do share it in the comments section.
Thank you so much for watching this video. Thank you. Bye.