Many Non-Residents (NRs) returning to India are unsure about the tax implications of their residential status change. They often ask:
- Will my global income be taxed in India once I return?
- Do I need to disclose my foreign assets?
- Will I have dual taxation issues?
- What tax exemptions can I still avail?
If you are an NRI planning to move back to India, this article will help you understand the tax impact of becoming a resident under the Income Tax Act, 1961.
What Are the Common Misconceptions About NRI Taxation?
One of the biggest misconceptions is that as soon as an NRI returns to India, all their foreign income becomes taxable.
However, this is not entirely true.
There is a special transition period called Resident but Not Ordinarily Resident (RNOR) status, which allows NRIs a two-year tax advantage before they are considered a Resident and Ordinarily Resident (ROR) and become liable to tax on their global income.
Case Study: What Happens When a Returning NRI Has Dual Residency?
Scenario:
- Mr. X, an Indian-origin NRI, has been working in UAE for several years.
- He plans to return to India for a new job in November 2023.
- In FY 2023-24, he will have:
- Stayed outside India for more than 182 days
- Stayed in India for 150 days
- Earned more than ₹15 lakhs after returning
Key Questions:
- Will his ITR for FY 2023-24 (AY 2024-25) be filed as a Non-Resident?
- Will his UAE income be taxable in India?
Answer:
As Per Section 6(1A) of Finance Act 2020:
- Since Mr. X stayed in India for more than 120 days and his Indian-sourced income exceeds ₹15 lakh, he qualifies as RNOR for FY 2023-24.
- His ITR will be filed as RNOR, meaning he will be taxable only on Indian-sourced income and not on foreign-sourced income.
✔ His UAE income will NOT be taxed in India.
How Should NRIs Plan Their Return to India for Optimal Tax Benefits?
NRIs should strategically plan their return to maximize tax benefits.
✔ RNOR status allows tax-free foreign income for up to two years.
✔ NRIs avoid global taxation until they transition to ROR.
✔ Tax planning can help NRIs optimize exemptions and reduce tax burdens.
Thus, NRIs should plan their transition carefully to ensure minimal tax impact when they return to India.
Why Is Strategic Tax Planning Essential for Returning NRIs?
Indian tax laws offer a structured transition period for NRIs returning to India.
Key benefits include:
✔ Foreign tax credit eligibility for doubly taxed income.
✔ DTAA (Double Taxation Avoidance Agreement) benefits for applicable countries.
✔ Relaxed reporting requirements—RNORs may not have to file detailed ITR-2.
However, once they become ROR, they must disclose all foreign assets and income.
Legal Backup
The Income Tax Act, 1961 defines clear residency conditions:
Section 6(1A) – RNOR Status for Returning NRIs
An individual qualifies as RNOR if:
- They stay in India for 120+ days in a financial year.
- They earn ₹15 lakhs+ in India.
Taxation Rules for RNORs
✔ Only Indian income is taxable.
✔ Foreign income remains tax-free.
✔ No immediate requirement to report global assets.
However, once an RNOR becomes ROR, they are taxed on worldwide income and must disclose foreign assets in their ITR.
What Happens to an NRI’s Foreign Assets/Income After Becoming Resident?
Disclosure Requirements for RORs
Once an NRI becomes a Resident and Ordinarily Resident (ROR), they must report:
✔ Foreign shares (listed/unlisted, ESOPs)
✔ Foreign property holdings
✔ Overseas investment income (dividends, interest, rental income)
Tax Treatment:
- Foreign shares and real estate: Taxed with indexation benefits.
- Foreign rental income: Taxed in India, but loan interest deductions may not be allowed if TDS is not deducted.
What Happens to NRE and NRO Accounts?
- NRE accounts must be converted to Resident accounts.
- Interest on NRE accounts is tax-free only until RNOR status applies.
- NRO accounts remain taxable as per Indian tax laws.
For FEMA compliance, returning NRIs should consult their banks to ensure a smooth transition.
What About Foreign Retirement/Pension Plans?
✔ 401-K and Foreign Pension Plans become taxable in India once ROR status is attained.
✔ Withdrawals exceeding contributions are taxable.
✔ DTAA benefits can help claim foreign tax credits.
What About Tax Exemptions on Selling Indian Property?
✔ NRIs selling property in India can claim exemptions under Sections 54 & 54F.
✔ To qualify, they must reinvest in residential property in India.
Even after becoming a Resident, they can continue to benefit from these exemptions.
Final Thought: NRIs Must Plan Their Tax Transition Wisely
Becoming an RNOR provides a tax-free period for foreign income. However, once an NRI fully transitions to ROR, global income is taxable.
Key Takeaways:
✔ RNOR status offers a tax-free period for foreign income for up to two years.
✔ Returning NRIs must carefully plan asset disclosures to avoid tax complications.
✔ Bank accounts, foreign assets, and investments must be updated as per FEMA rules.
✔ Using DTAA and Foreign Tax Credit rules can significantly reduce tax burdens.
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