V.B. PRABHU VERLEKAR explains investments and taxation options available to NRIs
A large number of Goans work abroad in different fields, professions, and vocations. Most of them cherish to return to their motherland to stay in their dream house after retirement. Most of them have anxiety and worry about their compliance with Indian Tax Laws and Foreign Exchange Management Regulations. Based on Automatic Exchange of Information (AEI) by different governments, automated system-generated notices and summons are issued to taxpayers to explain foreign bank accounts, financial assets, dividends, royalties, etc. This write-up is to clarify some of their basic doubts.
Definition of non-resident under Income Tax (IT) Act, 1961 and Foreign Exchange Management Act (FEMA), 1991 is different. Under IT Act, residential status is determined based on number of days physically present in India in a given financial year which is from 1st April to 31st March.
Under FEMA residential status is based primarily on the intention of the person to stay abroad for indefinite period for any purpose with appropriate visa. Thus, a non-resident under FEMA can be resident in India under tax laws if his stay in India exceeds 60/120/182 days. Under Income Tax Law, residential status is decided based on physical presence of an individual in India during the financial year and preceding 10 financial years.
Under Income Tax Act, a Tax payer in India is classified as ‘Resident’ or a ‘Non-Resident’. A Resident is further classified either as ‘Resident and Ordinarily Resident’ (ROR) or ‘Resident but Not Ordinarily Resident’ (RNOR). He will be considered as ‘Resident’ irrespective of nationality if any one of the following two basic conditions of stay are fulfilled.
1. If he was in India aggregating 182 days or more or
2. If he was in India aggregating 60 days or more in previous year and also had been in India aggregating 365 days or more for the four years preceding that year.
This Rule has following exceptions.
– The period of 60 days mentioned above becomes 182 days in case of a citizen of India who
i. Leaves India in the previous year as the member of the crew of the Indian ship; or
ii. Leaves India for employment outside India; or
iii. Is a citizen of India or a person of Indian origin, and being outside India, comes on a visit to India in any previous year.
If he does not satisfy any of the conditions, he will qualify as a ‘Non Resident in India’ (NRI). The ‘Resident’ as above will be considered as ‘RNOR’ in the previous year if he satisfies any one of the below conditions:
a. If he has been non-resident in 9 out of 10 previous years or
b. He has not been in India in aggregate 729 days or less during 7 years preceding that year.
In order to plug leakage of taxes by business tycoons who used to leave India to settle abroad to claim ‘Non-Resident’ status and dodge FEMA Regulations or used to remain ‘Non-resident’ all over the world (including India) by following their residency regulations, new rules are made in this regard from financial year 2020-21 as under:
a. An Indian citizen having total income, other than income from foreign sources, exceeding `15 lakh during the relevant financial year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature will be considered as ‘Deemed Resident but Not Ordinary Resident’ even though he has not lived a single day in India in previous year (deemed residency rule).
b. Sixty days are extended to 120 days for an individual, being Indian citizen or Person of Indian origin (PIO), who is based outside India and comes on a visit to India, if total income of such person, other than income from foreign sources exceeds `15 lakh. However, if his total income (other than income from foreign sources) is up to `15 lakh then 60 days condition is extended to 182 days. However, such individual will be considered as ‘RNOR.’ In this status in addition to income which is received, accrued in India, he will be liable for tax on income which accrues or arise outside India in respect of business deemed to have controlled or a profession set up in India. E.g. Adv. Harish Salve, settled in UK as Queens Counsel will be liable for his income from practice in England as he is member of Bar Council of India. No other income other than professional income earned in England from any other source will be liable for tax in India
‘Resident and Ordinarily Resident’ (ROR) is taxed on entire global income, ‘Resident but Not Ordinarily Resident’ (RNOR) and ‘Non Resident’ (NR) are taxed only on income earned or accrued in India or business controlled from India or profession set up in India.
The above amended definition is little complicated for a common taxpayer and can be ignored as this is applicable to HNI business tycoons.
NRIs/OCI card holders need not worry if their stay in India in a financial year is less than 60 days. However, if they wish to stay 60 days or more up to 181days, they should check resident history of 7 previous years.
• NRIs are not permitted to make investments in any postal saving schemes like national saving certificate, postal deposits, Public Provident Fund etc. However, NRIs can freely buy without Reserve Bank of India’s permission, immovable properties other than agriculture, plantations, farm house and can also invest in business without repatriation facilities. In case of long term capital gains on sale of properties, he is eligible for benefit of exemption under sections 54, 54F, and 54EC of the Income Tax Act.
• A NRI holding PAN need not file income tax return if his income is below taxable limits which at present is raised to `3.00 lakhs. However, to claim income tax refund filing of tax return is necessary.
• Under FEMA, a NRI cannot maintain Resident saving bank account or fixed deposit in India. Those who have migrated should designate their existing bank accounts as ‘Non-Resident Ordinary’ (NRO). Interest on this account is taxable and TDS is 30% irrespective of the interest amount. Any Indian income can be deposited in this account. Revenue receipts like interests, rent, dividends can be repatriated to foreign bank accounts or transferred to NRE accounts after paying due taxes. Any capital receipts like sale proceeds from properties after payment of taxes, upto to US $1 million per calendar year can also be repatriated or transferred to NRE bank account after complying with required formalities.
• A returning NRI can continue to hold overseas assets like foreign bank accounts, foreign securities, foreign immovable property or any other asset but this should be compulsorily disclosed in tax returns. He is required to re-designate all his bank accounts as ‘Resident’ by giving notice to bankers at earliest. Wherever he holds stocks, mutual funds etc. notice should be given to the company about change in his status.
• A returning NRE would generally be assessed as RNOR on his return to India for 2 assessment years from financial year 2003-04 onwards. In this RNOR status, any income earned abroad such as interest, dividend, royalty etc. is tax free. Interest on NRE deposit is tax free till the date he returns to India for permanent settlement. But interest on FCNR is tax free as long as his status is RNOR. For this, he should properly plan his timing of returning to India.
Returning Goans should avoid temptation of investing their hard earned life savings in industrial ventures lured by Government schemes, as by nature they are not cut out for ventures which requires hard business acumen.
After making safe, secured investments to have adequate returns to support their life-style and standard of living, the surplus may be invested in mom and pop stores to keep them occupied in retirement to lead happy life.
Considering the multiple and complex regulatory environment, one must be aware and seek advice from competent professionals to remain in compliance to avoid unpleasant situations such as penalties and prosecution.
The Columnist is a senior Chartered Accountant and has authored many books on accounting and taxation. Email: verlekar@bsnl.in
