Do Returning NRIs Have To Pay Tax In India?

Tax implications for NRIs returning to India will be determined based on their residential status

With stricter immigration laws and job cuts by US tech companies, many NRIs are thinking about returning to India. A number of things have to be planned in such situations, one of which is the tax obligations. Let us take a look at some key aspects in terms of whether returning NRIs have to pay tax in India or not.

Tax implication based on residential status of NRIs

The residential status of NRIs is broadly classified into three categories – Non-resident (NR), Resident but Not Ordinarily Resident (RNOR) and Resident and Ordinarily Resident (ROR). Tax implications for these categories will be accordingly calculated. Non-Resident (NR) refers to an individual who stays outside India for 183 days or more in a financial year.

RNOR (Resident but Not Ordinarily Resident) is a tax status for individuals who qualify as residents but have spent less than 2 out of the last 10 years in India or were in India for less than 730 days in the last 7 years. ROR (Resident and Ordinarily Resident) is a person who qualifies as a resident and has lived in India for at least 2 of the last 10 years and 730 days or more in the last 7 years. To reduce tax liability, NRIs should aim to get or maintain NR or RNOR status.

Tax implication for Non-Resident (NR) NRIs

NRIs belonging to this group do not have to pay any tax earned outside India. It includes incomes such as foreign salary, foreign rental income or capital gains from foreign assets. However, income earned or accrued in India will be taxable. For example, salary received in India, income from house property, capital gains, dividend from Indian companies, etc.

Tax implication for Resident but Not Ordinarily Resident (RNOR) NRIs

Income earned from foreign sources will not be taxed during the RNOR period, which is usually 1 to 3 years. Income earned or accrued in India will be taxable. If income is via a business setup in India, but received abroad, it too will be taxed in India. RNOR is essentially a transitional phase till the status changes to ROR. During the RNOR period, NRIs are not required to show foreign assets in their Income Tax Return (ITR).

Tax implication for Resident and Ordinarily Resident (ROR) NRIs

When an NRI has ROR status, all their income including global income is taxable in India. As such, NRIs with ROR status have to show both incomes earned and accrued in India as well as foreign income in their ITR filing. Provided that they have these income sources. ROR NRIs also need to show all their foreign assets such as properties, bank accounts, insurance policies and stocks.

This is as per the Foreign Assets (FA) Schedule of their ITR. Not disclosing or deliberately hiding assets can lead to penalties under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015. However, ROR NRIs do have the option to get relief under the Double Taxation Avoidance Agreement (DTAA).

Assessing tax implications for NRIs returning to India can be a complex task. There can be various other variables to consider. One also has to take the right steps to minimize the tax burden. That is why it would be better for NRIs to consult a certified tax professional. It will help avoid legal troubles and ensure compliance with Income Tax Act and FEMA regulations.