Taxability for Indians Returning to India

For the last few years we have been hearing the great Indian growth story. This has lead to a lot of investments in India by NRI’s. With growth there are better career prospects, so many Indians are either returning to India or are planning to return to India. For Indians returning, settling in India becomes a little nerve wrecking because of the plethora of rules and taxation.  

As per the Income tax act, taxation is not based on residential status, but on the basis of physical presence in India. Any income generated in India or deemed to be generated in India is taxable as per the Income Tax act irrespective of the residential status. As per the Act, to be 'Resident' your physical presence in India during the relevant tax year is taken into consideration.

Accordingly, once an individual breaches the threshold number of days presence in India (currently being either at least 182-days during the tax year or at least 60-days during the tax year where he / she was in India for 365-days in the immediately preceding 4-tax years), he / she qualifies as an 'Ordinary Resident' under the Act.

The second situation typically arises in the 2nd or 3rd year of his / her return. In case of ‘Ordinary Resident’, his/her global income is liable to tax. Individuals, who do not breach the threshold limit, qualify as 'Non-Residents' (liable to tax only on income generated or deemed to be generated in India).

In case you had created a fixed deposit before your status changed from Non-Resident, do not rush to close the Fixed Deposit. You enjoy tax exemption on it till maturity. Any interest earned in your NRE saving account is taxable from the date you lose your status as Non-resident.

You might want to return to India, but are not sure if you would like to stay on forever. So what should you do with your NRE account? You can convert is to a repatriable RFC account. This way if you decide to go back you can convert it to an NRE account again. Any interest received in this RFC account is taxable if your status is resident.

Next would be the topic of Wealth tax for returning Indians