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

Should one invest in gold?

We always keep reading that gold is the best hedge against inflation. Gold prices have been going up for quite some time now. The way it is going up, it could be treated as an investment instead of treating it as a hedging tool. Many people have already started investing in gold, but then safety of storing gold is an issue.

A better way would be to purchase as a mutual fund unit in a gold exchange traded fund. That way, you would also have liquidity, since the price of the unit would rise as the price of gold prices and could be sold anytime through the stock exchange. But why should we treat it as an investment option?

Some of the reasons are the appreciation in the value of the US dollar and rise in the interest rates. The economy of most of the so called advanced economies is in a bad state and it does not look like there will be recovery soon. Most of the countries hold back their currency with gold reserves, so most of them would either increase their gold reserves.

Worldwide people have started investing in gold exchange traded funds. These funds back their units by buying gold. This has also increased the demand for gold. For the purpose of improving the economy most of the governments have increased their spending to increase the money supply in the economy.

More the money, more the chances of that money finding its way into gold and more the demand for gold, the prices will go up. Taking the past trend we might say that gold does not give good returns. But is that true? Have we not seen prices of gold just sky rocketing.

Gold prices go up, but they do not give returns as good as those of other investments. This is the reason it is a good investment option for those who do not like to take risks. With news that many countries on the verge of sovereign defaults and rising interest rates, there would be more demand for gold. So buy gold now.