When it comes to returning to your home country after living abroad, there are many things to keep in mind with planning your finances being at the top of your list.
The Income tax provisions of India are very accommodating when it comes to returning residents however, it is still important that NRI's plan the finances in such a way that there are no surprises later.
The two most important legislations for a returning non resident are Foreign Exchange Regulations Act (FEMA) and Income Tax Act (ITA) and it is important that non residents pay special attention to their residency status based on these two laws. The ITA deals with the residency status based on the number of days the non resident is in India or abroad. FEMA on the other hand looks at the intent of the person. A person who has obtained a work visa in a foreign country immediately becomes a non resident for FEMA based on their intent of living abroad. In the converse case, a person returning back to India, with the intention of permanently settling back in India, has to be treated as resident under FEMA.
When the non resident is returning, they must conduct a residency test on themselves, for the financial year. This residency test is needed, to see what tax treatment for the investments under FEMA. The ITA has two sub divisions for residents. They are called resident but not ordinarily resident and the other is resident and ordinarily resident. These two sub divisions differentiate how you will be treated on the taxation for income generated in India and abroad. A person who is treated as a resident under ITA for a financial year, can also be treated as resident but not ordinarily resident, if the conditions of residency are fulfilled as a non resident for 9 out of 10 years and the person has been in India for 729 days or less in the past seven years .
FEMA regulates investments made in the foreign country. This includes bank accounts, investments in property, securities, mutual funds, remittances to India, borrowings and lending (including gifts) in the foreign country in foreign currencies. The ITA deals with the taxes on these investments. A non resident (under FEMA) is free to hold, sell, transfer and invest in an asset situated outside India. These assets have to be acquired or owned while the person was resident outside India or inherited from a person who was resident outside India. Foreign asset transactions continue to be done by a non resident after his permanent return to India. These assets have to be held in special accounts, which are through an Exchange Earners Foreign Currency (EEFC) account or Resident Foreign Currency(RFC) Account. The EEFC account can be used to hold any professional earnings or fees. The payment received by exporters and other types of income can be deposited into the EEFC account. Indian residents can also maintain a RFC account, for holding foreign currency assets which were held abroad at the time of return back to India. Foreign exchange received as pension or benefits from employment outside India, gifts, proceeds of life insurance policies can be deposited into a RFC accounts. RFC accounts can be maintained as a savings, current or term deposit account. The balance in the RFC account can be reinvested aboard freely.
I tis also possible for non residents to have Indian assets while they are living abroad. These could be investments, property and bank accounts. Special bank accounts have been provided in the FEMA. These accounts are Foreign Currency Non Resident (FCNR) accounts or Non Resident External (NRE) Accounts. These are accounts that have been opened to enable deposit of income earned abroad and can be repatriated back freely by the non resident. Once the non resident returns back to India and attains resident status in India they have to convert the FCNR or NRE account to an RFC account.
Under the ITA, the returning non resident, will be taxed on their global income however, the non resident with some planning can prolong their residency status as non resident to take benefit under this provisions of law. The interest in the RFC account is taxable if the returning non resident fails the residency test under ITA or has been back for more than three years.
The non residents are exempt from payment of wealth tax . This exemption of the wealth tax remains for a period of seven successive years after the return. The pensions received by non residents from their foreign employer are taxed at individual tax rates, as applicable.
The non residents returning also have to pay Customs Duties for goods brought into India in person. Transfer of Residence Rules provide for a clearance up to Rs 75,000 (US $ 1125). These should include used personal and personal effects.