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Planning for homecoming
NRIs returning to India need to carefully manage the financial aspects of their shift..

Non-resident Indians (NRIs) should also give a lot of thought to the financial aspects of shifting back to India and the challenges that arise in its wake.

FILE INCOME-TAX RETURNS

When an NRI returns to India, he should be aware of his tax residency status and file his income tax returns accordingly. Tax residency status is determined by an individual's actual physical presence in India during the financial year. To qualify as a resident, you would have to satisfy one of the following conditions: Your stay in India during the financial year should be 182 days or more; or your stay in India during the financial year should be 60 days or more and it should be 365 days or more in the four financial years preceding the current one.
Once you qualify as a resident, you need to find out whether you fall in the category of ordinarily resident (OR) or not ordinarily resident (NOR). If you meet any of the following conditions, you will qualify as an OR: you should be a resident in India in nine out of the previous 10 financial years; or, your stay in the seven years preceding the relevant financial year should altogether be 729 days or more. If you don't meet these criteria, you would be an NOR.
If your status is that of an NOR, you need to pay tax only on your Indian income but not on your global income. Once you fall in the category of OR, your entire income in India and abroad becomes taxable in India.

REPORT FOREIGN ASSETS

Once you become a resident Indian, you need to report all your foreign assets under the Undisclosed Foreign Income and Assets Bill, 2015. "Since July 2015, you have to ensure that you report all your bank accounts, financial interests, immovable property and trusts held abroad in your tax returns. These assets need to be reported even if you have no income from them. Failure to report could result in a penalty of Rs 10 lakh," says Sonu Iyer, partner and national leader, people advisory services, EY (see table: High penalty for not disclosing foreign assets).

CHANGE STATUS OF BANK ACCOUNTS

As an NRI, you would have held NRO, NRE and FCNR accounts. The moment you become a resident Indian, the status of the NRO and NRE accounts should change to resident accounts. The FCNR account should be converted into a resident foreign currency (RFC) account. The taxation status of these accounts also changes. The NRO account is always taxable. The moment you become a resident, interest income from both NRE and FCNR accounts becomes taxable. Notify your bank and request for a change in status.

TRANSFERRING WEALTH

A major challenge NRIs face is in transferring the wealth they have accumulated back to India. The complexity arises especially in dealing with the money lying in your employer's retirement account, such as the 401 (k) account in the US. Since you no longer work for that employer, you may want to bring the money completely under your control. You have two options: Leave it in the US but transfer it to other types of accounts, or bring it to India. If you decide to keep the money in the US, you can move it into a traditional IRA or a Roth IRA account, which are also retirement schemes. IRA accounts are offered by asset management companies. In a 401(k) account or a traditional IRA, you pay tax at the time of retirement, that is, at the age of 59.5 years. If you decide to pay taxes on the money right away, you can invest it in a Roth IRA account, where it becomes tax-free at the time of withdrawal.

There are other challenges if you decide to bring the money to India. "You might have to pay penalties for premature withdrawal and tax on capital gains. You will have to take into account whether India has a double taxation avoidance agreement (DTAA), and whether it covers retirement funds. If there is no DTAA, you might end up paying taxes in both the countries, and could well lose 50-60 per cent of the corpus," says financial planner Ankur Kapur of ankurkapur.in. Each of these decisions could lead to penalties for premature withdrawal and tax liabilities whose impact needs to be studied in detail. You may have to seek professional help as the issue is complicated.

NRIs also need to decide whether to dispose of their real estate abroad. The main criterion should be whether you plan to use the property in the near future, say, if you wish to return to that country in a few years or plan to visit it periodically. Usually, it is not advisable to retain the property for rental income. "In countries like the US, you are not left with much after paying the high management fee and taxes. The appreciation in rental from year-to-year is also low," says Kapur.

BUY INSURANCE

Whether you buy a term plan on your return should depend on your age and the amount of assets you have accumulated. Someone with a corpus of, say, Rs 20 crore, may not need to buy term insurance, while another person with an asset base of only Rs 50 lakh will need to buy one.

NRIs should also buy a personal health cover for their family. "Buy a health cover a few years prior to shifting to India so that the waiting period for pre-existing diseases is crossed while the family is still abroad and the family is fully covered on its return to India," says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

PURCHASING PROPERTY

NRIs, who are accustomed to the more streamlined processes and higher degree of professionalism abroad, could find themselves at sea when trying to buy a house in India. One challenge is to ascertain whether the features and amenities that the developer has advertised will come true. The second is to assess whether the developer has the financial strength to deliver the project on time. Third, developers might advertise that various infrastructure projects will come up in their area, which will boost the prices of apartments in their project. NRIs need advice regarding whether these projects will come up at all and whether this will happen within the time frames mentioned.

Before setting out to make a purchase, NRIs should do a lot of homework. Many developers provide information about their projects on their web sites. Property portals also provide listings of projects with details about them. "Zero in on a few reputed developers and a few projects whose specifications match your requirements," says Ashutosh Limaye, head of research and REIS, JLL India. To evaluate a developer, look at the construction quality of his past projects and his track record for timely completion and providing the promised specifications. For most NRIs, it might be a good idea to engage a professional broking agency. "That agency should be able to tell you whether all the permissions are in place and offer advice on the infrastructure projects slated to come up in the area. It should also be able to offer an assessment of the project's potential for price appreciation," says Limaye.
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Any gain arising from a sale of property located in India is taxable in the year of transfer and is subject to capital gains tax

I am a non-resident Indian (NRI) and a resident of the US. I want to buy a property in India and I want to know what will be the tax liability when I sell the property.

—Ramesh Gupta

Any gain arising from a sale of property located in India is taxable in the year of transfer and is subject to capital gains tax. Depending on the period of holding the property, capital gain will be considered as either long-term capital gain (LTCG—if holding period is over 36 months); or short-term capital gain (STCG—if holding period is 36 months or less).

LTCG is subject to a tax rate of 20% (excluding surcharge and education cess) after indexation of cost. It can be claimed as exempt to the extent it is re-invested in India (before filing of India tax return) in specified bonds or a residential house (to be either purchased within 2 years or constructed within 3 years of transfer of the land). There are certain restrictions, however, on the sale of the new asset bought and the quantum of investment made in bonds. If due to some reason, the capital gains remain un-invested until the due date of filing of India tax return (i.e., 31 July), the money could be deposited in a capital gains account scheme with a bank and subsequently withdrawn for re-investment. STCG is taxable at progressive rates of 10-30% (excluding surcharge and education cess).

Method of calculation of capital gains: Tax is payable on net consideration, which is full value of consideration that would be received on transfer minus cost of acquisition (indexed cost in case of LTCG), cost of improvement (indexed cost in case of LTCG), and cost incurred to execute the transfer. Any loss on sale of property can be carried forward up to eight years from the year of sale by filing a tax return. The loss can be offset against LTCG or STCG. Therefore, any gain on sale of house property would be subject to tax depending on the period you hold the property for.

I live in New York and hold a non-resident rupee account. I want to gift a house to my sister who lives in India. I wanted to know what will be the tax implications for both of us?

—Karunya Talwar

There is no gift tax in India. However, income tax is payable on any sum of money, movable property or immovable property received by an individual without consideration (i.e., without a quid pro quo), except gifts received from a relative. Any income from such property or any gains on the sale of such property in India will be taxable on its receipt in the hands of the legal owner.
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However, any income from the property (for example, rental income) or subsequent gain from sale of the property shall be taxable in India

I have been working with an airline company in Dubai for a few years now. I have a few fixed deposits in India. Will the interest earned on these deposits be taxed?

—Manas Gupta

Any income earned or received in India is taxable in India. Therefore, interest earned on the fixed deposits in India is taxable in India.

However, there are certain exemptions available under the Income-tax Act, 1961. Any interest earned on the deposit in an non-resident external (NRE) account (savings or fixed deposit) is exempt under section 10(4)(ii) of the Act for an individual who is a person resident outside India as per the Foreign Exchange Management Act,1999 (Fema) or a person who has been permitted by the Reserve Bank of India (RBI) to maintain the aforesaid account.

Interest on a non-resident ordinary (NRO) account or other resident accounts is fully taxable (special exemptions apply for NRE and foreign currency non-resident, FCNR, accounts only). Interest is taxable at progressive rates of 10-30% (excluding surcharge and education cess).

We would recommend that you check the type of account you hold in India and your residential status in India under Fema rules to determine the taxability of the interest income.

I am a non-resident Indian (NRI) based out of Sweden. I have been living here for the past 25 years. I want to buy a house in my father’s name in India. Will either of us be taxed for it if I do so? I also wanted to know the tax aspect of the same.

—Gurpreet Singh

If you buy a house in your father’s name, it will be termed as gift. Gift of any immovable property, where the stamp duty value of the property exceeds Rs.50,000, is taxable as “Income from other sources” in the hands of the recipient of the gift. However, certain gifts are not subject to tax.

In case the property is gifted to a relative, then there would be no tax implications, on the recipient or on the giver. The term ‘relative’ is defined under the income tax laws. This definition includes one’s parents.

Therefore, immovable property gifted by you to your father will fall under the exception and will not be subject to tax in India at the time of purchase.

However, any income from the property (for example, rental income) or subsequent gain from sale of the property shall be taxable in India.

Under the income tax laws, the term relative includes spouse, siblings, spouse of siblings, brothers or sisters of either of the parents

I work in a bank in Kuwait and have a rupee fixed deposit in India. The interest is credited to my savings account and tax is deducted at source (TDS). Do I need to file a tax return?

—Kamal R.

It is mandatory for an individual to file her income tax return if total income before claiming tax deductions under sections 80C to 80U of the Income-tax Act, 1961, exceed Rs.2.5 lakh in a given financial year. This can include investments made in Public Provident Fund (PPF), life insurance contributions, interest on education loan, and donations made to specified charitable institutions. The limit is Rs.3 lakh for senior citizens (60-80 years) and Rs.5 lakh for super senior citizens (above 80 years). If the total income (before claiming deductions) in India does not exceed the limits specified above, the individual is not required to file a tax return in India. If TDS is more than the actual tax liability, a tax return may be filed to claim tax refund.

What are the TDS linked regulatory requirements with respect to purchase of immovable property costing more than Rs.1 crore when the buyer is a non-resident Indian (NRI)?

—Jayesh Pradhan

On purchase of immovable property (other than agricultural land) worth Rs.50 lakh or more, the buyer is required to deduct (and deposit) withholding tax at the rate of 1% from the consideration payable to the resident seller. Withholding tax deducted by the buyer needs to be paid to the credit of the central government within seven days from the end of the month in which the tax deduction is made. Tax can be paid online or offline along with Form 26QB. The seller of the property must furnish her permanent account number to the buyer.

I want to buy an office space for my sister in India, and I’m an NRI. Will either of us be taxed for this?

—Kanv Khatri

There is no gift tax in India. Accordingly, there will be no tax liability for you. However, income tax is payable by the recipient of the gift on any sum of money, movable property or immovable property received without consideration (i.e., without a quid pro quo), except if gift is received from a relative.

Under the income tax laws, the term relative includes spouse, siblings, spouse of siblings, brothers or sisters of either of the parents, and so on.

Therefore, a gift of office space that is located in India to your sister will not be subject to tax in India.
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PIOs are allowed to repatriate up to $1 million per financial year out of the sale proceeds of assets in India acquired by her by way of inheritance

I am a non-resident Indian, and had invested in sovereign bonds (G-secs) in India 11 years ago. I want to withdraw the matured money. Will I be taxed?

—Christopher Samuel

Amount received on maturity of G-secs is not taxable in India if they are notified tax-free bonds. From your question, we infer that the bonds have already matured and the money is lying in your bank account in India. If you intend to withdraw the matured money, there should not be any tax deducted at source (TDS).

Can a Person of Indian Origin (PIO) sell inherited property in India and repatriate the amount? What are the tax liabilities for the same?

—Chandan Prakash

PIOs are allowed to repatriate up to $1 million per financial year out of the sale proceeds of assets in India acquired by her by way of inheritance. This is subject to production of documentary evidence in support of inheritance of asset and a certificate from a chartered accountant in the prescribed format. Remittances exceeding $1 million in any financial year require prior permission of the Reserve Bank of India. Sale of property situated in India will be taxable in the year of sale.

An immovable property held for more than 36 months is classified as a long-term capital asset. Capital gains on sale of these assets are subject to tax of 20% (excluding surcharge and education cess). For an inherited property, holding period is calculated from the date of acquisition by the original owner. Taxable capital gain will be net sale proceeds less indexed cost of acquisition (i.e., adjusted as per cost of inflation index or CII) less cost of improvement. Capital gains can be claimed exempt to the extent the money is re-invested in India in specified bonds or a residential house (to be either purchased within two years or constructed within three years of transfer of the land). If the capital gains remain uninvested until the due date of filing of India tax return (31 July), you can also put the amount into a Capital Gains Account Scheme (CGAS) not later than the due date of filing your India tax return. You can subsequently withdraw this amount for reinvestment.

If the entire amount is not reinvested or not deposited in CGAS, the remaining portion of the gain will be taxable. A provision is available to non-resident Indians (NRI) with investment income and long-term capital gains as the only sources of income. They are exempt from filing tax return in India if tax is deducted at source (TDS) on such income.

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In case of LTCG, the difference between the sale price and indexed cost of acquisition will be taxable as LTCG at the flat tax rate of 20%

I’m a non-resident Indian (NRI) living in Germany and have inherited a piece of non-agricultural land in India. I am going to sell it soon. Can I repatriate the sale proceeds?

—Ashish Sinha

An NRI may remit an amount up to $1 million per financial year (i.e., 1 April to 31 March), out of the balances held in her Non-Resident Ordinary (NRO) rupee account, including sale proceeds of assets (inclusive of assets acquired by way of inheritance or settlement), for all bona fide purposes, subject to payment of applicable taxes in India, if any.

So you can remit the sale proceeds from sale of non-agricultural land subject to satisfaction of following conditions:

(a) income-tax, if any, has been deposited

(b) documentary evidence of inheritance is provided.

Further, any gain arising from the sale of property is taxable in the year of transfer and is subject to capital gains tax.

Depending on the period of holding of the property, capital gain will be considered as either: long-term capital gain (LTCG), if period of holding is more than 36 months; or short-term capital gain (STCG), if period of holding is 36 months or less.

As you had inherited the property, the period of holding of the previous owner would also be taken into consideration.

The cost of acquisition will be the cost incurred by the previous owner to acquire the property.

In case of LTCG, the difference between the sale price and indexed cost of acquisition will be taxable as LTCG at the flat tax rate of 20% (plus applicable surcharge and education cess). LTCG can be claimed as exempt from tax to the extent that it is re-invested in India in another residential property or specified bonds, subject to certain specified conditions.

If due to some reason the capital gains remain uninvested till 31 July—the due date for filing of tax returns in India—then the amount of capital gains could be deposited in a capital gains account scheme with a bank (not later than the due date of filing your tax return in India) and subsequently withdrawn for specified reinvestment.

In case of STCG, the difference between the sale price and cost of acquisition will be taxable at applicable slab rates (plus the applicable surcharge and education cess).

Any loss on the sale of property can be carried forward up to eight years from the year of sale by filing a tax return and be offset against long-term or short-term capital gains.
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An Indian citizen or a person of Indian origin residing out of India is termed a Non resident Indian (NRI).

NRIs are allowed to invest in mutual funds in India on a repatriable or non-repatriable basis subject to regulations prescribed under the Foreign Exchange Management Act (FEMA).

Application form filled and signed by the NRI must be submitted at official points of acceptance.

It must be accompanied by payment instrument drawn in favour of scheme. The applicant must indicate whether the investment is being made on a repatriable or non-repatriable basis.

KYC papers and copy of PAN must be given.

A power of attorney (POA) holder can open and operate a mutual fund account on behalf of an NRI. To operate the mutual fund account, the POA has to be registered with the mutual fund.

The POA holder has to submit the original copy of the POA or a duly notarised copy of the POA.

The POA must be duly executed with signatures of both the NRI as well as the POA holder.

If investment is on a repatriable basis, the payment instrument must be drawn on NRE or FCNR account of the investor.

Investments on non-repatriable basis can be made by drawing payment instrument on NRE/ FCNR/NRO account of investor.

Redemption proceeds (after deduction of taxes) are paid in rupees by cheque to the account number provided. Some banks also offer direct credit of redemption proceeds to the NRE/NRO account.

If investments are made on non repatriable basis, redemption proceeds shall be credited to NRO account.

Tax is deducted at source on capital gains made on investments by NRIs. Investments in equity funds held over 1 year are exempt from tax and hence no tax is deducted at source.

A digitally signed TDS certificate is sent along with the redemption proceeds.

The investments carry the right of repatriation of capital invested and capital appreciation only till the investor remains an NRI

Overseas address is a mandatory field that requires to be filled in the mutual fund application made by a NRI.
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