Pattabhiraman worked in USA for 14 years. He returned back to India in June 2021 for good to settle down for his retirement. While he was working in USA, he had not filed his ITR in India as he did not have any taxable income in India and he had not spent beyond a few weeks every year in India during the 14 year period. He had transferred his savings from earnings in USA in his NRE FD account. For the sake of convenience of spending money during his visit to India in the past, he had an NRO account with minimum balance, which had minimum balance. What would be the tax implications for Pattabhiraman for FY 2021-22? Also should he convert his NRO and NRE account to a public savings account?

Taxability of income in India

Taxability in India depends on residential status of an assessee, source of income and place of receipt of income and not based on citizenship.

One should be aware of the changes made to the definition of “residential status” in the Income tax Act through Finance Act 2020 (Sec 6(1A)) before taking any critical financial decisions. It is also key to understand that residential status must be determined every year as it may change based on circumstances.

If an NRI returns back to India during a financial year and stays beyond 182 days (during the FY), he will qualify as a Resident in India. Further, if he satisfies the additional conditions specified in sec 6 of the Income Tax Act ie., he was resident in India for 2 out of 10 preceding previous years or if he had stayed in India for 730 days or more during 7 preceding previous years, he shall qualify as a Resident and Ordinarily resident (ROR) in India. If he does not satisfy the additional conditions, his residential status will be Resident but Not Ordinarily resident (RNOR) in India.

Global income shall be taxable in India in the hands of a Resident. However for a Non Resident and RNOR, only income earned or received in India shall be taxable in India.

As far as the residential status is concerned, Pattabhiraman will qualify as a Resident in India as his stay in India would cross 182 days during the FY 2021-22. Based on other inputs, it is clear that he will qualify as a RNOR for FY 2021-22.

Any income earned or received in India by Pattabhiraman will be taxable in India.

NRO/NRE account conversion to Public savings a/c

As per RBI norms, an individual returning to India permanently is required to convert NRE and NRO accounts to a public savings bank account within a period of three months. If not done, it would amount to violation of FEMA rules and thereby attract legal consequences. Alternatively the balance standing to the credit of NRE account can be transferred to an RFC (Resident Foreign currency) account, and can continue to enjoy tax free interest till the time, he becomes a ROR.

Normally interest earned on balance in an NRE account and interest on FCNR account are exempt from tax for a person not Resident in India as per FEMA Act (refer Note 1). In Pattabhiraman’s case, he is expected to change his NRE and NRO accounts to public savings account within timelines prescribed by RBI. Once done, the interest on such public savings account would be taxed at normal slab rates.

Note 1: Residential status is defined differently under various Acts. As per FEMA (Foreign Exchange Management Act, 1999), an individual is a person resident in India, if he stays in India for more than 182 days during the financial year and he has come to India for the purpose of employment or business or any other purpose indicating his/her intention to stay in India for an uncertain period.

How can we help you?

Various clauses from the Income Tax Act may be simplified in online contents. But most of the time, it requires professional help in identifying suitable route for specific instances. Similar to nurturing and taking care of personal health, it is important to also keep a tab on one’s financial health. We at Chockalingam Unnamalai & Associates, can help you understand the pros and cons of various choices you make in the context of personal taxation. You can bank on us for a stress free tax filing and related compliances.

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