FAQ for NRIs returning from abroad: Status of accounts and tax implications

Published: December 14, 2020 at 7:36 pm

Here are some FAQs for NRIs returns from abroad concerning the facilities and status of different bank accounts and their tax implications.

About the author: Shri R Vijayaraghavan is a Senior Banker retired from Indian Overseas Bank. Previously he worked in State Treasury and has vast experience in banking, investment wealth management and treasury. He is well-known for his helpful notes on the bank-promotion process; tips for retirees on savings and Investments and various articles on income tax, health insurance etc. Trivia: His son, Ramesh is an expert on Google sheets and has written a few useful screener sheets for freefincal. Also by the same author: Ten lesser-known facts about PPF accounts!

1. What will be the status of bank accounts of NRIs returning to India permanently?

Ordinary Non- Resident Accounts. Ordinary non-resident accounts will be redesignated to resident accounts in India on the return of the account holder to India and consequently becoming resident in India.

NRE SB accounts: Will be re-designated to resident accounts.


Non-Resident (External) Rupee Deposit Accounts: NRE accounts should be designated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts, at the option of the account holder, immediately upon the return of the account holder to India for taking up employment or on change in the residential status. In case of NRE Fixed Deposit, the accounts will continue to earn agreed rate of interest till maturity even after these being converted to resident account.

FCNR Accounts (Foreign Currency Non-Resident Accounts): On a change in residential status, FCNR (B) deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by the account holder.

Authorised dealers should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account (if the depositor is eligible to open RFC account), at the option of the account holder.

In case the account is converted to resident rupee account, the foreign currency amount will be converted to Indian Rupees at the applicable exchange rate (TT Buying) ruling on the day of conversion. Interest on the new deposit would be payable at the relevant rate applicable on such deposit.

RFC Accounts (Resident Foreign Currency Accounts): In case the amount is transferred to RFC account, the rate of interest applicable to RFC account will be payable. One can also open RFC account with the Assets brought by them on return as well as any other foreign assets held abroad, at any future date.

What is the rate of interest on RFC accounts? It is deregulated and can be decided by individual Banks.

3. What are the types of individual RFC accounts that a returning NRI can open? Savings Bank, Current account and Term Deposits

4. In what form can a resident foreign currency account be opened in such cases? The account can be held singly or jointly in the name of the person eligible to open, hold and maintain such account. Joint accounts can be opened with a resident relative(s) on former or survivor’ basis.

Relative as defined under Companies Act, 2013 (viz. members of HUF, spouse, parents, step-parents, son, step-son, daughter-in-law, daughter, son-in-law, brother/sister, step-brother/ step-sister). A relative joint account holder cannot operate the account during the lifetime of the account holder.

What are the permissible credits in such Resident Foreign Currency Accounts?

Permitted Credits in RFC:

1) Foreign exchange received by him as superannuation/ other monetary benefits from an overseas employer

2) Foreign exchange realised on the conversion of the assets referred to in Sec 6(4) of FEMA

3) Gift/ inheritance received from a person referred to in Sec 6(4) of FEMA

4) Foreign exchange acquired before July 8, 1947, or any income arising on it held outside India with RBI permission

6) Foreign exchange received as earnings of LIC claims/ maturity/ surrendered value settled in forex from an Indian insurance company

7) Balances in NRE/ FCNR (B) accounts on change in residential status.

6. What are the permissible debits in RFC accounts?

Permitted Debits: No restrictions on utilisation in/ outside India.

7. Can a resident continue to maintain an account outside India, which was opened by him when he was a non-resident?

A person resident in India might maintain a foreign currency account outside India if he had opened it when he was resident outside India or inherited it from a person resident outside India.

8. What is the status of the account held outside India on the demise of the account holder?

A resident nominee of an account held outside India has to close the account and bring back the proceeds to India through banking channels.

9. What is the status of Standing Instructions /ECS mandate for SIP /MF investments from NRE accounts?

 When the status becomes resident, the customer should inform the AMC of the MF regarding the change of status. Investments in MFs from NRE/NRO accounts are subject to FEMA regulations on reparability; it is in the interest of the customer to seek the advice of AMC /Fin adviser and continue the investments if need be as a resident individual.

10. How much foreign exchange can be brought in while returning to India?

A person can bring with him foreign exchange without any limit. However, if the aggregate value of the foreign exchange in the form of currency notes, banknotes or travellers’ cheques brought in exceeds USD 10,000 or its equivalent and/or the value of foreign currency alone exceeds USD 5,000 or its equivalent, it should be declared to the Customs Authorities at the Airport in the Currency Declaration Form (CDF), on arrival in India.

11. Can a resident (returning NRI) hold asset outside India?

In terms of sub-section 4, of Section (6) of the Foreign Exchange Management Act, 1999, a person resident in India is free to hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India.

Further, a resident individual can also acquire property and other assets overseas under LRS. (Liberalized Remittance Scheme)

12. What are the Tax implications on becoming Resident?

From the date of conversion into resident accounts, the interest earned on Deposit /SB accounts is subject to Income Tax. Applicable TDS if any has to be deducted from the interest on Deposit accounts.

Is the residential status being relevant in determining tax liability?

Yes, the residential status of a person earning income is very much relevant for determining the taxability of such income in his hands.

Taxability of any income in the hands of a person depends on the following two things:

(1)  Residential status of the person as per the Income-tax Law; and

(2)  Nature of income earned by him.

Hence, residential status plays a vital role in determining the taxability of income. ​

What are the different classes of residential status prescribed under the Income Tax Act?

For Income-tax Law, an individual can have any one of the following residential statuses:

(1) Resident and ordinarily resident in India (generally known as a resident)

(2) Resident but not ordinarily resident in India

(3) Non-resident

Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law designed in this regard.

15. As per Income Tax Act, how to determine the residential status of an individual?

To determine the residential status of an individual, the first step is to ascertain whether he is resident or non-resident. If he turns to be a resident, then the next step is to ascertain whether he is resident and ordinarily resident or is a resident but not ordinarily resident.

Step 1 given below will ascertain whether the individual is a resident or non-resident, and step 2 will ascertain whether he is ordinarily resident or not ordinarily resident. Step 2 is to be performed only if the individual turns to be a resident.

Step 1: Determining whether resident or non-resident

Under the Income-tax Law, an individual will be treated as a resident in India for a year if he satisfies any of the following conditions (i.e. may satisfy anyone or may satisfy both the conditions):

(1) He is in India for a period of 182 days or more in that year; or

(2) He is in India for a period of 60 days or more in the year and a period of 365 days or more in 4 years immediately preceding the relevant year.

However, in respect of an Indian citizen and a person of Indian origin who visits India during the year, the period of 60 days as mentioned in (2) above shall be substituted with 182 days. The similar concession is provided to the Indian citizen who leaves India in any previous year as a crew member or for employment outside India.

The Finance Act, 2020, w.e.f., Assessment Year 2021-22 has amended the above exception to provide that the period of 60 days as mentioned in (2) above shall be substituted with 120 days, if an Indian citizen or a person of Indian origin whose total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. Income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

Note: The Finance Act, 2020 has introduced new section 6(1A) to the Income-tax Act, 1961. The new provision provides that an Indian citizen shall be deemed to be resident in India only if his total income, other than income from foreign sources, exceeds Rs. 15 lakhs during the previous year. For this provision, income from foreign sources means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

However, such individual shall be deemed to be Indian resident only when he is not liable to tax in any country or jurisdiction because of his domicile or residence or any other criteria of similar nature.

Thus, from Assessment Year 2021-22, an Indian Citizen earning total income over Rs. 15 lakhs (other than from foreign sources) shall be deemed to be resident in India if he is not liable to pay tax in any country.

Step 2: Determining whether resident and ordinarily resident or resident but not ordinarily resident

A resident individual will be treated as resident and ordinarily resident in India during the year if he satisfies the following conditions:

(1) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant year.

(2) His stay in India is for 730 days or more during 7 years immediately preceding the relevant year.

However, w.e.f., Assessment Year 2021-22, the Finance Act, 2020 has inserted the following two more situations wherein a resident person is deemed to be ‘Not Ordinarily Resident’ in India:

a) An Indian Citizen or a person of Indian origin whose total income (other than income from foreign sources) exceeds Rs. 15 lakhs during the previous year and who has been in India for a period of 120 days or more but less than 182 days;

b) An Indian Citizen who is deemed to be resident in India as per new section 6(1A)​.

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as a resident but not ordinarily resident.

In short, the following test will determine the residential status of an individual:

If the individual satisfies any one or both the conditions specified at step 1 and satisfies any of the conditions specified at step 2, then he will become resident and ordinarily resident in India.

If the individual satisfies any one or both the conditions specified at step 1 and satisfies none or one condition specified at step 2, then he will become resident but not ordinarily resident in India.

If the individual satisfies no conditions satisfied at step one, then he will become non-resident.

16. What are the tax benefits for Non-Residents and Resident but not Ordinarily resident?

Tax Benefits for NRs and RNOR

The income arises in India- Fully Taxable in the hands of ROR, RNOR and NR.

Income accruing outside India from a business controlled from India or a profession set up in India-Fully Taxable in the hands of ROR, RNOR. Not taxable in the hands of NR.

Income other than above (i.e., income which has no relation with India)-Fully Taxable in the hands of ROR. Not taxable in the hands of RNOR, NR.

(ROR means resident and ordinarily resident. RNOR means resident but not ordinarily resident.  NR means non-resident. ​)

Disclaimer: Above write up is prepared on best efforts basis with available inputs, which is subject to change. Readers are requested to refer the latest RBI /Income Tax guidelines on the subject and make informed decisions before acting upon, as the write up is provided for academic purpose only.

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