How NRIs should manage finances on homecoming

NRIs returning to India need to carefully manage the financial aspects of their shift

Venkat Naishadham, 43, working for Citibank in Mexico City, plans to shift back to India this summer.

After 17 years abroad, he is excited about being back in the country and hopes to devote more time to philanthropic activities (he has adopted a village near Hyderabad).

But, he is also worried about whether his children will be able to cope with the heat, the crowds, and the challenges of day-to-day living in India.

Non-resident Indians like Naishadham 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 not ordinarily resident.

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 (Rs 1 million),” 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 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, 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 (Rs 200 million), may not need to buy term insurance, while another person with an asset base of only Rs 50 lakh (Rs 5 million) 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.

HIGH PENALTY FOR NOT DISCLOSING FOREIGN ASSETS

The Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, 2015, provides for criminal liability for attempting to evade tax on foreign income
All income and assets outside India should be disclosed and filed in returns
Penalty for non-disclosure of foreign income will be three times the amount of tax payable, in addition to tax payable at 30%
Penalty for not furnishing I-T returns on foreign income or assets is Rs 10 lakh (Rs 1 million). Assets with a value of Rs 500,000 or less excluded
Attempt to evade tax or non-disclosure of foreign assets can also result in imprisonment and fine

A LIST OF THINGS TO DO

Before you move