Key Takeaways
Provisions of the Income Tax Act, 1961
Residential Status :
A person would be a RESIDENT of India for income tax purposes if-
- He/she is in India for 182 days or more during the financial year (or)
- If he/she is in India for at least 365 days during the 4 years preceding that year AND at least 60 days in that year.
Where, a person doesn’t fall under any of the above criteria, will be treated as “Non-resident” in that financial year.
Further, a person would be a RESIDENT AND ORDINARILY REIDENT (ROR) of India for income tax purposes if any of the below mentioned conditions are satisfied :
- He/she is resident in atleast 2 out of 10 financial years preceding the financial year (AND)
- If he/she during the 7 financial years preceding the financial year been in India for a period of 730 days or more.
Deemed Resident
As per Section 6(1A), an individual will be deemed to be resident in India in any previous year if the following conditions are fulfilled :
a. the individual is a citizen of India;
b. his total income (excluding foreign sources) exceeds Rs 15 lakhs during the previous year;
c. he is not liable to tax in any other country or territory and
d. he is not liable to tax for the reason of (i) domicile (ii) residence or (iii) any other criteria of similar nature.
The individual who satisfies the aforesaid conditions would be deemed to be a resident even if has not stayed in India for a single day in the relevant previous year.
Further, such an individual will qualify as RNOR in India for the relevant tax year.
The above rule of determining a person as a ‘deemed resident’ of India will only be applicable where the normal rule of residency based on the individual’s physical presence in India during the relevant previous year and/or past four tax years is not applicable.
Income Tax Implications based on Residential status :
Non Resident :
Resident but Not Ordinarily Resident (RNOR) :
Resident and ordinarily Resident (ROR) :
A. Timeframe for Conversion of NRE/ NRO account to a resident savings account
Reserve Bank of India has provided the following guideline for converting NRI account to a resident account when there is a change in residential status from NRI to resident:
1. If the account held in India is NRE Account :
NRE accounts should be designated as resident accounts or the funds held in these accounts may be transferred to the RFC (resident foreign currency) accounts, at the option of the account holder, immediately upon the return of the account holder to India or change in Residential status.
- RFC accounts (Resident Foreign Currency) are bank accounts that can be maintained by resident Indians in foreign currency. These accounts are especially useful for Non Resident Indians (NRI) who return to India and would like to bring back foreign currency from their overseas bank accounts and the same can repatriated back. Funds held in RFC accounts are fully repatriable and transferred abroad without any restrictions.
- Alternatively, NRIs can convert their NRE FDs to Resident Rupee accounts, which are standard savings or term deposit accounts for Indian residents.
2. If the account held in India is NRO Account :
NRO accounts may be designated as resident accounts on the return of the account holder to India for any purpose indicating his intention to stay in India for an uncertain period.
Taxability of Interest: The interest earned out of such deposits will be fully taxable on becoming a Residential Individual upon satisfying the conditions.
Conversion of FCNR Deposits
Taxability of Interest :
- According to the provisions of the Income Tax Act 1961, assessee is exempt from tax payment for Interest Income earned from FCNR deposit until he holds the status of a Non-resident Indian or a Resident and Not Ordinarily Resident vide section 10(15)(iv)(fa). Hence, RNORs continue to enjoy exemptions available to NRIs for 2 years after their return.
- Once the residential status changes to the ordinary resident, interest from the FCNR deposit would become taxable.
TO CONCISE :
| Bank Account | Income Tax Provisions |
|---|---|
| NRO Deposits | Taxable. Under NRO status TDS was applicable as NRI and now it will be as per Resident. Hence, less TDS on conversion as per applicable income tax rates. |
| NRE Deposits | Taxable {Sec 10(4)(ii)} as the account cannot be maintained as per RBI guidelines |
| FCNR Deposits | Exempt till the Returning NRI is Non-resident or NOR {Sec 10(15)(fa)} |
Author
Renuka H
