7 things I wish I knew before returning to India

Summary

Returning to India as an NRI can be financially complex. In this video, Malvaka shares seven essential tips for managing taxes, protecting your money, and avoiding common mistakes. Key advice includes maximizing tax exemptions for foreign income, understanding LRS limits, managing foreign currency, handling international investments, and navigating property decisions. It also emphasizes the importance of proper paperwork for residency status and FEMA compliance. Whether you're dealing with healthcare or securing your social security credits, this guide offers valuable insights to help returning NRIs avoid costly mistakes and plan a smooth transition back home.

Takeaways

• 😀 Understand the importance of RN status (Resident but Not Ordinarily Resident) when returning to India. This status helps save significant tax on foreign income during the first few years.
• 😀 Be aware of the time-sensitive nature of the RN status period. Missing the window can lead to unnecessary taxes on capital gains, rental income, and more.
• 😀 Track the start and end dates of your RN status and plan major financial moves (like selling property abroad) inside this window to avoid extra tax.
• 😀 Don’t rush to convert foreign currency to rupees when you return. Open a Resident Foreign Currency (RFC) account to protect your funds from rupee depreciation and LRS limits.
• 😀 The LRS limit of $250,000 per financial year applies once you become a resident. To avoid this limit, consider using RFC accounts for repatriating foreign funds freely.
• 😀 If you have foreign investments or income (e.g., dividends, capital gains), file the appropriate forms (e.g., W8-BEN, 10F) to reduce tax withholding and avoid double taxation.
• 😀 Don’t close your foreign bank or brokerage accounts upon becoming a resident. They may be needed for tax refunds and future transactions.
• 😀 Pay attention to converting your NRE and NRO accounts into resident accounts. Ensure you follow the correct procedure to avoid penalties under FEMA regulations.
• 😀 Avoid rushing into property decisions in India. Rent before committing to buy to ensure you are settling in the right city and location. Renting out your foreign property during the RN period could provide tax-free income.
• 😀 If you have pre-existing health conditions, purchase Indian health insurance at least 2 years before returning to avoid waiting periods for coverage on those conditions.
• 😀 Ensure you have 40 Social Security credits if you’ve worked in the US to qualify for lifetime benefits. If you’re close, consider staying another year to reach the required threshold.

Q & A

What is the significance of the RN (Resident but Not Ordinarily Resident) status for returning NRIs?

The RN status is crucial because it offers a tax exemption on foreign income during the first few years after returning to India. This includes capital gains from overseas property, rental income from foreign properties, and withdrawals from retirement accounts. If NRIs miss this status, they could end up paying unnecessary taxes on their foreign income.

How can an NRI ensure they qualify for RN status and avoid tax issues?

An NRI should check if they qualify for RN status based on specific residency conditions. It’s important to track the start and end dates of the RN period and work closely with a chartered accountant (CA) to declare this status every financial year. Misunderstanding or missing this status could result in higher taxes on global income.

What is the LRS limit and how does it affect an NRI's ability to repatriate money once they return to India?

The Liberalized Remittance Scheme (LRS) allows NRIs to repatriate up to $1 million per financial year from their NRO accounts while they are abroad. However, once they become residents, the limit drops to $250,000 per year. NRIs should plan large international transfers before returning to India to avoid this limitation.

What is the Resident Foreign Currency (RFC) account and why should returning NRIs consider opening one?

An RFC account allows NRIs to park their foreign currency after becoming residents. The key advantage is that funds in this account are not subject to the $250,000 LRS limit, meaning money can be repatriated freely. Additionally, interest earned on RFC accounts is tax-free during the RN period, making it a useful tool for managing foreign funds.

What is the procedure for reducing tax withholding on foreign income for returning NRIs?

To reduce tax withholding on foreign income, NRIs must file certain forms. For example, they need to submit Form W8-BEN with their foreign broker to reduce the withholding tax on dividends and interest from 30% to a lower rate (often 15%). They also need to file Form 10F in India and obtain a tax residency certificate to claim the benefits under India's double tax avoidance agreements.

Why is it important for returning NRIs to keep their foreign bank and brokerage accounts open?

It's essential to keep foreign accounts open because tax refunds, dividends, and property sale proceeds may be processed through these accounts. Closing them prematurely can create complications in managing funds and receiving tax refunds after returning to India.

What are the key steps an NRI needs to take to ensure compliance with FEMA regulations after returning to India?

Once an NRI has stayed in India for 182 days or more in a financial year, they must convert their NRE and NRO accounts to resident status under FEMA regulations. This process involves informing the bank's NRI cell or customer care and providing necessary documentation to avoid penalties. Additionally, investment accounts and PAN card jurisdiction should be updated.

How should returning NRIs approach property decisions in India and abroad?

Returning NRIs should avoid selling or purchasing property in the first year after returning. Instead, they should consider renting out their foreign property or renting in India first. This allows them to adjust to life in India, test different cities, and avoid making rushed decisions that may result in financial loss if they decide to move again later.

What are the health insurance considerations for returning NRIs, especially those with pre-existing conditions?

Returning NRIs with pre-existing conditions should purchase Indian health insurance at least two years before returning. This is important because new policies often have waiting periods of 2 to 4 years for pre-existing conditions, and delaying this decision could result in denial of coverage or significant exclusions.

How can returning NRIs maximize their U.S. Social Security benefits?

Returning NRIs who have worked in the U.S. and are close to qualifying for lifetime social security benefits (requiring 40 credits) should consider staying one more year to earn the remaining credits. These benefits can be worth a significant amount (30 to 40 lakh rupees) over their lifetime.