RETURNING INDIANS A returning NRI should know and understand various aspects of Foreign Exchange Regulations (FEMA), Indian

Taxation and Banking Regulations in order to rearrange his financial affairs in India and outside India.

FOREIGN EXCHANE MANAGEMENT ACT (FEMA) A) OVERSEAS ASSETS All kind of Foreign exchange / Overseas assets such as properties, bank deposits, stocks and securities, life insurance policies, loans, company deposits, debentures, bonds etc. acquired, held or owned by an NRI while he was abroad can be continued to be so held and deal in any manner even after the NRIs return to India for permanent settlement. . There is no specific provision on movable assets like jewellery, motorcar and personal household effects. Accordingly A may continue to hold/ dispose such movable assets without permission of RBI though to avoid any possibility of litigation; he may inform RBI of the same. If required, overseas assets can be repatriated to India. Proceeds of assets held outside India at the time of return, can be credited to RFC account. The funds in RFC accounts are free from all restrictions regarding utilisation of foreign currency balances including any restriction on investment in any form outside India. Reinvestment abroad of sale proceeds of overseas assets is not specifically permitted but the same can be done by means of a RFC account i.e. sale proceeds deposited in RFC account and the same reinvested abroad (in shares or any other asset). Again under FERA, reinvestment was expressly permitted and we are of the view that the beneficial provisions of FERA would continue and permission from RBI would not be required for reinvestment directly i.e. not routed through RFC account. Under FERA, RBI had granted general permission to returning Indians to maintain and operate foreign currency accounts abroad . FEMA is silent on this issue. Thus, technically a returning NRI would require approval from RBI to maintain bank accounts abroad. However we are of the view that the beneficial provisions of FERA would continue though it is advisable to obtain the approval of RBI in this regard. FEMA stands for Foreign Exchange Management Act. Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property) or current account transaction (e.g. remittance of income on shares, property) are the cornerstones of FEMA. The golden rule of FEMA is, All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted. Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/ Government or it is mandatory to inform RBI of the same. Though transactions of residents in foreign exchange such as investment abroad are being liberalised at a very fast pace, India is still not close to full capital account convertibility though returning Indians enjoy certain concessions in relation to existing overseas assets Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of

a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the number of days of stay in India. Under FEMA, residential status is determined based on primarily the intention of the person. A would become a resident for FEMA with effect from the date of arrival in India

B) INDIAN ASSETS I. BANK ACCOUNTS. (In India) Returning NRIs, upon his return to India has to deal with his various accounts in India in the following manner:

Account Description NRO A/c

Treatment to be given Re-designate to Resident A/c.

FCNR A/c

Hold up to maturity. Upon maturity should be converted into Rupee Account or RFC A/c.

NRE A/c Banking Accounts

Re-designate to Resident A/c or Transfer Balance to RFC A/c.

NonNon-Resident Foreign Currency Resident External Rupee Particulars Non-Resident Account Ordinary Account (FCNR) Account (NRE) (NRO) Savings, Savings, Current, Type of Current, Term deposit only Recurring/ account Recurring/ Term Term deposit deposit For terms not less than Period for No 1 year and more than 3 No restriction deposits restriction years i.e. 1-3 years only In the name of In the name of two or May be held Joint two or more nonmore non-resident jointly with account resident individuals residents individuals Besides account Besides account NRI and Operation of holder, Power of holder, Power of Resident account Attorney holder Attorney holder Indian

Nomination

Permitted USD, Pound Sterling, Designated Japanese Yen, Euro, currency DM, Australian Dollars, Canadian Dollars Canadian Dollars

Permitted Indian Rupees

Account holder jointly or severally. Also Power of Attorney holder. Permitted Indian Rupees

Rate of interest

Savings: Ceiling rate of six month Fixed or floating within USD LIBOR the ceiling rate of Term Deposit: LIBOR/ SWAP rates for Ceiling rate of the respective USD LIBOR of currency/corresponding corresponding term minus 25 basis maturity points at present. Current: No interest is paid

Savings: As applicable to domestic savings account Term Deposit: Banks are free to determine interest rates. Current: No interest is paid.

Tax-free. If a NRI Tax-free. Even on Taxable and permanently permanent return to Tax returns to India, India, tax-free till the deducted at Taxation of interest accrued time a person is Not source at interest w.e.f the date of Ordinarily Resident the permanent within the meaning of applicable return to India is the Income Tax Act. rate taxable. Account Account Holder is holder is protected against Account holder Foreign exposed to changes in INR value is exposed to the Currency the vis- -vis the currency fluctuations in Risk fluctuations in which account is the value of INR in the value dominated of INR Interest and other Both principal and Both principal current Repatriation interest freely and interest income repatriable freely repatriable freely repatriable. Principal

repatriable up to USD 1 million per calendar year. Can be continued till Change in due date on which residential option for conversion to status Rupees/ RFC account to be exercised Can be Account to continued till be maturity, but to designated be designated as as a resident account Resident or converted to account RFC

II. RESIDENT FOREIGN CURRENCY ACCOUNT (RFC Account) o o o A Returning NRIs, on becoming residents are free to open and maintain such accounts with authorised dealers. The funds held in RFC are fully repatriable and also denominated in Forex. Funds in RFC accounts can be remitted abroad for any bona fide purpose of the account holder or his dependants.

Resident foreign currency or RFC accounts are bank accounts that enable resident Indians to maintain accounts in foreign currency. Such accounts are primarily advantageous for Non Resident Indians (NRIs) planning to come back to India as they would be able to retain their fortunes earned in foreign currency in RFC account. Below are certain specific attributes of this account with respect to returning NRIs. Who is eligible to open RFC account? Any resident Indian can open and maintain the RFC account in any freely convertible foreign currency. Also, NRIs who after residing for a continuous term of 1 year or more in a foreign nation have returned back to India are also eligible to open a RFC account in foreign currency. Authorized dealers or banks can assist in the opening of a RFC account. Else, existing NRE or FCNR account can also be converted into a RFC account at the discretion of the account holder. In which foreign currencies RFC account can be maintained? RFC account can be maintained in any of the freely convertible foreign currency that is recognized in the international markets. So, a person can open RFC account with funds in multiple foreign currencies such as AUD, CAD, Euro, GBP, JPY, USD etc.

What is the interest rates offered on RFC account? Interest rate offered on RFC account, which can be held as either term deposit, current or savings account, varies according to the term and currency. At present, the rate of interest offered on a RFC term deposit of over 1 year maintained in US dollar is in the range of 2.5%-3.5%. What is the tax implication on interest credited in RFC account? Interest credited on a quarterly basis on the balance fund in the RFC account is taxable. However, in a case, when the account holder is a Resident but does not qualify as an Ordinary Resident then he is exempt from tax payment for the interest earned on the RFC account. What funds can be deposited in the RFC account? All such sources of funds that can be deposited in the RFC account are provided here below: 1. Balance amount in foreign bank account that includes funds in foreign currency earned through conduct of some business in the foreign nation or by way of employment. 2. Superannuation, pension etc. received by the NRI from an employer abroad. 3. Foreign exchange received on account of sale of assets including shares, bank account, immovable property and investments held by the individual outside India. 4. Any income earned from assets held abroad such as interest income and dividend. 5. On becoming a resident Indian, funds from FCNR or NRE account can be deposited in the RFC account and in such a case no penalty would be levied on premature withdrawal of FCNR or NRE account. 6. Foreign currency notes brought from a foreign nation. Nevertheless, in a case when the valuation of such foreign currency notes is more than $5000 or the total value of notes and Traveler's cheques is over $10,000 then Currency Declaration Form (CDF) is to be submitted to the customs authorities. The form is also to be produced in front of the banking authorities for endorsement while depositing money at the time of opening or making a credit to the RFC account. For what purposes RFC account balance be used? The balance amount in RFC account can be used for investments or remittances abroad. The Funds can also be used for payments and investments in India and in this case the amount is converted into Indian rupee.

II. SHARES SECURITIES ETC

Returning NRI is required to inform all the companies, funds etc. as to change of residential status from NRI to Resident. A is required to redesignate all his banking accounts as Resident Accounts by informing the banker of change in residential status. FCNR (B)/ NRE Fixed Deposit account may be continued till maturity at the agreed rate of interest till maturity. On maturity, the proceeds of NRE/ FCNR (B) deposits can be converted into RFC account. Interest earned on NRO account till date of return can also be credited to RFC account. Similarly, one should inform of change in status to companies in which shares/ debentures are held as also to firms in which one is a partner. INCOME TAX ACT 1. The tax liability of a person returning India would depend on the Residential Status of a person as per the Income-tax Act, 1961. . There is no Income-tax in India on a foreign income merely because it is remitted to India during that year.

2. Under the Indian Tax Laws overseas income is liable to Tax in India only if the assessee is an ordinarily resident.

3. A returning Indian who has been a Non Resident for 9 years or more, then for 2 successive years he shall be a resident but not ordinarily resident (RNOR).

4. Interest on Non Resident External Account (NRE) and Foreign Currency NonResident Account (FCNR) [Section 10(4)(ii)] is Exempt in the hands of a person who is a Person Resident outside India as per section 2(w) of FEMA, 1999 and definition of 'Non-Resident' under Income Tax is not relevant for this sub section.

5. Income in respect of Interest, premium on redemption, other payment on notified securities, bonds, certificates and deposits. [Section 10(15)(i)].

Interest on India millennium Deposits (IMDs)/Resurgent India Bonds (RIBs) issued by State Bank Of India (The exemption from tax continues even if the NRI becomes a resident and is also available to the nominee or the survivor of the NRI or to a donee to whom the bonds have been gifted by the NRI.)

6. Interest paid by schedule banks to Non Resident or to a person who is not ordinarily resident on RBI approved foreign currency deposits (i.e. RFC deposits) is exempt (s. 10 (15) (iv) (fa)). The exemption, in respect of RFC account, continues till such time as the account holder continues to be Resident but Not Ordinarily Resident.

7. NRIs have been offered a separate concessional tax regime in respect of certain types of income under Chapter XIIA comprising section 115C to 115I. As per section 115E, concessional tax of 20 percent is available in respect of investment income and 10% in respect of long-term capital gains from the specified assets, which are acquired out of convertible foreign exchange. The benefit of concessional tax treatment under chapter XIIA continues even after NRI becomes a resident.

8. Pension: If you are likely to receive pension from your former employer after you return to India, it may be liable to tax in India subject to provisions of Double Taxation Avoidance Agreement between India and the country from which you are receiving it.

TAX EXEMPTIONS & TAX PLANNING

NRI's are also allowed to file exemption for the assets brought by them to India or assets acquired by such money. Up to seven years from the day of they return to India, they are exempted for they assets. The investment should be made in each of the file in such a manner that the amount of taxable income is kept below exemption limit, which at present is Rs. 50,000. Another important area of tax planning to be adopted by a returning NRI is to make investments in bank fixed deposits as also in NSCs in such a manner that each member of his family gets deduction upto Rs. 15,000 per year under the provisions of Section 80L. Every returning NRI must adopt tax planning carefully so as to avoid clubbing of the income of his spouse or daughter-in-law or minor children with his income. An important aspect of tax planning to be adopted by a returning NRI is to make investment in Relief Bonds so that the entire income is exempt from income tax under Section 10(15)(iic) of the I.T. Act. Likewise, he can make investment in tax-free 6% Savings Bonds of the RBI. Likewise, an NRI can make investments through the help of well-known brokers in shares of reputed companies so that there is security along with liquidity of investment and the dividend income is eligible to exemption under Section 10(34) from income tax.

If there is any taxable income, say on account of rental income or investment in nonbanking deposits, etc., then the tax incidence can be reduced through investments in PPF, NSCs, Life Insurance premiums, specified and notified infrastructure bonds, units, etc. under Section 88 where 20% or 15% rebate of income tax is allowed upto a maximum investment of Rs. 1,00,000 per tax-payer. Earlier, a very safe and sound avenue for returning NRIs was investment in 8 per cent Relief Bonds as the interest was completely tax-free for the period of the bond, namely five years. From 1.3.2003, however, these have been discontinued. But they can be bought through the Stock Exchange. Where an NRI is interested in having a house, he can invest his funds in the purchase or construction of a self-occupied residential house, the income of which will be nil for income tax purposes. Further, he can even borrow moneys from his relative and get a deduction on interest upto Rs. 1,50,000 every year from any other taxable income. The above account of tax planning to be adopted by an NRI gives the most important aspects of tax planning to achieve a zero income tax level.

WEALTH TAX i. ii. Assets located outside India of Non-resident (NR) / Resident but Not Ordinary Resident (RNOR) are exempt from Wealth Tax. If NRI return to India with the intention of permanently residing in India, the assets brought by him will be exempt. Also, the money and the assets acquired from the money, brought by NRI within one year after his return, will be exempt. This exemption is available to NRI for a period of seven years after his return to India. [Sec. 5(1)(v)]

PIO CARDS The Government has announced a scheme for issuance of Persons having foreign of Indian Origin (PIO) Cards for Persons of Indian Origin living abroad and passports. The PIO cards, which would be extended to Persons of Indian Origin settled in countries other than Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal and Bhutan besides introducing a visa free regime, also confer some special economic, educational, financial and cultural benefits to the holders of these Cards. The following facilities shall be extended to the PIO Card holders: a. Visa free entry to India. b. For PIO Card holders the requirement for registration with Foreigners Regional Registration Office has been done away with for continuous stay not exceeding 180 days. All future benefits that would extended to NRIs would also be available to the PIO Card holders.