Being a Non Resident Indian is a premium tag for the majority of Indians. I have seen that many people are so passionate to go abroad that they are willing to spend the savings of their life. Most common opportunities to become an NRI is either due to employment or education abroad. In some instances, i observed that people move abroad if any of their close relatives is staying there. A few countries have very friendly policies in this regard i.e. you can very easily become Non Resident Indian. One such country is Australia.
This post is not about residency status or how to become a Non Resident Indian. In this post, i will discuss the 5 points you need to take care when you become a Non Resident Indian. Normally i observed that if you are moving out because of employment then the HR department of the organization help the employee to understand all the financial and tax implications. Here i would like to clarify one point that under FEMA if you are leaving India for employment then you become Non Resident Indian as soon as your flight takes off from Indian Soil :).
5 Financial Points to Consider When You Become Non Resident Indian
1. Inform your Bank:
It is mandatory for you to inform your bank about the change in your residency status. The savings account is changed to Non Resident Ordinary Account i.e. NRO Account. The account no and other account details does not change. Simply in bank records, the account type is changed to NRO Account. In many cases especially related to property sale by Non Resident India, the bank account no shared with the buyer is Savings Account i.e. NRI’s don’t inform bank regarding the change in residency status. Please note that mere possession of Permanent Account Number and Indian Savings Account does not change residency status of Non Resident Indian to Resident Indian.
There is a common misconception that change in status is required only for a savings account. It is not correct. You have to update the status in all the investments including Fixed Deposits, Small Savings Schemes, Recurring Deposits etc.
2. Tax Treaty between India and country of emigration:
Not many people are aware that India has signed DTAA i.e. double taxation avoidance agreement with more than 80 countries. In layman terms, DTAA implies that you will not be taxed twice for the same income. It applies when you are staying in country A but taxed in country B. Therefore, Non Resident Indian is covered under DTAA if it is signed.
For example, Mr. A who stays in Country X and earn rental income in India from multiple properties. Assuming in India, he is taxed at 10%. Now if this income in India is taxed in Country X as a foreign income at 20% and provided India and Country X has signed DTAA. In this case, rental income in India will be taxed at only 10% in country X as 10% is already taxed in India.
The reverse of the same is also true i.e. if tax/TDS is higher in India compared to Country X then rate of TDS in India will be low. I will discuss it in the next point.
3. The Rate of TDS:
This is the biggest deterrent for Non Resident Indian to declare their status to banks and other financial institutions. The rate of TDS increase from 10% to 30%, if your residency status change to Non Resident Indian. The reason being, for NRO accounts TDS on bank deposits is 30.9% including 3% education cess.
Normally, there is a confusion on the rate of TDS. The reason for this confusion is the definition of Non Resident Indian under FEMA and Income Tax Act. Quite interestingly, both the laws have a different definition. As i shared that if you are leaving the country for employment then under FEMA you become Non Resident Indian from the date of leaving India. Whereas in the case of Income Tax Act, it is not the case. Under Income Tax Act, the residential status is determined for the Financial Year on the basis of provisions of Income Tax Act. There is a possibility that an individual is Non Resident Indian under FEMA but Resident Indian as per Income Tax Act. I will discuss it in detail in one of the future posts.
Therefore, there is no standard process followed by banks with ref to the rate of TDS. Some banks will deduct 30.9% TDS from the date of the change in residency status whereas others may determine the residency status under income tax act.
The biggest catch is that TDS is deducted on NRO Savings Account whereas for resident Indians TDS is not deducted on interest from Savings Account.
Another important point is that Non Resident Indian can avoid TDS by submitting form 15G or 15H as the case may be if the effective tax rate is lower than the TDS. Otherwise, the only solution is to file ITR and claim refund.
One of the option to lower the rate of TDS but not exercised by many Non Resident Indian is to take advantage of DTAA. In continuation of point no 2, if the Country X deduct 12% TDS on bank deposits and in India applicable TDS is 30.9%. In this case, under the provisions of DTAA, a Non Resident Indian can request the bank to deduct TDS at 12%. The reason being, in such cases there is no provision to claim a tax refund in Country X. This is especially applicable in case the income in India is taxable under highest slab i.e. 30%.
4. Higher Remittance:
The biggest advantage of NRO Savings account is higher remittance limit. A Non Resident Indian can remit up to 1 million dollars (This limit is exclusive of Current Income in India) during the financial year i.e. whopping 6.8 Cr at current exchange rate of Rs 68. It comes handy at the time of sale of property. On the other hand, resident Indian can remit of 2.5 L dollar under liberalized remittance scheme.
It is always advisable for a Non Resident Indian to accept all the income in India in his/her NRO account. The reason being, any income in India can be remitted without any limitation provide all the tax dues are cleared on such income. As i mentioned, remittance of income is over and above the limit of 1 Million dollar. Please note that there is NO LIMIT only on current income but not on the past income.
5. Bank Account:
Non Resident Indian should open either of following accounts depending on their requirement
(a) NRO Account – Non Resident Ordinary
(b) NRE Account – Non Resident External
(c) FCNR (B) Account – Foreign Currency Non Resident (Banks). FCNR account can be opened only as time deposit or fixed deposit.
NRO account is normally savings account whereas NRE account can be opened as savings, current, RD or FD. It is important to open anyone of the above-mentioned accounts. Discussion on these accounts is a separate topic altogether. I will cover it in my next post.
Words of Wisdom:
The taxation of Non Resident Indian is a bit complex topic. For high-value transactions, it is always advisable to apply for an advance ruling to avoid taxation issues. In this post, i only covered the basics of the same. In certain cases, the decision also depends on the period i.e. for how long you are moving out? Secondly, what you want to do with the Income earned in India. Normally there is a dilemma on what to do?
In my opinion, if you are planning to shift for the long term then it is always advisable to liquidate Indian assets and remit from India. Otherwise, you may face problem in future. It requires micro level financial planning. Here by long term, i mean min 3 years.
On the other hand, if you are moving abroad for short term i.e. 1-3 years then the basic steps highlighted by me in this post will suffice. At the same time, i would like to add that many people shift abroad for short term but it becomes long term. It is due to either change in employment abroad or extension by the current employer. You cannot avoid unforeseen circumstances but it is always advisable to plan for such scenarios in advance.
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