This article is written by Komal Shah and Pinky Sharma, Team LawSikho.

Living and working overseas has its advantages. You can earn in foreign currencies and have the experience of working with the most developed economies of the world. 

If you have lived in one country for a relatively longer period, you will have income and investments in that country. Therefore, when you relocate, you will have to consider how to deal with the income and the investments you have generated in that country.

Hence, if you have secured an opportunity overseas and are moving, you will need to think about what changes will happen to your assets in India. Similarly, if you relocate to India, you will have to think about how your overseas income and assets will be treated.

Although major implications of such movements are in terms of taxation, there can also be implications in terms of foreign exchange management related regulations and labour-related regulations.

Tax implications viz a viz residential status

Governments tax your income either on the basis of the place where your income is generated or on the basis of the place where you reside. If your residence and generation of income are both at the same place, there is no confusion and the Government of that country will be entitled to tax that income. If you reside and earn in India, the Indian Government can tax your income. If you reside and earn in the United Kingdom, only the UK Government can tax your income. 

However, the issue arises when you have assets in India which are generating income and you move to the UK. Or when you have investments or residential properties in the UK which are generating income and you relocate back to India. 

In such cases, it is the residential status which will determine the tax liability. The Income Tax Act, 1961 provides for three different types of residential statuses: Non-resident (NR), Resident but not ordinarily resident (RNOR), Ordinary Resident (OR).

These statuses are determined on the basis of the number of days you are resident in India in the relevant tax year, in four tax years prior to the relevant tax year and in ten tax years prior to the relevant tax year. Changes introduced by the Finance Act, 2020 simplified the provisions relating to the RNOR status. For details, you can read a financial express article here.

If you are an Ordinary Resident (OR), your global income will be taxed in India, irrespective of where it is earned. On the other hand, if you are a Non-Resident or a Resident but not ordinarily resident, only the income earned in India will be taxed in India. 

Therefore, when you return to India, it may be possible for you to have an NR or RNOR status for a certain period of time (around 2 years), when your income abroad will not be taxable in India. In this duration, it may be possible for you to arrange your assets abroad in such a way so that they would be easily manageable and subject to lesser tax when your status changes to OR.

Bank account balances abroad are generally not subject to significant tax because the interest rates abroad are quite low and therefore, the income, even when converted into Indian Rupees, does not amount to much. However, if you have profits from selling shares held outside India or rental income from properties outside India, this would need some planning.

Once you attain the OR status, you will have to declare your foreign assets in your income tax return and also pay tax in India on the income earned abroad. It is possible that the interest on bank account balances abroad has already been taxed outside India and hence, if you also pay tax on that income in India, you may be able to avail tax credit on the same in accordance with the prevailing Double Taxation Avoidance Agreement (DTAA) between the two countries.

If an individual needs this extent of planning, think how much you would need to plan if you were running or advising a company having multinational operations! It’s just one of the things we discuss extensively in our Certificate Course in Advanced Corporate Taxation.

Bank accounts

Another thing which you should keep in mind while returning to India is your bank accounts. At the time of moving abroad, you would have had to redesignate your bank account as NRO account and your demat account as NRO/ NRE account. When you return to India, these would have to be redesignated as resident savings accounts (one view is that this needs to be done immediately as you return with an intent to stay for an uncertain duration, and not when your residential status changes to OR).

What about your bank accounts abroad? If you have multiple accounts, it makes sense to consolidate your holdings into one account which may be linked with something else, like your pension fund or the revenue there etc. You would also need to change the addresses with the banks there. You may be subject to certain KYC requirements and be asked to provide certain confirmations under the Foreign Account Tax Compliance Act (FATCA) or the European Payment Services Directive (PSD) as applicable. If you are not using the account or retaining it with a minimum or very low balance, the bank may even ask the reason why you are retaining the account. In any event, it’s only the interest on the balances in those accounts which will be taxed.

Social security considerations on being employed in India

Assume that you have secured the passport of the foreign country you were resident in, while you were out of India and hence, you ceased to be an NRI (since you are no longer Indian). If you now return to India with an employment offer and are employed in India while holding nationality of a country other than India, you will have very different provident fund implications. You will belong to a specific category of workers known as “international workers”. 

International workers are excluded from making any contribution towards Provident Fund in India if they are contributing to Social Security in their home countries. For this purpose, they will have to obtain a certificate of Coverage (CoC) under the relevant SSA. 

However, this is unlikely to be the case for erstwhile Indians who want to return to India and settle in India, after securing the nationality of the foreign country. Until they hold a foreign passport, they will be required to contribute 12% of the total salary towards provident fund, unlike the Indian workers who contribute a percentage of their basic salary plus dearness allowance. 

There are also differences in the eligibility for withdrawal of the provident fund balance, depending upon whether you are covered under a Social Security Agreement (SSA) or not. 

If therefore, you are employed with an Indian employer registered for PF, you will have to consider what net salary you will receive. It may not be the same as your Indian counterparts.

We discuss the provisions applicable to international workers at length in our Diploma in Labour, Employment and Industrial Laws.

Investment in property

There are so many Indians who have this dream of being able to own a property or more properties with the help of the income they have earned out of India. The intention is to be able to generate enough funds to create a residential property in India or own commercial property to create passive income like rent.

Like taxes, purchase or ownership of properties are also linked to residence in or outside India, although citizens of certain countries cannot acquire or transfer immovable property in India without the prior permission of the Reserve Bank of India except through a lease not exceeding five years.

There are very specific provisions on the type of properties that NRIs (or their foreign national spouses, if any) can purchase in India and the source of finances for such purchases. Basically, NRIs cannot purchase agricultural land, farmhouses or plantation properties. The sources of finance are also identified and these have to be through remittances from abroad through normal banking channels or their non-resident accounts in India.

However, once they return to India and become resident in India, they can purchase and own properties like any other resident Indian.

We discuss both the acquisition of immovable property in India and acquisition of property out of India by resident Indians in our Certificate Course in Real Estate Laws.

Want to be able to take the benefit of all these courses and many more, and be able to deal with non-resident clients for multiple different areas? The Master Access Program is what you should go for. You may even be able to avail of the Master Access for a year. Want to know more? Hit reply to this email.

If spreading your clientele over residents and non-residents and multiple other types of clients is what you are seeking, don’t miss our amazing workshop!

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