As a Non-Resident Indian (NRI), maintaining clean records with the Indian Income Tax Department and ensuring compliance with financial regulations are crucial. Here’s a comprehensive guide on the necessary steps and precautions:
Immediate Compliance Measures
1. File Income Tax Returns (ITR) Annually: Even if your income in India is below the taxable threshold, filing an ITR can help keep your records clean and avoid penalties. NRIs must file ITR if their gross income exceeds Rs 2.5 lakh in a financial year. But keeping current scenario in mind, NRIs have received income tax notices even they don’t have any income in India. This is due to the fact they have done any financial transaction in India like purchase of house, purchase of mutual funds/shares, fund repatriation etc.
2. Obtain a Permanent Account Number (PAN): A PAN is essential for all financial transactions in India. Ensure your PAN details are updated with all your financial institutions.
3. Adhere to Residential Status Rules: Your tax liability depends on whether you qualify as a Resident Indian (ROR or RNOR) or an NRI. For NRIs, only income earned or accrued in India is taxable. While for resident Indian, global income is taxable. Further, rule is different for Resident and Ordinarily Resident (ROR) and Resident but not Ordinarily Resident (RNOR).
4. Monitor Financial Transactions: High Value Transactions such as deposits above Rs 1 crore in a current account, expenses over Rs 2 lakh on foreign travel, or electricity bills exceeding Rs 1 lakh trigger mandatory ITR filing. But these days any kind of financial transaction can lead to notices from income tax department. So, NRI should make sure to update their KYC with all financial institutions in India with whom they are dealing with. Also, file income tax return as an NRI for better records.
Precautions while doing Financial Transactions in India
1. Avoid Double Taxation: Utilize Double Tax Avoidance Agreements (DTAA) to prevent being taxed twice on the same income. Gather necessary documents to claim tax credits or exemptions as per DTAA provisions.
2. Maintain Proper Documentation: Keep detailed records of all financial transactions, including receipts, investment proofs, and communication with tax authorities. If you plan to close any bank account in India, ensure to download or request bank statements for as many past years as possible. This is crucial for audits and resolving disputes.
3. Comply with Foreign Exchange Management Act (FEMA) Regulations: Adherence to FEMA guidelines is essential for NRIs. This includes restrictions on investments, property purchases, and repatriation of funds.
Types of Bank Accounts which NRIs can hold in India
1. Non-Resident External (NRE) Account: Ideal for NRIs to hold and remit foreign earnings. Interest earned is tax-free, and the principal and interest are fully repatriable.
2. Non-Resident Ordinary (NRO) Account: Suitable for managing income earned in India such as rent, dividends, etc. While interest earned is taxable, it allows repatriation of current income within set limits.
3. Foreign Currency Non-Resident (FCNR) Account: Allows NRIs to hold fixed deposits in foreign currency, shielding against exchange rate fluctuations. Both principal and interest are repatriable.
Important FEMA Guidelines for NRIs
1. Prohibition on Regular Savings Accounts: NRIs are not allowed to hold regular resident savings accounts. They must convert these to NRE, NRO, or FCNR accounts upon changing their residency status.
2. Investment Restrictions: NRIs can invest in residential and commercial properties but are restricted from purchasing agricultural land, plantations, and farmhouses. Certain investment avenues like Public Provident Fund (PPF) and National Savings Certificates (NSC) are not accessible to NRIs.
3. Repatriation of Funds: NRIs can repatriate up to USD 1 million per financial year from their NRO accounts, subject to tax compliance. Funds in NRE and FCNR accounts can be repatriated freely.
4. Special Provisions for Students- Indian students studying abroad are treated as NRIs and can avail facilities such as remittance of up to USD 1 million per financial year from their NRE or NRO accounts.
By understanding and adhering to these guidelines, NRIs can effectively manage their finances in India while staying compliant with Indian rules and regulations. It is advisable to consult with the experts to navigate the complexities of Tax Law and ensure all transactions and holdings are within legal frameworks.
Please do let me know if you still have any questions related to above. You can write to me at ushma@nricaservices.com or call/Whatsapp me at +91 9910075924.
