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Non-resident ordinary accounts can be used by NRIs for income earned in India

NRO accounts can be kept to receive income earned in India and such income is taxable and cannot be repatriated

I own and run a business in India and have local bank accounts. I am currently also working abroad and I recently changed my citizenship from Indian to Canadian. I will soon be returning to India and plan to work and live here for at least a few years. Am I allowed to keep my local Indian bank accounts? Do I need to open non-resident external (NRE) or non-resident ordinary (NRO) accounts? Should any other income from India be deposited only into an NRO or NRE account? How will my income in India be taxed in these accounts and in general, now that I am a Canadian citizen?

—Jacob

When you leave India for good and become a non-resident Indian (NRI), you have to convert your regular bank account to NRO or open NRE account or open an FCNR (Foreign Currency Non Resident) account. As per Reserve Bank of India (RBI) regulations, as a non-resident, you cannot hold regular bank accounts in India. Whenever you plan to return to India for good, you can convert NRE accounts to regular bank accounts. NRO accounts can be kept to receive income earned in India and such income is taxable and cannot be repatriated. Money held in NRE and FCNR accounts can be repatriated. Such accounts are used by NRIs to bring foreign income to India.

To find out how your income will be taxed in India you have to identify your residential status in India as per the Income-tax Act in India. You can test your residential status in the following manner. You must meet any of the following conditions and both the additional conditions:

Conditions: a) you are in India for 182 days or more in the financial year (FY); or b) you are in India for 60 days or more in the FY and 365 days or more in the four FYs immediately preceding the relevant FY. Additional conditions: you are a resident in India in two of the 10 FYs immediately preceding the relevant FY; and you are in India in the seven years immediately preceding the relevant FY for 729 days or more.

If you meet any of the first set of conditions and both the additional conditions, you shall be considered a resident in India. If you meet any of the first conditions but do not meet the additional conditions, you shall be considered a resident but not ordinarily resident (RNOR) in India. If you do not meet any of the first conditions, you shall be a non-resident in India.

For a non-resident and an RNOR, only the income that is earned or received in India shall be taxable in India, whereas for a resident Indian, the entire global income shall be taxable in India.

My son moved to Canada in May 2015 for his graduation. He has been doing a job since the last seven months. He wants to purchase a house there after he gets a permanent residency in Canada. I want to help him by transferring 1.20 crore in his account. Will this amount be treated as his income in India?

—Raj Kumar

Based on the information provided by you, your son is likely to be a non-resident Indian for tax purposes. As per the Liberalised Remittance Scheme (LRS), a resident Indian is allowed to remit up to $2,50,000 a year as a gift or for maintenance of close relatives, or for other specified purposes. Father and son are considered as specified relatives under the Income-tax Act, so the gift of money to your son (a specified relative) shall not be taxed in his hands in India.

Archit Gupta is founder and CEO, ClearTax. Queries at mintmoney@livemint.com.

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