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I got US citizenship in November 2021 but have been staying in India since 15 January. I have received an Overseas Citizen of India (OCI) card. What will be my status for bank account and income tax (I-T) purposes? I am a retired senior citizen from India and have only interest income in India.

— Name withheld on request

 

The rules for the determination of residential status under the exchange control law are different from those under the Income-tax law. The residential status under the exchange control law impacts the status of your bank accounts.

Under the Income-tax law, residential status is determined based on the physical presence of an individual in India during a financial year (FY) and the preceding 10 FYs. For Indian citizens, even if they do not become residents based on physical presence in India, they can still become residents (but not ordinarily resident) based on the absence of liability to pay tax in any other country or territory because of domicile or residence or any other criteria of similar nature, if India-sourced income exceeds 15 lakh. Residential status needs fresh determination for each year.

If the individual satisfies any of the basic conditions mentioned below, the individual would qualify as a ‘resident’; otherwise, he or she would qualify as a ‘Non-Resident’. A resident may either qualify as a resident and ordinarily resident (ROR) or resident but not ordinarily resident (RNOR).

An individual qualifying as ROR is taxable on his worldwide income in India and is required to report all foreign assets in the India income tax return (ITR). Also, the income earned from such foreign assets during the relevant year along with the nature of income and head of income under which such income has been offered to tax in the India ITR needs to be reported about each foreign asset.

An individual qualifying as non-resident or RNOR has to pay tax on the following incomes: income accruing or arising in India, income deemed to accrue or arise in India, and income received or deemed to be received in India. In the case of RNOR, income that accrues or arises outside India from business controlled or professional set-up in India is also taxable in India.

Under the exchange control law, when a person leaves India for the purpose of employment or for carrying on business or for any other purpose indicating his intention to stay outside India for an uncertain period, he may be considered as a “person resident outside India". A non-resident Indian (NRI) is a “person resident outside India" who is either a citizen of India or a person of Indian origin. As a “person resident outside India", he is required to designate his existing resident bank accounts to non-resident accounts due to a change in his residential status. Similarly, if a person is coming to India for employment, business, or vocation or with an intent to stay in India for an uncertain period of time, then in such case, under exchange control law, the person will qualify as a “person resident in India".

In your case, it is important to determine your residential status under the Income-tax law and exchange control law.

Interest income from bank accounts in India will be taxable in India. However, you may claim a deduction up to 50,000 under Section 80TTB available for senior citizens aged 60 years or more during the relevant FY if you qualify as a “resident" of India under the Income-tax law. If you qualify as an RNOR under the Income-tax law, you can claim exemption from Income-tax on interest income on foreign currency deposits with scheduled banks. Also, if the deposits with Indian banks/public companies were made with inward remittance of convertible foreign exchange while you were non-resident, you can claim a lower tax rate of  20% (plus applicable surcharge and cess) even after qualifying resident, till the encashment of such deposits by electing for such option in the ITR if such option is beneficial to you.

Sonu Iyer is tax partner and people advisory services leader, EY India.

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