Key tax and FEMA rules for Indians who come back after staying in the US

Taxation of Indians in the US depends upon their residency status. The US tax laws classify aliens, which are migrating individuals, as resident or non-resident. An individual who is not a US citizen is considered a resident alien if she changes her residential status to permanent resident or passes the substantial presence test. In India, residency status is defined by the regulations under the Indian Foreign Exchange Management Act (FEMA). This classifies individuals into categories of person resident in India (a person residing in India for 182 days or more) and person resident outside India, which includes non-resident Indian (NRI), Overseas Citizen of India (OCI), and Person of Indian Origin).

Indians moving to the US and obtaining green cards indicate their intention to stay outside India for an uncertain period and fall under the category of Person Resident Outside India. In such cases, all their existing Indian bank accounts (including joint accounts) have to be converted into Non-Resident (Ordinary). They can remit foreign earnings into this account, which will be converted into INR. Funds held in NRO accounts are not freely repatriable to accounts overseas. However, non-resident Indians can remit overseas up to $1 million each financial year from this account. Non-Resident (External) Account (Rupee Denominated) (NRE) can be opened by non-resident Indians to park their earnings for use either in India or overseas.

From the Indian taxation standpoint, an Indian moving to the USA is classified as a Resident & Ordinarily Resident (ROR), Resident but Not Ordinary Resident (RNOR) or Non-Resident (NR).

An individual is classified NR when neither of these two conditions are met: The individual has stayed in India for 182 days or more or the total number of days of their stay in India for the immediate four preceding years is 365 days or more and 60 days or more in the relevant FY. In case, an individual is classified as a Resident in India, the next step is to determine if such an individual shall be considered as ROR or RNOR, which is subject to some additional conditions under the law.

Global income is taxable in the case of ROR whereas only India sourced income is taxable in the case of RNOR and NR. Income tax return is required to be filed by NR in case of India sourced income. Since, an individual after moving to the US will become a non-resident (assuming stay in India does not exceed 182 days), he/she will be liable to pay tax in India only in respect of Indian sourced income.

Salary income received by an Indian working in the US (assuming NRI) in an Indian bank account related to services rendered in the US cannot be taxed in India on the ground that income is received in India. Sometimes, the determination of residential status of an individual differs as per the domestic laws of relevant countries. A situation may arise when an individual becomes a resident of both countries, and both countries impose tax on global income, so the problem of double taxation can arise, which can get resolved through a “Tie Breaker Rule” under the India and US Double Taxation Avoidance Agreement.

If an individual continues to remain a US citizen or resident alien at the time of coming back to India, the US rules related to filing tax will be applicable irrespective of whether an individual is in the US or India. The worldwide income is subject to US income tax, irrespective of his/her physical presence.

At the time of returning to India, if a person continues to hold US citizenship or green card and holds financial interest in or signatory or any operating authority over one or more financial accounts located outside USA and the aggregate value of all foreign financial accounts is more than $10,000 at any time during the calendar year reported, then the requirement to file FBAR (Report of Foreign Bank and Financial Accounts) also arises in addition to the FATCA (Foreign Account Tax Compliance Act) requirements.

Under the exchange control requirements in India, when an individual returns for any purpose which indicates an intention to stay in India for an uncertain period, NRO, NRE accounts of such persons should be designated as resident accounts. An individual is required to file an ITR after returning to India. If he/she is considered as ROR, then their global income is taxable, and they shall also be eligible to claim the foreign tax credit for the taxes paid in the US. It is also mandatory for ROR (but not RNOR and NR) to report details of foreign assets/bank accounts in the ITR. If an Indian ROR taxpayer fails to report the foreign assets and income arising from them, a penalty of ₹10 lakh is leviable under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

Amit Maheshwari is tax partner, AKM Global. Yeeshu Sehgal, head of tax market, AKM Global, contributed to this article.