Returning NRI: What happens to your NRO, NRE and FCNR accounts?

If you are a non-resident and planning to return to India, there are many questions that worry you.

What about your assets acquired abroad? Can you hold them or do you have to sell those? What about your NRO, NRE and FCNR accounts and deposits? Can you continue holding such deposits or do you have to convert them to resident accounts? What will be the tax implications? And there are many more.

Moreover, there is compliance with FEMA (Foreign Exchange Management Act) and the Income Tax Act to be taken care of. I can’t cover all the questions in a single post. In this post, I will limit the discussion to bank accounts. What happens to your NRI accounts (NRO, NRE, and FCNR) when you return to India? Do note the post is about NRIs who have returned to India with an intention to stay back (and not for a temporary stay).

What happens to my NRO, NRE and FCNR accounts?

Whether you can hold an NRO, NRE or FCNR accounts is decided as per provisions of FEMA. As per FEMA, you are resident from day 1 of return. Therefore, you cannot make investments as an NRI (person resident outside India). Similarly, you cannot hold bank accounts that only an NRI can own. Therefore, you must

You must inform your bank about the change in your residential status.

NRO Account/deposit must be re-designated as resident rupee account (savings account or fixed deposit).

NRE savings account will be re-designated as a resident rupee account.

FCNR and NRE deposits can be closed immediately or can be allowed to run up to maturity. However, you must re-designate your NRE FD as a resident FD. If you choose to continue till maturity, you will get the contracted rate of interest until maturity. Premature withdrawals/closure will attract penalty as per terms of the deposit.

For FCNR deposits and NRE account/deposit, you also have an option to transfer the balance to a Resident Foreign Currency Account (RFC). No penalty is payable for premature withdrawal of NRE/FCNR accounts in such cases. 

Read: Mutual Fund Taxation for NRIs (How are NRI MF investments taxed?

Read: How can NRIs invest in Mutual Funds in India?

How will my existing NRI accounts be taxed?

Interest on the NRO account was taxable even when you were an NRI. It remains taxable on your return.

Interest on NRE accounts/deposits (re-designated as resident rupee account/deposit) becomes taxable on your return. If you transfer the balance to RFC account, the interest income will become taxable or exempt as per rules for RFC account. There is some confusion among investors that interest on NRE fixed deposits is always exempt from tax.  Therefore, they somehow want to continue their NRE deposits. However, this is a misplaced belief. As per Section 10 (clause 4(ii)) of the Income Tax Act, NRE interest is exempt from tax only for those who qualify as NRI as per FEMA. Since, as per FEMA, you become resident from day 1 of permanent return, you cannot hold NRE deposits. Even if you continue holding such deposits, the interest on such NRE deposits is taxable. Therefore, there is no point in continuing those NRE accounts.

The interest on FCNR deposit will remain tax-free if the returning NRI remains RNOR (Resident but not Ordinarily Resident).  As and when you become ROR (Resident and Ordinarily Resident), even interest on FCNR deposit is taxable.

Interest on RFC account/deposit is exempt from tax as long as you are RNOR.

More on ROR and RNOR status later in this post.

Read: You don’t have to break your NRE Fixed Deposit on return to India

What is a Resident Foreign Currency Account?

An RFC Account can be maintained by a resident in Foreign Currency. This account can be useful for those NRIs who are returning to India.

Please understand RFC account, under discussion, are different from RFC (Domestic) accounts that can be opened by residents. RFC(D) accounts are non-interest bearing accounts and are different from RFC accounts under discussion. The focus of this post shall be returning NRIs.

Who can open RFC account?

Persons who have been NRI for a continuous period of not less than 1 year and have become persons resident in India (as per FEMA and not Income Tax Act) on or after April 18, 1992 can open RFC account. RFC accounts can be denominated in any freely convertible foreign currency.

RFC Accounts can be held in the form of savings, current and term deposits accounts.

Do note there is a difference in the definition of non-resident as per FEMA and as per Income Tax Act. As per FEMA, you become Resident from day one if you have returned with an intention to stay in India for an uncertain period.

Benefits of Resident Foreign Currency (RFC) Account

1. Funds in the RFC accounts can be freely utilized for any bona fide remittance outside India through normal banking channel.
2. Balance in RFC account is fully repatriable. Both principal and interest are fully repatriable.
3. Both principal and interest are payable in foreign currency. Hence, there is no exchange risk.
4. Interest rates on RFC accounts or deposits are deregulated and will vary across banks
5. RFC accounts/ deposits are typically available in freely convertible currencies such as USD, GBP, Euro, AUD and CAD. However, not every bank will offer RFC account in all currencies.
6. Funds in the RFC account can be freely remitted abroad or credited to fresh NRE/FCNR account if you regain non-resident status

Eligible Credits to RFC account

1. Proceeds from the sale of Eligible Assets outside India
2. Transfer from other RFC/NRE/FCNR accounts
3. Remittance of funds from bank accounts outside India, which qualify as an Eligible Asset
4. Pension/other monetary from an employer outside India
5. Income such as dividend, interest, profit, rent etc earned on Eligible Assets.
6. Interest earned on RFC account

Eligible Assets are assets acquired by the person abroad while the person was a non-resident. Such assets would include deposits in banks outside India, investments in foreign currency, shares or securities or immovable properties outside India, investment in business and foreign exchange earnings through employment, business or vocation.

Eligible Debits to RFC Account

1. Transfer to NRE/FCNR accounts while regaining NRI status
2. Any bona fide remittance outside India through normal banking channel including for investments abroad.
3. For local payments in INR in India

Interest on the RFC account is taxable. However, if you qualify as RNOR (Resident but not Ordinarily Resident), then you are exempt from paying tax on interest income from RFC account.

Who is RNOR (Resident but not Ordinarily Resident)?

RNOR status is essentially a transition phase from being non-resident to being a resident (ROR).

As per Section 6 of the Income Tax Act, there can be two types of residents.

1. Resident and Ordinarily Resident (ROR)
2. Resident but not Ordinarily Resident (RNOR)

You are RNOR if you satisfy any of the following two four conditions:

1. You have been a non-resident (NRI) in 9 out of 10 previous years preceding that year. From FY2021 (from April 1, 2020),this condition will be relaxed. From FY2021, for you to qualify for RNOE status, you must be NRI in 7 (and not 9) out of 10 previous years. This was introduced in Budget 2020. The condition has been relaxed. As we would see later, RNOR status has a few tax benefits. With this change, you will be able to retain RNOR status for more number of years. OR
2. You have, during the previous 7 years preceding that year, been in India for a period of 729 days or less. OR
3. If you are an Indian Citizen AND are not a tax-resident in any other country AND your Indian Income (income other than income from a foreign source) exceeds Rs 15 lacs. This is a new condition and has been added through the Finance Bill, 2020. You can see this condition has no linkage to the number of days of stay in India. As I understand, this is to bring High Networth individuals who are planning their stays to avoid paying taxes anywhere under the tax bracket. This condition has been added through the Finance Bill, 2020 and will be applicable from FY2021. OR
4. You are a citizen of India or Person of Indian Origin (PIO) AND your Indian Income exceeds Rs 15 lacs in the previous year AND your period of stay in India in the previous year ranges from 120 days to 181 days.This condition has been added through the Finance Bill, 2020 and will be applicable from FY2021.

As per Finance Bill, 2020,  “Income from foreign sources” means income which accrues or arises outside India (except income derived from a business controlled in or a profession set up in India).

So, essentially, you first determine whether you are a resident or non-resident. If you are a resident, you must determine whether you are ROR or RNOR.

FEMA has only two classifications: Resident and Non-Resident (Resident outside India).

Income Tax Act has three classifications: ROR, RNOR and NRI.

Does RNOR status affect taxation?

Very much. RNOR are almost treated like NRIs when it comes to taxation.

Your income earned outside of India is not taxed in India as long as you retain your RNOR status.

As per Section 10(15)(iv)(fa) of the Income Tax Act, the interest on foreign currency deposits in Indian Banks is exempt for non-residents and RNOR.

Hence, interest on FCNR deposits will continue to be exempt from tax as long as you remain RNOR. Similarly, interest earned on RFC account will be exempt from income tax as long as you are RNOR.

Since RNOR get favourable tax treatment (as compared to ROR), you can time your return in a way that you stay RNOR for as long as possible.

Illustration: RNOR Status

If you are returning after being NRI for 5 continuous years or less, you become a resident (ROR) immediately (as per Income Tax Act).

If you are returning to India after being NRI for 6 continuous years, you can become RNOR for one year. Subsequently, you become ROR.

If you are returning to India after being NRI for say 20 continuous years, you can become RNOR for two years. Subsequently, you become ROR.

In extreme cases, if you are returning after being NRI for 5 years or more (and didn’t visit India during those years) and return to India after April 2, you can be RNOR for maximum three years.

Please understand there are specific numbers involved in determining residential status.

This is best understood with the help of an example. I consider only conditions 1 and 2 while determining the status.

You have been staying abroad for 20 years and didn’t come to visit India even once during those 20 years. You return to India on June 1, 2015. You would obviously qualify as NRI for the last 10 years from FY2006 to FY2015.

FY2016 (ending March 31, 2016): Since you have been in India for more than 182 days (305 days), you qualify as a Resident for FY2016. But which type of resident? You were non-resident for all 10 previous years (FY2006 to FY2015) preceding that year (FY2016). Hence, you are RNOR.

FY2017 (ending March 31, 2017): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2017. You were non-resident for 9 out of 10 previous years (FY2007 to FY2016) preceding that year (FY2017). Hence, you are RNOR.

FY2018 (ending March 31, 2018): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2018. But which type of resident? You were non-resident for 8 out of 10 previous years (FY2008 to FY2017) preceding that year (FY2018). The condition is not met. However, there is an additional condition.  During 7 previous years (FY2011 to FY2017), you were in India for 670 days (305 in FY2016 + 365 in FY2017), which is less than 729 days.  Hence, you are RNOR. (With the new rule introduced in Budget 2020, you will qualify as RNOR for this year too since you have to NRI for just 7 out of 10 previous years. You have been NRI in 8 out of 10 previous years)

FY2019 (ending March 31, 2019): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2019. But which type of resident? You were non-resident for 7 out of 10 previous years (FY2009 to FY2018) preceding that year (FY2019). The condition is not met. However, there is an additional condition.  During 7 previous years (FY2012 to FY2018), you were in India for 1,035 days (305 in FY2016 + 365 in FY2017 + 365 in FY2018), which is more than 729 days.  Hence, you are ROR. (With the rule change introduced in Budget 2020, you will qualify as RNOR for this year too since you have to NRI for just 7 out of 10 years. You have been NRI in 7 out of 10 previous years).

FY2020 (ending March 31, 2020): Since you have been in India for more than 182 days (365 days), you qualify as a Resident for FY2020. But which type of resident? You were non-resident for 6 out of 10 previous years (FY2010 to FY2019) preceding that year (FY2020). The condition (under old or new rule) is not met. However, there is an additional condition.  During 7 previous years (FY2013 to FY2019), you were in India for 1,400 days (305 in FY2016 + 365 in FY2017 + 365 in FY2018 + 365 in FY2019), which is more than 729 days.  Hence, you are ROR (under both new and old rule)

You can be RNOR for a maximum of three years.   With the rule change introduced in Budget 2020, you can hold RNOR status for 4 years. Do through this article in Mint for more clarity on RNOR status. For more on determining the residential status of an individual, you can refer to Section 6 of the Income Tax Act.

Useful Posts for NRIs

1. The definition of NRI as per Income Tax Act and as per FEMA
2. Beginners’ Guide: What are NRE, NRO and FCNR(B) deposits?
3. Income Tax and TDS rates for NRIs
4. Capital Gains Tax for NRIs in India
5. NRIs have to close their PPF accounts
6. Aadhaar card is not mandatory for NRIs
7. How can NRIs invest in mutual funds in India?
8. How can NRIs invest in equity markets?
9. You don’t have to break your NRE Fixed Deposit on return to India
10. Interest rate arbitrage is not without risk

Additional Read

1. Resident Foreign Currency Account circular by Reserve Bank of India
2. SBI RFC Account
3. ICICI Bank RFC Account
4. Book: In the Wonderland of Investments for NRIs: by A.N. Shanbhag/Sandeep Shanbhag

Disclaimer: This is a very simplistic representation of FEMA and Income Tax Act. Many aspects have not been included to keep the post simple. You are advised to consult a tax advisor before making any decisions. The post is based on my interpretation of FEMA and Income Tax Act. If you don’t agree with any of the points, do leave your observations in the comments section.