Returning to India: Income Tax and FEMA Implications
1. Introduction
India’s relationship with its diaspora has undergone a quiet but consequential reversal post Covid. For much of the post-independence era, the movement of skilled professionals, entrepreneurs and capital was largely outbound by a one-directional flow toward opportunities primarily in the West. That narrative has begun to shift.
The phenomenon of Indians returning after extended periods overseas has become increasingly significant in the post-pandemic era. These trends are not merely demographic or economic developments but have consequences that require a careful examination of residential status, treaty eligibility, foreign asset reporting obligations, exchange control regulations, social security considerations and, in many cases, cross-border estate and succession issues. The interaction of these regimes can produce outcomes that are both technically complex and commercially significant, making advance planning an essential component of any relocation strategy.
2. Understanding the Change in Residential Status — FEMA vs Income Tax
Residential status is the foundational determinant for the applicability of tax and regulatory provisions under the Income-tax Act and FEMA. The taxability of income, reporting obligations, foreign exchange transactions, investment eligibility, and compliance requirements are primarily governed by an individual’s residential status under the respective laws. Residential status under the Foreign Exchange Management Act, 1999 (hereinafter referred to as “FEMA”) provides guidelines to a person vis-à-vis holding of foreign assets/liabilities, investments outside India, remitting foreign exchange outside India or receiving foreign exchange in India. On the other hand, residential status under the Income Tax Act, 2025 (hereinafter referred to as “Act”) determines the scope of Income taxable in India and its related disclosures in India.
A. Residential status under FEMA
2.1 Definition of “Person Resident in India” under FEMA
Section 2(v) of FEMA, 1999 defines “person resident in India” to mean a person residing in India for more than 182 days during the course of the preceding financial year. Further, the definition provides a carve-out for two categories of exceptions that give the provision its intention-based character. The 2nd exception becomes relevant for returning individuals.
The relevant extract is as under: –
“person resident in India” means—
(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—
(A) ……
(B) a person who has come to or stays in India, in either case, otherwise than—
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;
A long-standing practitioner view has been that clause (B) operates independently of the 182-day requirement and can result in a person becoming a resident in India immediately upon returning with the intention of staying for employment, business or for an uncertain period. This view found support in Master Direction – Deposits and Accounts RBI/FED/2015-16/9 – FED Master Direction No. 14/2015-16 dated January 1, 2016and its subsequent revisions), which has broadly followed an intention-driven approach, treating the act of taking up employment or change in residential status as a sufficient indicator of the shift in residential status from Person Resident Outside India (hereinafter referred to as “PROI”) to Person Resident in India (hereinafter referred to as “PRII”), without necessarily insisting on a prior 182-day stay in the preceding year. However, this interpretation has recently been questioned by the Appellate Tribunal in the case of Pradeep Mishra, discussed later in this article. It is worth noting that Section 2(w) of FEMA defines a “person resident outside India” simply as a person who is not resident in India, making it the residual category. FEMA does not recognise any concept equivalent to RNOR status.
2.2 The Pradeep Mishra Case — [2025] 176 taxmann.com 876 (SAFEMA – New Delhi)
The question of whether the 182-day condition and the intention test under Section 2(v) of FEMA operate as alternative criteria or cumulative requirements has been the subject of significant controversy.
Facts in brief: The individual returned to India in May 2012 with the firm intention of settling permanently. He had not, however, spent more than 182 days in India in the preceding financial year (2011–12), having been resident abroad throughout that year. Shortly after his return, he facilitated the purchase of agricultural land. Agricultural land in India can only be purchased by a person resident in India, not by a PROI. The Enforcement Directorate proceeded against him on the basis that he was a PROI at the time of the transaction because he had not fulfilled the 182-day requirement of the preceding year, regardless of his intention to settle.
The Appellate Tribunal took a strict, literal view of Section 2(v) and held that the primary condition, i.e., being in India for more than 182 days in the preceding financial year, was a mandatory prerequisite to being classified as a person resident in India. The intention-based carve-out in Exception (B) was interpreted as supplementary to, rather than independent of, the 182-day condition. On this reading, since the individual had not spent more than182 days in India in the preceding year, nor had he come to India and stayed thereafter during the said year, he could not be a PRII regardless of his intent to settle, and the purchase of agricultural land was accordingly a FEMA contravention. The Tribunal held that the carve-out indicating intention to settle has to be satisfied in the previous year. The issue remains unsettled and may be subject to further judicial or regulatory clarification.
The ruling, in a way, contradicts the RBI’s own operational practice and its Master Directions, which have consistently proceeded on the basis that the intention of settlement is sufficient to trigger the change in status. Considering diverse positions, practically, transactions which are permissible only for a PRII, such as the purchase of agricultural land, the purchase of a plantation property, or the making of certain domestic investments, should not be undertaken until FEMA residency is established with certainty, considering both interpretations.
B. Residential Status Under the Income Tax Act, 2025
2.3. Residential Status Tests under Section 6 — Overview
Unlike FEMA, where residential status may depend on the purpose and intention of an individual’s stay, residential status under the Act is determined principally through objective statutory tests applied separately for each financial year. The analysis is based primarily on the individual’s physical presence in India during the relevant year and, for determining Resident and Ordinary Resident (hereinafter referred to as “ROR”) or Resident but Not Ordinary Resident (hereinafter referred to as “RNOR”) status, during the prescribed look-back periods.
An individual is a resident in India for a financial year if they satisfy either of the following two basic conditions:
Basic Condition 1: The 182-Day Test [Section 6(2)(a)]
An individual is regarded as a resident in India if he has been in India for a period or periods amounting in total to 182 days or more during the previous year (i.e., during the financial year in question, from 1 April to 31 March).
This is the primary test and operates irrespective of citizenship, purpose of stay or any other factor. An individual who is physically present in India for 182 days or more during a financial year is a resident of India for that year, regardless of their intention. There is no exception available for this test, unlike Basic Condition 2 below.
Basic Condition 2: The 60 Day + 365 Day Test [Section 6(2)(b)]
An individual is regarded as a resident if he has been in India for 60 days or more during the previous year and for 365 days or more during the four immediately preceding previous years taken together.
Both limbs of this test must be satisfied simultaneously. The 365-day computation covers the aggregate stay across the entire four-year look-back window. The relaxation to extend the stay extends to a person coming on a visit to India. However, since returning individuals come back for good, they shall not be entitled to these relaxations. Thus, a returning individual can become a resident in the year of return even without reaching 182 days if they cross 60 days, coupled with 365 days in the previous four years.
2.5 Additional Conditions: ROR or RNOR?
Once an individual satisfies either of the basic conditions, he is classified as a resident in India. Therefore, the next step is determining whether such a person is ROR or RNOR. This sub-classification carries tax consequences: An ROR is taxable in India on global income, while an RNOR is taxable only on Indian-source income and income from a business controlled from India or a profession set up in India.
An individual is considered an ROR only if it satisfies both of the following additional conditions:
Additional Condition 1 [Section 6(13)(a)]: Individual has been a resident in India in at least 2 of the 10 previous years immediately preceding the relevant previous year.
Additional Condition 2 [Section 6(13)(a)]: Individual has been in India for 730 days or more during the 7 immediately preceding previous years.
An individual will be treated as RNOR if either of the additional conditions is not satisfied for that year. A returning individual can remain RNOR for as long as the additional conditions continue to fail, typically 2–3 years, depending on historical residence and travel patterns.
2.6 Deemed Residency — Section 6(7)
Even if basic conditions are not satisfied, a person can be deemed to be a resident under Section 6(7) of the Act. The section provides that an Indian citizen shall be deemed to be resident in India in a previous year if:
- Their total income (other than income from foreign sources) exceeds ₹15 lakhs during that previous year; and
- They are not liable to tax in any other country or territory by reason of domicile, residence or any other criterion of similar nature.
Such deemed residents are classified as RNOR by express statutory provision inserted in Section 6(13), ensuring that their foreign income remains outside the Indian tax bracket despite them becoming deemed resident in India. This deemed classification can have an impact on the year of return, as well as for past years where additional conditions of being a resident are relevant to decide ROR/RNOR.
This deemed residential status may also have unintended consequences under other income tax provisions, such as the availability of rebate, non-availability of specified rates for interest/ fees for technical services for non-residents, etc. Taxability in India depends upon the residential status of a person:
| Status | Income from Indian sources | Foreign income received in India | Foreign income accrued outside India |
| ROR | Taxable | Taxable | Taxable |
| RNOR | Taxable | Taxable | Not taxable (except income from a business controlled in or profession set up in India) |
| NR | Taxable | Taxable | Not taxable |
3. RNOR — The Transitional Tax Shield
3.1 Scope of Taxability: What the RNOR Shield Covers
The scope and extent of taxability of a resident individual is governed by Section 5(1) of the Income Tax Act, which provides that a resident’s total income shall include income received or deemed to be received in India, income that accrues or arises in India or is deemed to accrue or arise in India, and in the case of a ROR includes income that accrues or arises outside India. The last limb is a critical one – A ROR is taxable on global income, while RNOR is not. In case foreign income is received directly in an Indian bank account, it is treated as income received in India and accordingly taxable even for RNOR. This is a frequently misunderstood point, as the location of direct receipt matters, and inadvertently crediting foreign income to an Indian account during the RNOR period can inadvertently bring it within the Indian tax base.
3.2 Care to be taken during the RNOR Window under the Income-Tax Act, 2025
The following are the principal areas where care should be taken during the RNOR window to avoid adverse tax consequences:
3.2.1 Taxability of NRE/FCNR Deposits.
Interest on NRE accounts ceases to be exempt under Sch IV(1) once the individual becomes PRII. It is important to note that taxability depends on residential status under FEMA and not under the Act. However, interest on Foreign Currency Accounts continues to be exempt under Sch II(17) for individuals who are RNOR.
3.2.2 Unrealised Capital Gains on Foreign Securities
A person who has worked abroad for several years typically accumulates significant unrealised capital gains in their foreign brokerage portfolio. The cost of acquisition of these securities may be years or decades old, and the embedded gain, i.e., the difference between the current fair market value and the historical cost, may be substantial.
If these positions are sold during the RNOR period, the capital gains arising on such sale are not taxable in India, since the gains accrue and arise outside India from foreign assets. However, the entire gains accumulated over the non-resident tenure can be taxable if sold after attaining ROR status. At times, capital gains may also not be taxable in foreign countries.
3.2.3 Foreign Retirement Account — Section 158
Individuals returning from abroad typically have at least some portion of wealth in retirement accounts.
Under the general accrual basis of Indian taxation, once an individual becomes a ROR, income accruing inside a foreign retirement account (e.g. 401(k) or IRA in case of USA) such as dividends, interest or capital gains arising within the retirement account would be taxable in India each year on an accrual basis, even though no withdrawal has occurred and the income has not left the retirement account. The foreign country may tax these accounts only on withdrawal. This temporal mismatch between Indian accrual taxation and withdrawal basis taxation created a foreign tax credit (FTC) problem. For e.g. India tax event occurs in Year 1 (on accrual) while foreign country taxes in Year 5 (on withdrawal). In such cases, FTC under section 159 read with Rule 76 may not be possible to be claimed in India in the absence of foreign tax payment in Year 1.
Section 158 of the Income Tax Act permits a“specified person”being an individual who was a non-resident and is now a resident of India holding a “specified account” in a “notified country” to defer Indian taxation on income from such account to the year of actual withdrawal. The notified countries for this purpose are the USA, UK and Canada. Section 158 questions become live only upon attaining ROR status. From the first year of ROR, the individual can elect Section 158 for relief for taxation on withdrawal by filing Form 40 before the due date of filing the income-tax return (ITR) for that year. The election is irrevocable and applies to all subsequent years and cannot be reversed. Careful evaluation is needed to determine whether to continue retirement accounts or opt for withdrawal, as significant tax costs and penalties may apply in case of premature withdrawal.
3.2.4 Foreign immovable property
Foreign immovable property can also be considered for taxation as deemed let-out property if it exceeds 2 properties held as a personal asset. In the case of rented property, there can be a mismatch in the taxability of income, leading to issues with higher taxability. Often, foreign countries give a deduction for repairs, maintenance, insurance, etc., while India allows a flat 30% standard deduction, which can result in such a mismatch.
4. FEMA Implications Upon Returning to India
4.1 Treatment of Existing Foreign Assets — The Section 6(4) Grandfathering Protection
A returning individual who holds foreign assets such as foreign bank accounts, foreign securities, foreign mutual fund units, or immovable property abroad does not need to liquidate or repatriate those assets upon becoming a PRII. Section 6(4) of FEMA provides a broad statutory permission to continue to hold, own, transfer these foreign assets if acquired when the person was a resident outside India or inherited from such person.
This provision is foundational protection for returning individuals. It grants general permission without any requirement of RBI approval, filing, or ongoing reporting to the RBI to continue holding all foreign assets that were legitimately acquired during the period of overseas residence. This protection extends to holding the asset, receiving income from it, and transferring or reinvesting the asset. The RBI clarified the scope of this provision through A.P. (DIR Series) Circular No. 90 dated 9 January 2014, which specifically addressed representations from the NRI community regarding ambiguities under Section 6(4). The Circular confirmed that:
- Assets acquired when the individual was a resident outside India may be retained after return.
- Income arising from such retained assets (interest, dividends, rent, capital gains) or gift/ inheritance received may also be retained abroad.
- Transfers of such retained assets, including sale proceeds, are permissible, and the proceeds may be held abroad or remitted to India as the individual chooses.
4.2 Resident Foreign Currency (RFC) Account
The RFC account is a specific account structure provided under the Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) Regulations, 2015 (FEMA Notification No. 10(R)/2015-RB, as amended). It is available to individuals who have returned to India after being resident outside India, and its purpose is to provide a FEMA-compliant account for holding foreign currency in India without the obligation of immediate conversion to Indian rupees.
The RFC account is a foreign currency-denominated account maintained with an authorised dealer bank in India. It is available in the form of savings, current or term deposits, and may be maintained in USD, GBP, EUR, and JPY, depending on the bank’s offering.
4.3 Existing NRO, NRE and FCNR(B) Accounts — Redesignation Requirements and Timelines
NRO/NRE Savings Account: An NRO/NRE savings account must be converted to a Resident Rupee savings account upon the account holder becoming a PRII. There is no provision for continuation of an NRE/NRO savings account for a returning resident. Alternatively, the individual may elect to transfer the balance in the NRE savings account to an RFC account.
FCNR(B) Deposits: FCNR(B) deposits are denominated in foreign currency. Upon the account holder becoming a PRII, FCNR(B) deposits may continue until maturity at the contracted rate without any obligation to convert or close prematurely. Upon maturity, FCNR(B) proceeds may be credited to an RFC account (retaining the foreign currency denomination) or transferred to a Resident Rupee account (converting to INR at the maturity exchange rate).
4.4 Other assets:
Upon becoming an ROR in India, an individual should review all financial relationships and update their residential status with relevant institutions, wherever required. This may include brokerage accounts, bank accounts, insurance policies, investment platforms, and other financial arrangements.
5. Implications of becoming ROR
5.1. Foreign Assets and Disclosure Requirements
Upon becoming an ROR, an individual is required to disclose foreign assets and income held in Schedule FA of the income-tax return. The disclosure requirement extends to foreign bank accounts, brokerage and investment accounts, foreign immovable property, foreign insurance policy, interests in foreign entities and foreign accounts over which the individual has signing authority. The reporting obligation is independent of whether any income has been earned from such assets during the relevant year.
Consequences of Non-Reporting — The Black Money Act Framework
Failure to disclose foreign assets in Schedule FA of the income-tax return may attract significant consequences under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 (BMA). In addition to a penalty of ₹10 lakh per year for non-disclosure or inaccurate disclosure of foreign assets, the undisclosed asset/income may be subject to tax at 30% of its value. Further, where tax is assessed under the BMA, a penalty of up to three times the tax amount may also be levied. In certain cases, prosecution provisions may also be attracted. Hence, it is essential that returning individuals ensure correct reporting of their foreign assets and income to avoid adverse implications.
5.2 Foreign Tax Credit (FTC): Section 159, Rule 76, Form 44
Once a returning individual attains ROR status and foreign income is taxable, the primary mechanism for eliminating double taxation is the FTC u/s 159 (where India has a DTAA with the source country) or Section 160 (where there is no DTAA). The procedural rules governing the FTC are set out in Rule 76 of the Income Tax Rules, 2026. The credit is limited to the lower of (a) the Indian tax payable on foreign income and (b) the foreign tax actually paid. Form 44 must be filed within 12 months from the end of the relevant tax year in which income has been offered to tax
6. Maintaining Overseas Financial Records: A Critical Pre-Departure Step
Before relocating to India, individuals should download and securely retain copies of overseas bank statements, investment records, tax returns, passport, salary slips and other financial documents. In practice, access to foreign financial accounts may become restricted or cumbersome after leaving the overseas jurisdiction. These records serve as important evidence of the source and ownership of funds and investments held abroad, assist in determining the tax treatment of foreign assets and income in India, and provide concurrent documentation of the individual’s non-resident status and overseas economic ties during the relevant period.
7. Estate Planning and Succession — Key Considerations for Returning Individuals
Further foreign Will, if required as per local laws, should be aligned with the Indian Will to avoid disputes. Also, it should be ensured that all foreign financial assets have nomination in line with the Will.
Certain countries have high inheritance tax for foreign citizens/non-residents, and at times, the threshold limits are significantly lower compared to those available for residents. Hence, appropriate structuring, such as a trust, foundation, etc., can be considered before returning to India. A returning individual who has held these accounts for years may have included their foreign address, a foreign-based family member, or a former employer’s HR as a contact or nominee or may not have updated the contact since their return to India. The consequences of an outdated or absent contact can be severe: the asset may be frozen or may pass to an unintended recipient.
Returning to India after years of overseas residence is rarely a single event. It is a process that unfolds across multiple financial years, each carrying its own compliance obligations and careful planning. The central challenge for the returning individual is that this process is governed by multiple statutes operating on different definitions of residency, administered by different authorities, and carrying consequences that are both immediate and long-tailed
The FEMA residential status shifts from the moment of return, triggering obligations around bank account redesignation, foreign asset management and permissible transactions regardless of where the individual stands under the Income Tax Act. The income tax residential status, determined annually on a physical presence test, transitions through a structured three-tier progression from Non-Resident to RNOR to ROR, typically spanning two to three financial years. The RNOR window, often misunderstood as a mere administrative classification, is, in substance, a genuine window to avoid adverse tax and regulatory implications. This care needs to be taken before and after returning to India to ensure there are no regulatory lapses.
[Disclaimer: This write-up is for general informational purposes only and is based on our interpretation of applicable laws and regulations as of the date thereof. It should not be construed as professional advice. Readers are advised to seek specific professional advice before acting on any matter. The author recognizes the contributions of CA Rajvi Gandhi and Manan Gada in putting together this article. The author can be reached at niraj.chheda@gbcaindia.com.]