Why it’s critical to effectively manage Non-Resident Indian status

30 November 2021
Indian nationals living outside India are faced with a bevy of changing rules that have an enormous impact on their tax strategies and asset administration. To help them navigate these waters, we spoke to three experts with extensive experience in tax, wealth management and estate planning in India and abroad.

Neeraj Aggarwal, Vistra’s commercial director in India, has over 17 years’ experience in banking and specializes in capital markets and wealth management. Niyati V. Doshi and Ashika Shah are both assistant directors for Vistra’s private clients in Mumbai. Niyati is a chartered accountant with expertise in asset administration and estate planning, and Ashika holds a law degree and has expertise in financial services and investor relations.

What is Non-Resident Indian (NRI) status, and what groups of people does it include?

Neeraj: A Non- Resident Indian is someone who does not live on a permanent basis in India, but is either a citizen or holds an Overseas Citizen of India (OCI) card. A Person of Indian Origin (PIO) can also obtain an OCI card.

With 2.5 million Indian nationals migrating overseas every year — many temporarily — the non-resident population is huge and growing. In fact, Indians comprise the world’s largest diaspora. According to a report by the Ministry of External Affairs, India now has 32 million NRIs and PIOs.

Many NRIs are highly skilled workers who command high salaries and accumulate significant wealth. They’re among the most prosperous ethnic communities in many affluent countries, including prominently in the UK, the US and Singapore. Though no current figures are available, in 2007, the cumulative wealth of NRIs stood at $1 trillion, eclipsing India’s GDP of $850 billion.

What are some of the reasons for acquiring official NRI status?

Niyati: NRI status confers tax exemptions for income earned outside India, as well as government incentives and preferential treatment for capital investments. NRIs are taxed only on the income they earn in India, which may include salary and any revenue from the sale or rental of property. They can continue to visit India without a visa.

Are there any other benefits associated with being an NRI?

Ashika: NRIs can take up to $1 million out of India each financial year, compared with $250,000 for resident Indians. And NRIs are not subject to Indian income tax on rupee-denominated fixed deposits, one of the most popular savings vehicles in India.

What are some of the risks if NRI status isn’t managed correctly?

Neeraj: India is a high-tax jurisdiction, and NRIs who don’t manage their status carefully can become subject to Indian taxes on their global income, in addition to the amounts they pay to other jurisdictions.

To maintain their status, NRIs must keep close track of the time they spend in India. If it amounts to 182 days or more during a financial year, they will be treated as ordinary Indian residents for tax purposes.

In addition, Indians who spend more than 60 days in India in a financial year and have also spent more than 365 days there in the previous four years may also be considered Indian tax residents. However, the 60-day time period extends to 182 days for NRIs who are visiting India and for those who have gone abroad for employment purposes.

Ashika: Also, starting in fiscal year 2021, additional rules apply, including reducing the 182-day limit to 120 days if Indian income exceeds INR1.5 million. People in this category should check with a tax advisor to discuss their individual circumstances.

Can you provide examples of how you’ve helped clients with NRI-related issues?

Neeraj: We generally work with two sets of clients: NRIs who are planning to become Indian residents in the future, and Indian residents who are planning to become non-residents.

We help future residents optimize their estate and succession strategies, withhold their assets to benefit the next generation and ensure a smooth transition through succession planning.

For those planning to become non-residents, we help arrange pre-gifting to optimize post-NRI benefits, set up Indian trusts to enable estate and succession planning, and assist with the long-term protection of assets in India.

What do NRIs need to consider when deciding where and how long to live outside India?

Ashika: It is essential for them to ensure they continue to qualify as NRIs under Indian laws, which, as we have seen, may change. They should also make sure they are not involved in any business activities in India that could change their status to resident if they stay for more than 120 days. Finally, NRIs should try to ensure that they become tax residents of the jurisdiction that is most beneficial from a tax and financial perspective.

What are some of the family-related issues NRIs should be aware of?

Niyati: India places restrictions on gifts from residents to non-resident family members. Arranging an inheritance for NRI children is also difficult to do without proper structuring. NRIs should assess the value of their assets in India in advance and reexamine them in light of tax and inheritance rules they will encounter in other jurisdictions, such as the US or the UK.

What trends are you seeing among NRIs?

Ashika: NRIs are increasingly interested in making investments in India. This is a tricky area from a tax perspective. They should work with service providers who can help them create a ringfenced structure to hold their Indian assets while also assisting them with taxes and financial planning in multiple jurisdictions.

Are there any important NRI considerations that people often miss?

Niyati: To achieve a desirable outcome, residents need to create a plan before becoming NRIs, and NRIs need to create estate and succession plans for their families in India.

If you could only give one piece of advice about NRIs, what would it be?

Neeraj: Consider tax structures — including double taxation agreements — in several jurisdictions before acquiring or gaining a controlling interest in any offshore assets. If you are an Indian resident, avoid owning or controlling offshore assets. If you are an NRI, avoid owning or controlling Indian companies.