Inform bank about your permanent return to India to avoid Fema violation

My friend Archana came to me for my suggestion with a unique issue. Her father had been working overseas for decades till he retired and came back to India sometime in December 2016. Apart from the home he was staying in, he had a portfolio of equity mutual funds as well as around Rs 50 lakh in non-resident external (NRE) fixed deposits (FDs).

Most of the NRE FD’s had been invested at around 8.50% per annum and would be maturing in 2018 or later. He had deliberately not informed the bank about his permanent return to India as he thought he could enjoy the tax-free high returns till maturity as long as the deposits remained tagged as NRE FDs. Archana wanted to know about the taxability of interest on NRE FDs after his return to India and any foreign exchange law implications on not informing the bank about the permanent return to India.

Archana’s father was allowed to continue the NRE FD till maturity on the same contracted interest rates but he was required to inform the bank “immediately upon return to India” and had to get the NRE FDs redesignated as resident fixed deposit. Reserve Bank of India (RBI) has not defined the term “immediately upon the return of the account holder to India” but it should be taken in its normal sense which can mean a few days or at the most a few weeks after returning to India. As over nine months had passed since his return to India, he was already in default of the foreign exchange laws and should even now make amends by informing the bank to limit the period of default.

As far as taxability of the interest was concerned the tax exemption would continue only for the years that he was a “resident outside India” as per Foreign Exchange Management Act (Fema), 1999. Even though he had come back for good in December 2016 , for the financial year 2016-17 he would be treated as a person “resident outside India” under FEMA as he had spent more than 182 days during that financial year outside India. Therefore the interest on NRE FDs would remain exempt for that financial year.

The taxability in the current financial year 2017-18 is very different. In my opinion, in the current fiscal year, he is certainly a person “resident in India” under Fema 1999. Hence, the interest on the NRE Fixed deposit would be taxable in his hands irrespective of whether he informs the bank or not. It would also be in his own interest to inform the bank immediately about his return to India so that the default of the Fema laws remains much milder.

I advised Archana to ensure her father filed proper income-tax return for FY18 as and when it fell due in July 2018. He could claim the benefit of the initial exemption limit and any deductions that he may be eligible to claim and hence not pay any significant tax in any case.

If instead of NRE FD, her father has held foreign currency fixed deposits called FCNR deposits, the situation would have been a little different. Even these deposits have to be re-designated but are allowed to be held till maturity in foreign currency. Tax exemption would have continued for two years more since Archana’s father had been a non resident for much more than 10 years prior to his return to India. He would be considered as “resident but not ordinarily resident” for financial year 2017-18 and 2018-19 and the interest on FCNR deposits during those financial year would continue to remain exempt. The interest would be taxable only from the financial year 2019-20 onwards in such a case.

To summarise, many returning Indians fail to inform the bank about their permanent return to India and may thus be violating the Fema laws by not getting their non-resident accounts re-designated as resident accounts. They are allowed to continue both the NRE FDs and FCNR FD accounts till maturity. The taxability of NRE FD would be from the first financial year in which the person is treated as “resident in India” as per Fema whereas no tax will be payable on the FCNR FD interest for those financial years in which the holder remains “not ordinarily resident” as per the income tax laws.

If the summary is confusing, I don’t blame you. Please do seek proper financial advise preferably before you actually return to India but definitely as soon as you return to India to fully understand your obligations under both the tax laws and the FEMA laws.