Here are the financial issues that NRIs might face on their return to India

If they withdraw money prematurely from their retirement account in the US, there will be a tax as well as a penalty

Placement firms in India have witnessed a spike in applications from US-based tech workers. “Around 60,000-100,000 people could be affected in the short run by changes in visa norms,” says Rituparna Chakraborty, executive president and co-founder, TeamLease Services. While jobs are available in India's tech sector, they are in emerging, specialised domains. “Those who have skills in those areas will find a job right away. As for those who need to re-skill themselves, it could take them six months to a year to find a job,” adds Chakraborty.

With H1B norms in the US  being tightened, the salary limit for eligibility is proposed to be hiked from $60,000 to $130,000. Spouses on dependent H4 visas may also not be able to work in that country if legislation to this effect become a reality. The higher cost of living in the US makes it difficult to run a family on a single income.

Determine residency status for tax purposes: NRIs returning to India need to determine their ‘residential status’ based on the Income Tax (IT) Act, which depends on  physical presence in the country. A person's residency status can fall into one of the three categories: resident and ordinarily resident (ROR), resident but not ordinarily resident (RNOR), and non-resident (NR). 

In the first financial year, assuming that a person spends more than 182 days in India, his residential status will be “resident”. However, if out of the preceding 10 years he has been a non-resident for at least nine years, his status will be RNOR. In the second year, too, if he has been a non-resident for at least nine years out of the preceding 10, his status will be RNOR. “When a person is an RNOR, income received or accrued in India, and also income accruing outside India from the business controlled in India, will be taxed here. There will be no tax implication for the RNOR on income accruing or arising outside India,” says Suresh Surana, founder, RSM Astute Consulting Group.

In the third year, assuming that he was resident during the past two years, he can claim RNOR status only if his stay in India was for 729 days or less in the seven years immediately preceding the third year. Otherwise, he will become an ROR and his global income will be taxable in India. 

So long as a person enjoys RNOR status, he need not disclose his foreign assets. But once he becomes an ROR, he will have to file details of his foreign assets in Schedule FA as part of his tax return. “It has become important to disclose foreign assets with the promulgation of the Black Money Act, which imposes a stiff penalty on non-disclosure of assets in IT return,” says Surana.

Deal with retirement funds: If you withdraw money from your 401K retirement plan before the age of 59.5 years, you will have to pay tax  and also a 10 per cent penalty for early withdrawal in the US. “If you don't need the money, leave it in the 401K account. Treat it as a dollar-denominated investment in a safe market that will provide diversification to your portfolio,” says Sonu Iyer, tax partner and national leader, people advisory services, EY India.

If you withdraw before 59.5 years, you will have to pay tax in the US. Taxability in India will depend on your residential status. For NRIs and RNORs, such a withdrawal is not taxable in India. For RORs, there is no clear stipulation in the IT Act. “In my view, employee and employer contribution will not be taxable. However, the accretion or earnings need to be offered for tax. Credit can be claimed for the tax paid in the US to offset the tax liability in India,” says Iyer.

Switch to resident accounts: NRIs returning to India also need to comply with the Foreign Exchange Management Act (FEMA). Under FEMA regulations, an individual's residential status depends not only on his physical presence in India - he should have been in the country for more than 182 days during the preceding financial year - but also on his intention to stay. When an individual comes to India to take up employment, carry out a business or for any other purpose, it indicates his intention to stay in India for an uncertain period. Under FEMA, he will be treated as “resident” from the day he enters India.

He needs to inform his bank and ask it to re-designate his accounts as resident accounts. Non-resident ordinary (NRO) and non-resident external (NRE) accounts will get changed to resident accounts, while the FCNR account will get converted into a resident foreign currency (RFC) account. The NRO account is always taxable. Interest from NRE and FCNR accounts will also become taxable once they become resident accounts. 

Reduce liability, purchase health insurance: IT workers in the US should begin to reduce their older liabilities (loans) and not take on fresh ones. They should also buy health insurance in India at the earliest. “If they visit India in the interim before the final shift, they should use the opportunity to buy a family health floater cover here,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors. There could be a period when the NRI is not covered by his US employer's policy and hasn't found employment in India. A personal family floater will ensure that his finances are not left exposed to the risk of illness during this period. Buying a mediclaim cover at the first opportunity also ensures that any waiting period is crossed at the earliest. 

NRIs returning to India should live on rent initially. “Buying a house takes away flexibility regarding where to pursue a career, and  regarding where your children should be educated. Moreover, the decision to shift to India could get reversed a couple of years later,” says Dhawan.