OCI living in India: Specific tax and FEMA issues

If you are an OCI and are living and working in India, you can face confusion at each step of the way in your financial dealings in India. In this post, I am trying to address some of the questions of such OCIs in a form of a FAQ. Please note that for the purpose of this post, we’re referring to a person who has obtained an OCI and is living and working in India for quite some time now.

Note: The opinion will be different depending on a person’s specific situation hence please consider it as generalized information. Consult a qualified tax and FEMA adviser with your specific facts/case situation.

Residential status of an OCI living in India

There is a lot of confusion is to establish residential status of a person is in India. First things fits, OCI status has nothing to do with a person’s residential status as per ITA and FEMA.

Speaking of residential status, it may be noted that two different laws converge here – Income Tax Act (ITA) and Foreign Exchange Management Act (FEMA)

ITA is concerned with taxability of income of that person in India.

FEMA is concerned with foreign exchange and related compliances by such person.

While for ITA, the number of days stay in India for a particular financial year is relevant; under FEMA what matters is the “intention” of stay in India. You can get more clarity on residential status under ITA and FEMA in below posts:

NRI Definition: FEMA Act VS Income Tax Act

How to find your residential status as per Income Tax Act

OCI living in India – Rules on taxation of income in India

Generally, for an OCI living and working for a long time (at least > 2 years) in India, he should qualify as a “Resident and Ordinarily Resident” (ROR) as per ITA

If OCI is an ROR as per ITA, then his worldwide income is taxable in India. In case of income outside India, the person may avail benefit of DTAA or claim a tax credit of tax paid in foreign country. Also read: Foreign Tax Credit Rules – An Overview

However, if the OCI qualifies as a RNOR, then only his Indian income is taxable in India. Income from outside India is not taxable in India, unless it is received directly in a bank account in India.

Does OCI need to also offer Indian income to tax in foreign country of which he is a citizen?

This depends on the tax law of the country of which the OCI is a citizen. Normally, countries require the person to have stayed in that country for a minimum number of days for qualifying him as resident and then taxing his worldwide income, however some countries like USA have different rules – in USA, there is something called citizenship based taxation which says that a US citizen (or a lawful permanent resident i.e. GC holder) is taxed on worldwide income irrespective of his actual place of stay during the year.

So, OCI living in India need to check with a CPA in their country of citizenship to see if such rule exists. If yes, then one has to file tax returns and pay tax in that country on Indian income as well. DTAA benefits can be claimed to avoid double taxation though.

Does OCI living in India need to file a tax return in India?

Tax return filing provisions are applicable similar to those applicable to a resident of India.

If the taxable income of OCI exceeds the qualifying exemption limit of INR 2.5 lacs (or INR 3 lacs or 5 lacs, for senior citizen and super senior citizen)

If the income is below exemption limit however there is any foreign income/assets, then OCI need to file a tax return in India – it is important to select ITR form that contains Schedule FSI and FA to declare those income/assets else penalties under Black Money Act can follow – for more clarity, you can read below posts:

Black Money Act: An Analysis

How NRI should disclose their foreign income/ assets in Indian tax return

Does OCI living in India need to obtain Aadhaar and link it with PAN?

In Finance Act, 2017, a new Section 139A has been added, which makes it mandatory to link Aadhaar with PAN and quote Aadhaar in tax return. I’ve done a detailed post analyzing this requirement here: New Aadhaar and PAN linking requirement: Impact Assessment for NRI

In terms of the question that are OCI living in India allowed to obtain Aadhaar, answer is YES. The eligibility for application for Aadhaar is that you should have resided in India for atleast 182 days in past 12 months as on date of enrolment. There is no condition that Aadhaar is only for Indian citizens. Hence, the fact that you are no more an Indian citizen will not come in your way of obtaining Aadhaar.

Now, we come to the second leg of the question – Does Section 139A requirement of Aadhaar PAN linking and quoting PAN in tax return apply to such OCI, and the answer again in YES. OCI living in India must obtain Aadhaar and link it with PAN.

Can OCI living in India open bank account?

Since OCI living in India qualifies as a “resident” as per FEMA, he can only have regular resident savings and current accounts. Such OCI cannot retain non-resident accounts like NRE, NRO etc.

If OCI had held an NRE or FCNR FD and returned to India, he can retain those FDs till maturity but cannot renew. Such OCI can open RFC account to credit any income from foreign investments which will be freely repatriable out of India.

OCI card can be used as a valid identity proof while opening bank accounts, MF KYC etc.

Can OCI invest in mutual funds in India?

Yes, OCI can invest in mutual funds from his resident savings/current account. He need to first do a KYC in India. If his citizenship in existing KYC has been updated as Indian and he is now no more an Indian citizen, it is advisable to immediately do a fresh KYC with revised details.

The KYC so done will be auto populated across Asset Management Companies (AMCs) and there is no requirement to do a fresh updation of information with each AMC. Once KYC is done, such OCI can invest online from the comfort of his home.

What should OCI fill in FATCA /CRS declaration at the time of MF KYC?

OCIs living in India face confusion on what to fill in the mandatory FATCA CRS declaration. Here, in my experience with a few clients, I’ve come across that the information sought by CAMS is different from the individual AMC.

For example, extract of FATCA CRS declaration in CAMS is as follows:

 

Now, extract of FATCA CRS declaration for HDFC MF is as follows:

 

 

 

As one can see, CAMS only asks you whether you are a tax resident of a country other than India, plain and simple. However, in case of HDFC MF, you’re required to answer if your country of birth OR Citizenship OR Nationality OR Tax Residency is other than India.

My question is: What is the exact requirement under FATCA/CRS?

If it is on multiple parameters, then CAMS is incorrect in asking for only one parameter i.e. tax residency. However, if only tax residency need to be enquired into, HDFC is asking too many questions.

How does it impact the OCI? Let us assume a UK citizen living and working in India for past 15 years and has an OCI. He wants to start investing in MF. He can do KYC through CAMS or through HDFC MF.

 He visits CAMS and since he is tax resident only of India, answers the question as NO.

However, had he gone to HDFC MF, since his country of birth is UK, he would enter YES. Now, since he has never filed taxes in UK (being a non-resident of UK), he does not have a tax identification number of UK. Also, since he has shifted to India in his childhood, he does not have an address in UK. There have been situations where MF people are asking for a UK address from people who have indicated themselves as UK citizen.

The above is only one example of teething issues that OCIs living in India face in their financial dealings. In my view, to avoid the hassle of dealing with over the counter questions in case of MF, better to do KYC with CAMS. At least first get the KYC closed, then you will have various choices amongst AMCs to invest your money.

Can OCI living in India invest in PPF?

An extract from PPF Rules 1968 is as follows:

“…..Non Resident Indians are not eligible to open an account under the Public Provident Fund Scheme:-

Provided that if a resident who subsequently becomes Non Resident Indian during the currency of the maturity period prescribed under Public Provident Fund Scheme, may continue to subscribe to the Fund till its maturity on a Non Repatriation Basis.…“

 

So, if we see the Rules, the restriction is on NRIs – word NRI has not been defined  – we can safely presume that it is NRI as per FEMA – since the FDI rules in FEMA also do not state PPF as a permissible investment by NRI in India.

Now the question is: what about OCIs which are resident in India? In my view, there is no restriction. PPF is a very good long term investment option and OCI can explore it. Yes, there can be some resistance from over the counter if you approach the bank however there, you need to ask for specific directives/word of law that prevents OCI from opening PPF account. If matter is not resolved, you can complain to the bank’s grievance cell.

Can OCI living in India invest in Sukanya Samriddhi Yojana (SSY)?

OCI, living in India or outside India, cannot invest in SSY. There had been a considerable lack of clarity on this point, and the new rules vide Notification No. 181 dated 18/03/2016 have clarified it by saying that if after subscribing to SSY, person becomes a non-citizen or non-resident of India, the account will be closed. So, SSY is not open to OCI.

Can OCI living in India invest in National Pension Scheme (NPS)?

No, NPS is open only for Indian citizens. Hence, living in India or outside, as an OCI, you cannot subscribe to NPS.

Good news, however is that in its current form, NPS is not a great investment option when you compare it with investment options like mutual funds, so it’s not really a loss:)

Can OCI living in India invest in property in India?

Being a resident under FEMA, there is no restriction for purchase of agricultural property for an OCI as far as FEMA is concerned.
I also checked the Citizenship Act, 1955 and that too does not contain such a restriction. However, OCI planning to buy agricultural property must also check the applicable revenue law of the state where the property is located. Generally, states in India have enacted laws to prohibit non-farmers from purchasing agricultural land. However, as far as FEMA is concerned, there is no restriction.

Also read: Returning NRI Property Purchase in India – A Checklist

Can OCI living in India invest outside India?

Since OCI is a resident of India as per FEMA, he is allowed to invest outside India either by way of direct investment (i.e. privately purchasing shares of a company outside India) or by way of portfolio investment (by way of purchasing shares of companies on stock exchange). OCI can also open bank accounts and purchase real estate outside India. Generally, the investment per year is limit to the LRS limit, else RBI approval needs to be taken.

I’ve published a detailed post on ODI by Indian residents: FEMA Rules on Overseas Direct Investment: An Overview

For detailed info on LRS, you can read this post: Liberalised Remittance Scheme (LRS) under FEMA: Analysis & Issues

How much money OCI living in India can send outside India?

Since OCI is a resident of India as per FEMA, he is allowed to remit funds outside India for permitted capital/current account transactions within the LRS limit of USD 2,50,000 per financial year. Any amount over this requires RBI approval and strong reasons need to given for the same.

Also, for sending money outside India, bank may require you to provide Form 15CA and 15CB – refer to my detailed post here: Form 15CA/CB compliances by NRI: Procedure and Issues

Other Important points

  1. In case OCI’s income is liable to tax in India as well country of citizenship, he can use the benefit of a DTAA or Section 91 of Income Tax Act to claim a foreign tax credit.
  2. There may be a significant fee difference w.r.t. cost of education for a OCI child getting admitted in a university in India vis a vis an ordinary resident.
  3. OCI should run a check across all his financial investments, particularly insurance policies so that the citizenship, residential status, address etc. are correctly reflected. If not, one should immediately inform the bank etc. in writing (retain an acknowledgement as proof) of the change and follow up to ensure that change in details is duly reflected in its database.
  4. OCI does not need any registration with FRRO and stay for an unlimited period in India
  5. OCI cannot vote or seek an employment with the Indian Government
  6. Due to FATCA (read: CRS & FATCA: Overview and Implications for USA based NRI), OCIs from USA and Canada may face issues in opening financial accounts (especially investing in mutual funds and opening demat accounts) in India. This is an unfortunate reality. Some MF still allow, but you need to consider the PFIC related tax implications and reporting in USA (read: Decoding IRS Passive Foreign Investment Company (PFIC) Rules & Implications) and in my view, if your intention is to stay back in India permanently, such OCI can explore renouncing US citizenship. More info here: Should I retain my US citizenship/ Green Card on Return to India?

Hope the post has been of service to you. Please share your thoughts/feedback.

Hello! I am Abhinav, a Chartered Accountant by qualification and also registered with SEBI as an "Investment Adviser" from Mumbai, India. I specialise is providing Expert Cross Border Tax, FEMA and Investment Advisory to NRI/PIO families, Seafarers Expats and corporates. I can be reached at abhinav@abhinavgulechha.com