When you become an NRI

One cannot open a savings bank account, have a fixed deposit or a public provident fund.

Chartered accountant Sandeep Shanbhag recalls a case where a non-resident Indian (NRI) wanted to continue with his resident savings account because he received interest income on it. By law, NRIs are not allowed to hold regular savings accounts in India.

Shanbhag advised him to either closed it or change to a non-resident external (NRE) or non-resident ordinary account (NRO) account. The interest income on the balance in NRE and NRO accounts are at par with a savings bank account, currently at four per cent. The onus of changing these accounts from regular ones to NRE/NRO accounts lies with you. He/she must intimate the bank.

Jayant Pai, vice-president, Parag Parikh Financial Advisory Services, explains: “Both these accounts are rupee-denominated. They differ in terms of the amount that can be repatriated and how freely it can be done.”
 

THE NRI FINANCIAL PLANNER

* NRIs cannot hold savings bank account, need to convert it to NRE/NRO account

* Resident fixed deposits cannot be held by NRIs, they can have NRO deposits

* Such individuals need to redo their KYC for mutual funds

* PPF accounts opened prior to change in residency continue enjoying tax benefits

* Individuals need to be present in person for status change with insurers, policy renewal

* Renewing policies online without updating insurer is considered fraud

An NRE account allows you to deposit only foreign funds and these can be freely transferred to your foreign account and vice versa. The amount and any interest earned thereon are tax-free. An NRO account allows you to deposit any income earned in India (like rental income). But you cannot repatriate more than $1 million (Rs 4.5 crore) in a year. And, the interest earned is taxed at a flat 30 per cent.

NRIs also cannot hold a resident fixed deposit. So, if you have an NRI family member as a joint holder in an FD, he/she needs to intimate the bank about his status. The bank may allow you to hold the deposit till maturity and not renew it further. Or, you may be asked to break the deposit and open a fresh one. If the NRI is opening the deposit, it has to be an NRO deposit and a resident Indian can be the second holder. However, you can have an NRI as a nominee for an FD.

Since, January 1, 2011, compliance with know-your-customer (KYC) norms for mutual funds has been made mandatory for all MF investors. Therefore, the asset management company needs to be updated about the change in status (from citizen to NRI). And, the KYC needs to be renewed, although your investments continue on a regular basis.

Reason: Your account used for electronic clearance system (ECS) or auto debit for the systematic investments in the MF will change. Also, the residential address would differ, explains Hemant Rustagi, CEO, Wiseinvest Advisors. On the change in status, link your investments in India to the NRE or NRO account.

According to the Central Depository Services (CDSL) website, “NRIs must submit a certified copy of the passport and overseas address. If any of the documents (including attestations/certifications) towards proof of identity or address are in a foreign language, they have to be translated into English. The documents can be attested,by the consulate office or overseas branches of scheduled commercial banks registered in India.”

Next, an NRI cannot open a public provident fund (PPF) account. However, accounts opened prior to your change in status will continue to enjoy all benefits. Meaning, one can hold the account to maturity and even extend it every five years, twice thereafter.

Unfortunately, the interest income or dividend earned on investments in India will be taxable, as the Income Tax Act applies on on all India-sourced and receipt income, in line with the slab applicable to you. However, tax-exempt incomes like that earned on investments in PPF will continue to be exempt in India. How the foreign country treats the amount for taxation would depend on its rules.

Damien Marmion, CEO, Max Bupa Health Insurance, says, “Under law, you need to be present at the time of policy renewal, specially if you are an NRI, though the cover continues. This is because you will need to do the paperwork for change in status.”

Only residents can renew policies online. A safer way could be to transfer your policy to the foreign partner of your insurer, if allowed.