When Non-resident Indians (NRIs) return to India and become residents, they need to handle some important tax-related matter for their NRI bank accounts.
As an NRI, one is allowed to open NRE, NRO and a FCNR accounts but once they become resident Indians, they have to immediately inform their residential status to the bank to avoid penalties under FEMA regulations.
NRIs need to carefully proceed while dealing with their foreign accounts in India. “Misclassification or misuse, particularly continuing tax exemptions after returning to India, often creates compliance exposure. A structured approach, rather than rate-chasing, tends to withstand both regulatory scrutiny and market volatility, says Sonam Chandwani, Managing Partner, KS Legal & Associates.
What Happens to NRE Accounts
According to RBI guidelines, NRE accounts should be designated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts, immediately upon the return of the account holder to India for taking up employment or on change in the residential status.
NRE accounts can be used by NRI only to deposit foreign earnings in Indian currency while income earned in India cannot be deposited into this account. The interest earned in NRE is tax-free for NRIs.
After a change in residential status, taxation also changes. “An NRE account cannot be continued once the individual becomes a resident. It must be redesignated as a resident savings account or converted into a Resident Foreign Currency (RFC) account if the individual qualifies as RNOR. The tax-free status on interest also ceases, and it becomes taxable as per applicable slab rates,” says CA Ruchika Bhagat, MD, Neeraj Bhagat & Co.
Resident but not-ordinarily resident (RNOR) accounts are typically for returning NRIs, who have been non-resident in 9 out of 10 preceding years.
What Happens to FCNR Accounts
However, on change in residential status, FCNR (B) deposits may be allowed to continue till maturity at the contracted rate of interest, if so desired by the account holder. “Upon maturity, the funds can be converted into an RFC account (for RNOR individuals) or a resident account. Interest on FCNR deposits remains tax-free until maturity, provided the individual qualifies as RNOR during that period,” informs Bhagat.
As per RBI rules, authorised dealers should convert the FCNR(B) deposits on maturity into resident rupee deposit accounts or RFC account (if the depositor is eligible to open RFC account), at the option of the account holder.
What Happens to NRO Accounts
NRO accounts are rupee-denominated bank accounts used for depositing income earned in India by NRIs, such as rent, dividends, pensions, gifts, and real estate sale proceeds. They can be designated as resident accounts on the return of the account holder to India for any purpose indicating his intention to stay in India for an uncertain period.
Interest earned in an NRO account is taxable and cannot be repatriated, except for current income. Also, as per the RBI rule, NRIs can remit up to USD 1 million per financial year from the balance in their NRO account. After becoming resident Indian, the NRO account rules will no longer apply.
“Since NRO accounts are already taxable in India, there is no significant tax impact post conversion. However, repatriation restrictions no longer apply once the account becomes resident,” adds Bhagat.
Disclaimer: This article is intended for general awareness only and does not constitute legal, tax, or financial advice. NRI taxation and FEMA regulations are complex and subject to frequent revision. Readers are advised to seek guidance from a certified tax professional or legal advisor familiar with NRI and cross-border financial matters. Financial Express is not responsible for any decisions made based on this information.