Want to become an NRI? Before you pack your bags and leave, address all the issues as non-compliance in relation to them can have far-reaching implications and many time botheration to your immediate family members.
In their zeal to settle overseas, quite many Indians completely ignore the requisite formalities that are required to be done in India prior to becoming a non-resident Indian (NRI). Change of residential status, in fact, has a direct bearing on the activities which you as a non-resident can undertake in India & hence it is essential to consult an expert and prepare a comprehensive checklist of do’s and don’ts on becoming an NRI. Understandably, lack of awareness leads to oblivious non-compliance with laws.
Here are some of the issues to be addressed if you are planning to become a non-resident:
1. Converting Bank Accounts to NRO account
The first step is conversion of bank accounts to Non-Resident (Ordinary) account (NRO) by submitting an application to your bank. NRO savings account functions like your regular savings account which can be used to make all legitimate rupee payments in India. You can also remit foreign earnings in this account which will be converted into Indian rupees.
Funds in NRO accounts (Indian funds as well as overseas receipts) are held on a non-repatriation basis, i.e. the funds are not freely repatriable to your foreign account overseas. However, you can remit up to USD 1 million each financial year from this account. Over and above USD 1 million, any current income like dividend, interest or rental income can also be remitted to your foreign account without any limits subject to providing a Chartered Accountant (CA) certificate that applicable taxes have been paid.
2. Opening NRE/FCNR account
As NRO account is a non-repatriable account, it may be advisable to open a Non Resident (External) Account (Rupee Denominated) (NRE) or Foreign Currency Non Resident (Foreign Currency Denominated) Account (FCNR) to invest your foreign earnings in India. These accounts are highly beneficial as funds held in NRE and FCNR accounts can be freely remitted outside India. Interest earnings on NRE and FCNR accounts are tax free.
3. Updating Joint bank accounts
You are permitted to hold a joint NRE bank account with a resident who is your close relative on a “former or survivor basis”, i.e. only the first holder can operate the account during his lifetime.
If you have an existing joint account with a resident relative where you are the first holder, then you need to intimate the banks to designate these joint accounts as NRO account. Also if you want the resident relative to operate the account, then a power of attorney needs to be executed in favour of the resident.
Where you are the second holder, only the resident is permitted to operate the account and you will not be permitted to transact in such account.
4. Safe deposit locker
In case your locker is not operated within the stipulated time, banks have the right to cancel the allotment of the locker and open the locker, even if the rent is paid. Thus, it would be advisable to either close the locker or add resident joint holder in the locker. Banks may also permit you to continue the locker in case of genuine reasons like you are out of India due to a transferable job etc. In such an event it is better to intimate the bank accordingly.
5. Updating Demat Accounts/Intimating Investee entities
You can continue to hold your existing investments that were done before your change in residential status. However, these securities will be held on non-repatriable basis. There are further restrictions on the type of activities which can be conducted in these entities like agricultural activity or real estate business is prohibited. Thus, you need to intimate all investee entities of change in residential status.
You are permitted to acquire securities on repatriation basis where funds have been remitted from NRE/FCNR account or from overseas. The RBI has further stipulated restrictions on NRI investments held on repatriation basis, like you cannot invest more than 5% of the paid up value of securities of the company and aggregate investment of all NRIs put together cannot exceed 10% of paid up value of securities.
Due to the above restrictions, the existing Demat accounts need to be closed and a PINS (NRO/NRE) account needs to be opened. A PINS account is a Portfolio investment scheme account mandated for NRIs who want to invest in securities listed on stock exchange.
Thus, all new investments in listed securities can be done from the NRE account with the PINS account linked to the same to ensure sale proceeds of investments are freely repatriable. For all your existing investments, as these are held on non-repatriation basis, the PINS account must also be linked to the NRO account.
6. Public Provident Funds
As an NRI, you cannot open a PPF account. However, PPF accounts which were previously opened as a resident can continue post change in residential status till the period of maturity, but no further extension is permitted. The withdrawals from the PPF account are non-repatriable and need to be deposited in the NRO account. The bank in which you have your PPF account needs to be intimated about your change in residential status.
7. Updating KYC at Mutual Funds and Insurance Policies
Insurance Policies are crucial and if you do not update your residential status, the insurer can invalidate the policy. You need to re-evaluate the terms and conditions of the existing insurance policies. As a generic guide, for life and term insurance, the cover is provided globally. However, any medical insurance is only India-specific, i.e. claims for hospitalization expenses incurred overseas will not be granted. Similarly, if you hold any mutual funds, KYC with the fund houses should be updated.
8. Existing Loans from Financial institution
Any existing loans availed by you, including home loans, can continue. Repayment of the loan is permitted through inward remittance or from funds in India. For any loans made by you to a resident, the repayment can be made only to your NRO account.
9. Directors / Designated Partners
If you are a director in a company/ designated partner in an LLP, trustee of a trust, you need to intimate these entities. As companies and LLPs are required to have at least one resident director and designated partner, respectively, you must review the implications thereof.
10. Power of Attorney (POA)
POA in favor of a trustworthy person will enable you to manage your financial matters efficiently apart from many other matters which require your signature, including for authorizing your Income tax returns in India.
So, before you pack your bags and leave, address all the issues as non-compliance in relation to the above can have far-reaching implications and many time botheration to your immediate family members whom you have left behind. Bon voyage!
(By Diana Mathias, Manager- Business Consultancy, and Sneh Bhuta, Senior Consultant-Business Consultancy, N. A Shah Associates LLP)