Mr. Subramaniam an IT professional was excited when he was selected for a long-term assignment in the US. He had worked very hard in the last few years and had been eagerly waiting for this opportunity for a long time. Finally, it’s the time for Mr. Subramaniam to reap the benefits of all his efforts. However, he was wondering about the impact of the change in residential status on his financials and what would be the formalities he needs to complete before he moves abroad and gets the NRI(Non-resident Indian).
A lot of people move abroad these days, and the reason could be one among; promotion in their current job or on a long-term assignment from their current employer, higher studies, to seek better career opportunity or to earn more money, etc. In such a scenario, most of us will have the queries similar to that of Mr. Subramaniam. Below post will take you through the ‘to do checklist before you gain a Non-Resident Indian (NRI) status’.
Who is a Non-Resident Indian (NRI)?
A ‘Non-Resident Indian (NRI)’ is a person resident outside India who is a citizen of India. There are two ways to recognise whether you have attained NRI status or not.
i. Income Tax Act, 1961: According to this Act, a person is deemed to be a resident Indian if he/she is staying in India for more than or equal to 182 days in the current financial year or he/she stayed in India for more than or equal to 60 days and 365 days or more in the preceding 4 years of the financial year under consideration.
In April 2020, an additional clause has been added that a period of 120 days will be applicable in cases where the total Indian income is more than Rs.15 lakhs in a financial year.
ii. Foreign Exchange Management Act (FEMA), 1999: As per FEMA, a person is deemed to be a resident Indian if he/she stays in India for more than or equal to 183 days during the previous financial year. This definition of Non-Resident Indian (NRI) is primarily for the purpose of foreign exchange.
So if you don’t satisfy any of the above conditions then as per Section 6 of the IT Act, you will be deemed as a Non-Resident Indian (NRI).
Checklist of things to do before you gain a Non-Resident Indian (NRI) status:
1. Convert your existing Savings bank account into an NRO account:
As per the RBI guidelines, an NRI is not allowed to keep a regular savings bank account in India. So, one has to convert his/her existing savings bank account to NRO account. All you have to do is visit your bank, fill up the requisite forms, and submit two photographs along with the self-attested copy of the passport and visa. Some of the eminent features of an NRO account are:
You can hold the account jointly with residents and/or non-residents.
The account can also be operated through resident Power of Attorney (POA).
You can deposit all your Indian income in the account, make EMI payments, and other investments from such account.
Principal amount in the NRO account is non-repatriable i.e. it cannot be taken outside India. Income and interest earned is repatriable.
You will have access to earnings such as rent, interest, dividends and can transfer them to a foreign account.
You may remit an amount not exceeding $1 million during a financial year.
You can transfer funds to any other account in India.
The interest on such account is same as the interest on a regular savings bank account i.e. 4% per annum and TDS is deducted at the rate of 30.90% on such interest income by the banks.
What will happen in case of Joint account/s?
In case of Joint bank account/s, there are two scenarios:
I. Joint account with spouse or any other resident Indian:
If you have a joint account with your spouse or any other resident Indian where you are the primary account holder, such account will be converted into an NRO account after you inform the bank.
II. Joint account with spouse or any other resident Indian where you are the secondary account holder:
If you have a joint account with your spouse or any other resident Indian where they are the primary holder, and you are the secondary account holder, then on such account your operating pattern will get converted into a formal or survivor basis and you won’t be able to operate such account until the primary account holder lives. This will be done once you update your status as a Non-Resident Indian (NRI).
2. Open an NRE account:
You can open an NRE account if you have continuous requirement of transferring funds to India. There are no limitations on the amount which can be transferred and the funds are freely and fully repatriable. The procedure to open an NRE account remains same as that of an NRO account.
NRE account is a rupee account and is available in 3 formats i.e. savings, current and fixed deposit accounts. You can make credits in the account by depositing cheques/ instruments drawn in foreign currency/ traveller’s cheque/foreign currency notes, through inward remittance in Indian rupees or foreign currency from abroad. There will be no tax on the interest earned on such account in India.
3. Buy Insurance before you leave:
If you are planning to buy insurance, get one before you leave as it requires a lengthy procedure to get insurance in India once you become an NRI. In case of life insurance policies, death cover is provided globally, while, for health insurance policies cover is provided for any medical expenses/ treatment in India. So check for the T&C of the policy before you buy one.
If you already have a term insurance, it is advisable to update your residential status with the insurer for continuity in service.
4. Assign a Power of Attorney (POA):
It is crucial that you legally assign a ‘Power of Attorney (POA)’ to someone for taking care of your finances in India before you move abroad. POA will have the authority to operate your bank accounts, perform real estate transactions, rent out property, sign tax forms, issue cheques from your account, etc. on your behalf.
However, POA also has some limitations like they are not authorised to open a bank account on your behalf, they can only operate the existing accounts. You can either opt for ‘General POA’ or ‘Specific POA’. Take help of your lawyer to do it in a correct manner. After the registration of POA, do ensure to submit the document copies to banks and other financial institutions before you move abroad.
Note: POA is crucial to managing your finances on your behalf in your absence. So, assign it to a trustworthy person.
5. Open a Portfolio Investment Scheme (PIS/PINS) account:
According to the guidelines given by RBI, an NRI can only trade or invest in stocks and shares in India through the secondary market via a designated account known as Portfolio Investment Scheme (PIS/PINS) account on a repatriation or non-repatriation basis.
For any transaction in a secondary market on repatriation basis, you need to have an NRE bank account. On the other hand, if you want to do any transaction on a non-repatriation basis, you should have an NRO bank account. An NRI can open only one PIS account.
So, if you have existing shares in your Demat account in India, you are required to get the shares transferred to your PIS account so that if you wish to sell these shares in future, you can do so through the PIS route and then you can close your Demat account.
6. Update KYC details with Financial Institutions
As per the RBI norms for KYC, it is mandatory to update the change of your tax status to NRI status and submit the new KYC details to the financial institutions such as banks, mutual fund houses and insurance companies. It is required for ECS or auto debit facility because the change in your residential status will result in the change of your savings account and you will have to link it to your NRE/NRO account.
In case of mutual funds, NRIs are required to submit a certified copy of the passport and overseas address as per the instructions by Central Depository Services (CDSL). NRIs can invest in all mutual funds schemes in India except funds promoted by US based AMCs such as HSBC, Franklin Templeton and Fidelity.
Note: You can make transactions in your existing mutual fund holdings while you are in abroad. All you have to do is open a single folio with the AMCs where you have invested, get a transaction PIN before leaving India and you are good to go.
7. Open a PPF account:
If you have a PPF account and it is operational, then you can continue to contribute to such account through your NRO/NRE account. However, once you become an NRI, you cannot open a new PPF account. So if you have a plan to open a new PPF account, it is advisable to open the account before you gain NRI status.
8. Convert your Fixed deposits to NRO deposits:
Few banks automatically convert your fixed deposits to NRO deposits once your savings account gets converted into an NRO account. While, for some banks you still need to do it manually, so check with your bank and get it done. Interest earned on the deposits will be same as the regular savings account, but TDS at the rate of 30.90% will be deducted on such interest.
9. Activate online payment for Home loan EMIs:
You can make payments for the EMIs on your home loan by shifting to the auto payment mode. If you already have ECS instructions for your EMIs, all you have to do is link your loan account to the NRO account. It will also help you to make a prepayment of your loan account (if you want to), through NEFT.
10. Initiate international roaming on your Mobile number:
If you want to use the same mobile number, it’s better to activate international roaming on your number as it will help you to reduce roaming charges to a huge extent. It will also help you to get the OTP in case of funds transfer and be in touch with your loved ones while using the same mobile number without any hassles.
11. Get your Debit/Credit card converted into an International card:
It is advisable to convert your debit/credit cards into international cards due to charges associated with the overseas expenses. You will have charges such as foreign currency conversion, international withdrawal fee, foreign transaction fee, etc. when you swap your card overseas. You can make payment for your credit card bill only through the NRO account. Do check for any mark-up fee before buying a new card.
So, if you are going abroad for a long-term assignment, higher studies, or to settle down permanently, or for any other reason, the above checklist will help you to keep away with the hassles of tasks you need to complete before you gaining the NRI status.