Embarking on a journey abroad, whether for a dream job or a fresh start, brings excitement and opportunities. However, it is crucial to understand the intricacies of managing your finances smoothly during this transition from resident to non-resident Indian (NRI), and its impact on banking, investments and taxation.
Here’s a comprehensive guide on making informed decisions and avoiding legal or financial pitfalls during this transition.
Once you’ve been out of India for 182 days or more in a year, you are considered an NRI. This change impacts your banking, taxation, and investments. You must update your status with your bank immediately to avoid legal or financial complications.
First, convert your resident bank account to a non-resident ordinary (NRO) account. Also consider opening a non-resident external (NRE) account. For this, you are required to provide specific documents to your bank.
Funds in an NRE account, including the interest earned, are tax-free in India and can be remitted freely. An NRO account, however, contains Indian rupees and is essential for NRIs to manage income earned in India such as rent, interest, or dividends from local assets. It is convenient for handling local expenses like utility bills, rent, and maintenance costs. (see graphic)
"Debits for local payments in rupees (including payments for investments, subject to compliance with the relevant regulations of the Reserve Bank of India) are allowed freely from NRO accounts. Receivable amounts of the account holder in India (rent, interest, dividend and other local receipts) and remittances received from abroad through banking channels are permitted to be credited to NRO account freely," said Prakash Hegde, a Bengaluru-based chartered accountant.
According to RBI guidelines, NRIs can transfer the equivalent of up to $1 million every financial year from their NRO savings bank account to their NRE savings bank account. To facilitate this transfer, you will require a signed cheque or letter requesting the transfer, a Foreign Exchange Management Act (Fema) declaration, and proof of the source of funds.
Additionally, you have to obtain Form 15CB from a chartered accountant, and generate Form 15CA via the income tax portal. These documents will ensure regulatory compliance and verify the transfer's legitimacy.
“For an NRI, submission of Form 15CA or obtaining Form 15CB from a CA for remittance of his funds from his own bank account in India to his NRE bank account is not required, as per the income tax rules. Still, many banks insist on them,” Hegde said.
Note: You are not allowed to transfer money to an NRE account from a savings bank account in India. For instance, if you receive gifts from relatives, rental income or dividend in India, it must go to your NRO account. An NRO account allows NRIs to transfer money to other local bank accounts seamlessly.
Mutual funds and stocks: If you already have investments in India such as mutual funds or stocks, you must update your KYC (know your customer) details to reflect your NRI status. You must update your KYC as per FEMA regulations to continue holding these investments legally.
The required documents vary, depending on the investment type, and the process involves changing your status from resident to NRI and providing proof of your new status and foreign address.
For stock investments, transfer your holdings to a new demat account and close the old one. The new demat account can be a portfolio investment scheme (PIS) or a non-PIS account.
PPF, EPF and NPS:NRIs can retain their existing Public Provident Fund (PPF) accounts up to the maturity period.
“NRIs can neither open new PPF accounts nor are they permitted to renew their PPF accounts after maturity. However, they are permitted to contribute further amounts only within the maturity period,” said Pankaj Bhuta, founder of P.R. Bhuta & Co CAs.
With the Employees' Provident Fund (EPF), there is the option of withdrawing all funds before setting sail.
"You can also let the money lie in the account, but the EPF interest becomes taxable if you’re no longer working with an Indian employer covered by the EPF Act," said Bhuta.
For the National Pension System (NPS), contributions can continue as long as you remain an Indian citizen. However, you must update your KYC with the CRA (Centralised Recordkeeping Agency). Foreign citizens cannot contribute to NPS.
Rental income: If you own property in India, it’s essential to inform your tenants about the change in your residential status to ensure they deduct tax at the correct rate. If tenants are unaware of your NRI status and deduct only 10% tax, you may face additional tax liabilities.
"It is always advisable to inform the tenant or lessee about the change in residential status from resident to non-resident so that they can deduct TDS at the rates applicable to non-residents. Otherwise, advance tax liability will arise in the hands of the NRI since the payer will deduct TDS @10% (plus applicable surcharge and cess),” added Bhuta.
With your KYC status updated, you can start new investments using your foreign earnings. According to experts, mutual funds are a popular choice for NRIs as they do not require a demat account, unlike stocks, simplifying the investment process.
“Most NRIs prefer MFs. You can invest directly through your chosen fund house. Explore options in your new country or consider Indian MFs that cater to NRIs,” said Nitesh Buddhadev, a CA.
However, only a few fund houses accept investments from NRIs in the US and Canada due to regulatory constraints. For NRIs based out of the US, fund houses SBI MF, ICICI Pru MF, DSP MF, Bandhan MF, ABSL MF, PPFAS MF, Sundaram MF, Edelweiss MF, and White Oak MF accept investments. NRIs in Canada can avail the services of most, barring ICICI Pru MF, DSP MF, and Bandhan MF.
Note: Due to passive foreign investment company (PFIC) rules in the US, mutual funds may not be advisable for NRIs.
Deciding between a PIS and non-PIS account depends on your investment goals and flexibility requirements. A PIS account is easier to get with lower minimum investments and can be linked to either an NRE or NRO account, facilitating money management.
PIS accounts also allow for repatriation of funds—you can move both your invested money and any profit back to your foreign account—but they come with strict regulations and reporting requirements.
A non-PIS account offers more freedom to invest in assets such as stocks and bonds, and has fewer rules, but is linked to an NRO account, limiting repatriation options.
Note: Non-PIS accounts might involve more paperwork and potentially higher fees (see graphic). Ideally, linking your PIS account to an NRE account facilitates easier repatriation of funds and profits back to your foreign account.
By following this comprehensive checklist and consulting with financial experts, you can ensure a smooth financial transition as you embark on your new adventure abroad. Staying informed and keeping your financial documents updated are the key to a stress-free experience, allowing you to focus on making the most of your new opportunities.
Ensure these changes are made to avoid risks under FEMA. Upon returning to India, you will need to update the status on all your investments and bank accounts accordingly.
Additionally, new opportunities are emerging in GIFT City (International Financial Services Centre), where rules for NRIs are more favourable, allowing them to hold assets in USD and other foreign currencies without tax implications in India.
