When you move abroad for work, studies, or business, along with your residence your legal and financial obligations towards India also change. When you become a Non-Resident Indian (NRI), it is important that you update your bank, tax, and other financial records accordingly. Failing to do so, especially not converting your savings account, can lead to legal trouble.
But, before we look into the penalty for not converting to an NRO account or declaring NRI status, let’s see who is deemed as an NRI.
Who is an NRI?
An NRI, or Non-Resident Indian, is someone who lives outside India for more than 182 days in a financial year for reasons such as work, business, or education. Under the Income Tax Act (1961), residential status is based on the number of days spent in India. If you do not meet the criteria for a ‘resident’, you are legally considered an NRI.
The Foreign Exchange Management Act (FEMA) also defines NRIs as individuals who reside outside India for various reasons for an indefinite period. If you are an NRI as per this classification, it can affect your ability to hold certain financial accounts and investments in India.
Is There a Penalty for Not Declaring Your NRI Status?
Yes, while there is no direct penalty for not declaring NRI status, there are serious financial and legal consequences if you fail to convert your savings account.
As per FEMA regulations, it is illegal for NRIs to continue holding a regular resident savings account. If you are an NRI and have a resident savings account, you could face a penalty for not converting it to an NRO account.
This penalty can be:
- A fine of up to three times the balance in your account, or
- ₹2 lakh, if the amount is not quantifiable
- An additional ₹5,000 per day from the date of violation until the issue is corrected.
Thus, while there is no penalty for not declaring NRI status, there is definitely a penalty for not converting to an NRO account upon achieving one.
How to Convert Your Savings Account into an NRE/NRO Account?
To avoid the penalty for not converting to an NRO account, you must convert your savings account into an NRO account (to manage Indian income) or open an NRE account (to manage foreign income).
Here’s how to convert your existing savings account.
Step 1. Contact your bank
Get in touch with your bank’s branch or customer service and inform them of your change in residential status. Request them to provide the applicable savings account conversion form.
Step 2. Fill out and submit the form
Provide your account details and also mention other financial relationships with the bank (FDs, loans, etc.).
Step 3. Attach required documents
Submit proof of NRI status. This may include a passport copy, visa, overseas address proof, etc.
Step 4. Wait for verification
Once submitted, your bank will verify the documents and convert the account, usually within a few working days.
By following the above steps, you can avoid having to pay the penalty for not converting to an NRO account.
Remember, only NRO accounts can be created by converting an existing savings account. NRE and FCNR (Foreign Currency Non-Resident) accounts must be opened separately.
Other Financial Aspects NRIs Need to Keep in Mind
Along with converting a savings account to an NRO account, there are several other financial aspects an NRI must keep in mind.
Change in Taxation Rules
Once you become an NRI, your Indian income (like rent, interest, or capital gains) may be taxed differently. You must file taxes accordingly and may need to pay tax on certain Indian incomes. Not doing so can attract penalties.
Update Other Financial Accounts
Your mutual fund, stock market investments, and life insurance plans also need to reflect your NRI status. Inform your fund house/broker and insurer and complete the necessary updates.
Review Life Insurance Policies
If you hold policies, check if they remain valid abroad. Several insurers offer life insurance for NRI, including term insurance for NRI in India. These offer global coverage in most cases, and hence, will be valid wherever you reside.
Review Retirement Plans
As an NRI, you should plan for your future. Look into retirement plans for NRI that offer long-term wealth accumulation while also allowing you to enjoy tax benefits. ULIPs for NRIs may be an ideal option that meets these criteria. With some plans, you may be able to contribute to foreign currency and receive maturity in INR or your preferred currency.
Explore NRI Investment Options
There are various NRI investment plans like NRE/NRO FDs, real estate, government bonds, and mutual funds. Choose based on your goals and risk appetite. Some investments offer repatriation benefits, while others may not.
Ensure Insurance Coverage
NRIs may end up overlooking insurance after moving abroad. However, both health and life insurance for NRIs should be considered, especially if you have financial dependents in India.
Declaring your NRI status and updating your financial details in accordance with the prevalent regulations is crucial. While there’s no penalty for failing to declare the status itself, the penalty for not converting to an NRO account or failing to comply with other FEMA regulations can be severe and is entirely avoidable. With a few smart steps, you can ensure legal compliance, avoid penalties, and protect your financial future, both in India and abroad.
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