Can I retain my old bank account in India after I become a NRI? Video Credit: Surabhi Vasundharadevi, Social Media Reporter

Dubai: One of the most common queries among Non-Resident Indians (NRIs) is whether or not he or she will get fined if a regular Indian resident savings account is not converted to a non-resident account after moving away from home and settling abroad in a country like the UAE.

If you are operating a normal savings or current account while residing outside the country for a prolonged duration, you could be in violation of India’s Foreign Exchange Management Act (FEMA) laws of the Reserve Bank of India (RBI). Let’s understand how.

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While there is no clear mandate concerning the legality of a NRI holding a resident account in India, what you should be aware of is that one should not hold accounts with different tax statuses. Meaning, you should either hold non-resident accounts or resident accounts but not both, tax consultants caution.

Dubai-based tax consultants also reveal that anyone breaching any provision of the FEMA is liable to a penalty up to thrice the amount involved or up to INR200,000 (Dh9870), if the applicable amount cannot be quantified.

Moreover, converting to non-resident accounts from regular resident savings account will only benefit NRIs financially, given the tax-free benefit for a certain type of accounts, while for some funds there are many options which let you save a lot of money on tax.

NRI investments 2021 AHR Wealth Management
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Why does RBI want you to convert an Indian resident bank account to non-resident account?

However, it is key to first understand why RBI wants you to close or convert an Indian resident account to non-resident bank accounts. The reason for this, from RBI’s perspective, is based on the fact that a person residing abroad is the source of incoming and outgoing foreign exchange and wealth.

This is why RBI wants to keep a check as they generate statistics related to foreign assets and currency exchanged in India. RBI monitors and manages depreciation and appreciation of the Indian rupee and they do so by having updated figures of capital outflow and inflow, both current and expected.

All non-resident accounts (NRO and NRE) have permissible debits and credits. So the RBI differentiates money in terms of country and usage and keeps a tab on Indian currency and the money that is brought in or taken from India.

What are NRE and NRO accounts and how does tax rules apply to them?
An NRE (Non-Resident External) (NRE) account is a bank account opened in India in the name of an NRI, to park his foreign earnings; whereas, an Non-Resident Ordinary (NRO) account is a bank account opened in India in the name of an NRI, to manage the income earned by him in India.

An NRI can open a joint NRO account with one or more NRIs or Indian citizens. The interest earned on the NRO account is subject to taxation. The tax percentage or amount is subject to holder’s tax bracket based on income earned in India. The interest earned on the NRE account is free from taxation.

NRE account is freely repatriable (can be converted to any foreign currency), while the NRO account has restricted repatriability i.e permitted remittance allowed from NRO is up to $1 million (Dh3.67 million), which is net of applicable taxes in a financial year.

An NRO account is like your regular bank savings account but has certain restrictions. In this account you can deposit your rupee earnings from India such as rent, interest, dividends etc. You can also deposit funds from abroad that are in the form of freely convertible foreign currency.

The funds in NRO account are usually from income earned locally, like rent on a property in India or certain capital account transactions like sale of property purchased prior to becoming an NRI.

Also keep in mind that interest on amounts in NRO account attracts TDS (which is tax deducted at source of income before paying the balance to the payee) at the highest rate of 30 per cent.
STOCK Reserve Bank of India RBI
RBI headquarters in Mumbai. Picture used for illustrative purposes.

Should I close my existing savings or current account as soon as I leave India to reside abroad?

The answer to that question is ‘no’. There is no problem in briefly delaying the process of closing the account or converting it to NRO if you earn income only from abroad. This is because you need to provide address proof and visa of the new country of residence.

You can reside in one country and continue operating a bank account in India. However, you would be required to intimate the bank of change in your residence, after which the bank will ask you to convert the account to NRO or NRE account.

However, the websites of India-based banks indicate on their websites that after banks are made aware that you are a non-resident, and provided with the required documents, your existing savings bank accounts will not be valid once you become a non-resident Indian.

If you continue operating a normal savings or a current account while living outside the country, as mentioned earlier, you would be in violation of the FEMA laws of the RBI. To put it simply, this is because RBI wants to keep track of all the accounts where the money is being repatriated.

But is there any time frame for you to either convert your account or to close that account? While there isn’t a time frame, you wouldn’t want to be on the wrong side of any regulation, Dubai-based tax consultants warn.

Indian rupee
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So in short, as per RBI regulations, a non-resident Indian (NRI) cannot open and operate a regular resident savings account after he or she has been given and further, any account should be converted into NRI Account by the bank before one gets NRI status.

Additionally, if you have income only from abroad and not planning to remit or conduct any transaction in India, tax experts further add there is no problem in delaying the process of closing your prior account or converting it to NRO, if you have your old savings bank account.

Can I convert my zero-balance savings account into a NRO account?

If you have a zero-balance savings account, you will have to convert it to normal savings account with an average monthly balance requirement. Once that is done, you can then convert the resident savings account to a NRO account.

You can open a NRO account in Indian currency and any foreign currency that can be converted. If you make the initial deposit in dollars or any other foreign currency, then the foreign currency will be converted into Indian currency - based on the exchange rate of the day - for the initial deposit amount.

That said, all deposits in the account will be maintained in the form of India currency.

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What should I do if my bank account is still lying unused or inactive back home in India?

The best strategy would be to close that account since there’s a cost associated with maintaining a bank account.

Also, there are compliance issues (complication in tax filings) with maintaining multiple accounts which all culminate in streamlining your bank accounts. You can close or convert them to NRO or NRE accounts.

Moreover, most of the banks in India make it easy to re-designate your current residence account to NRO by sending in some basic documentation to the bank. After re-designating, the account number still remains same. So any funds destined to your resident account will still make it to your NRO account.

Is converting a regular Indian savings account to non-resident account finally worth it? Yes, here’s why

• Remitting foreign income to India:

Both the types of non-resident accounts in India, NRE and NRO, can receive foreign currency. If the purpose of opening a bank account is to facilitate easy transfer of foreign income to India, NRIs can be indifferent to open NRE or NRO account.

• Receiving Indian income in NRI account:

An NRI may be earning income in the form of dividends, rental income, business income, etc. in Indian currency. For any such credits, an NRI must open NRO account only. An NRE account does not allow any credits in Indian currency and may reject the transaction.

• Elimination of currency risk:

If your purpose of remitting funds to India is to utilise such funds in India itself, both NRE and NRO accounts make it possible for the NRI to eliminate the currency risk. This is because the amount received in the account is converted into Indian currency at that time itself and thereafter the balance is carried forward in Indian currency only.

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• Repatriation of funds:

Both NRE, as well as NRO accounts, allow the NRI to freely repatriate the interest income without any restrictions. However, in terms of the principal or main amount, only the NRE account enables the repatriation of the funds without any limit.

The balance outstanding in NRO accounts, excluding the interest income, is subject to prescribed limits. In simple words, repatriation of funds means the ability to remit the money to bank account abroad.

• Taxability:

This might be another important consideration for the NRIs while they consider opening an NRI account. Ensuring tax compliances in India may be an undesirable activity for someone living in, let’s say, the US, and hence, they may like to stay free from any such compliance requirements.

As per the relevant provisions of the Indian Income Tax Act, the interest earned for the balance in NRE accounts is tax-exempt. If there is no other taxable income in India for the NRI, he or she is not required to even file his or her Income Tax Return (ITR) in India or to pay any tax in India.

However, NRO account does not have any such exemption and accordingly, the account holder would be required to pay taxes as applicable for the interest income earned on NRO account.

• Joint operations:

An NRI may want easy access to the funds available in NRI account for their parents and family. Having joint operations in the account is the most commonly used method to fulfil such requirements.

However, NRIs must note that while an NRE or NRO account can be opened in joint name with another NRI, it can be operated jointly with a resident Indian relative on ‘former or survivor’ basis.

What is a ‘former or survivor’ basis clause w.r.t Indian accounts?
It simply means that in a bank account the first named person will operate the account in all circumstances except in case of his/her death. Only in case of death of the first person the joint holder (on former or survivor basis) would be eligible to operate the account.

While NRE accounts score higher in terms of ease and tax-exempt status, NRO accounts can be more convenient if regular operations in India are required along with receipt of credits into the bank account from the income sources within India. NRIs must take an informed decision regarding opening of their NRI account, after considering the above points.
Indian rupee
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Steps to convert resident savings account to NRO savings account

To carry out the conversion from a resident savings account to a NRO savings account, you will have to follow the steps mentioned below:

• Inform the bank holding your resident savings account that you have shifted abroad and wish to convert your account into a NRO savings account.

• You will now have to fill in the conversion of resident savings account to NRO account form. The form will contain all your KYC details and details of your new address (overseas), point of contact, etc. The form can be obtained either at any bank branch or on the website of the bank holding your account.

• Attest the form once you have filled it.

• At the bank, submit the required documents - visa permit, passport copy, etc.

• If in case the savings account was a zero-balance savings account, the account holder will have to convert it to a savings account with a minimum average balance.

• The customer has to submit all the documents and form listed above to the bank branch holding the account. If in case the account holder is outside the country, the forms and documents will have to first be attested by the Indian embassy and then submitted to the bank branch.

• Once the bank receives the form and documents, it will verify the documents. Following the approval for the conversion of the savings account, the bank will rename the account as a NRO saving account though the account number in most cases will remain the same.