What is NRI Status?
A person who is of Indian origin but lives in any foreign country is known as a non-resident Indian. As per the Income Tax Act of India, 1961, the tax rules for Indian residents and NRIs are different. In other words, Indian residents and non-resident Indians are taxed differently.
Indians can attain NRI status if they stay in India for less than 182 days during the preceding financial year or if people live outside India for business, employment, and profession for an indefinite amount of time. Therefore, the NRI status of an individual is determined by the amount of time he/she has spent in India in the previous year.
There are 2 main laws and regulations that determine the rules for the taxation of NRIs in India. These laws are as follows -
- Income Tax Act - It governs the tax liabilities of NRIs
- Foreign Exchange Management Act (FEMA) - It governs the opening of bank accounts, transactions, and investments of NRIs. The definition of NRIs under the Income Tax Act is different.
How to Determine NRI Status?
The determination of residential status involves understanding the specific criteria laid out by the Income Tax Department. The definition of an NRI is different from that specified in the Foreign Exchange Management Act.
As per Section 6 of the Income Tax Act, an Indian resident is someone who -
- Has stayed in India for 182 days or more during the previous financial year
Or
- He/she has stayed in India for at least 365 days during the 4 years preceding the current year and at least 60 days in the current year.
These days can be in either a single visit or counted over multiple visits to India.
Is There a Penalty for Not Declaring Your NRI Status?
The FEMA Act governs the penalties and fees for NRI taxation. As per the rules and regulations laid out by FEMA, individuals are not required to pay any penalty for not declaring their NRI status. However, as soon as you attain the status of an NRI, you need to either close your resident savings account or convert it into an NRI account such as NRE (Non-Resident External), NRO (Non-resident Ordinary), and FCNR (Foreign Currency Non-Resident Account) Savings account immediately. If you fail to do so, it might result in legal consequences.
It is illegal for NRIs to hold resident savings accounts, and can lead to severe consequences and heavy penalties. If you continue to hold a savings account even after attaining the NRI status, you might have to pay a penalty of upto 3 times of the amount in your savings account or Rs.2 lakh. You may also have to pay Rs.5,000 per day from the day when you attained NRI status to the day when the savings account was closed or converted.
Also, the determination of residential status by the Income Tax Department is crucial for tax-paying individuals and companies, especially during the tax filing season. This factor plays a pivotal role in determining the tax liabilities of individuals, influencing their overall taxability.
What are NRE, NRO, and FCNR accounts?
A Non-Resident External (NRE) Account is an Indian rupee-denominated bank account that NRIs (Non-Resident Indians) can open in India to deposit their foreign currency earnings. NRE accounts can take various forms, including savings accounts, current accounts, recurring deposits, and fixed deposit accounts. These accounts can be opened individually or jointly, with joint accounts limited to NRIs.
A Non-Resident Ordinary (NRO) account serves as a means for non-resident Indians to manage income earned in India, including interest, dividends, rent, etc. This account allows deposits in both foreign and Indian currency, but withdrawals can only be made in Indian currency. However, not all deposits in an NRO account can be freely repatriated into foreign currency.
The term FCNR stands for Foreign Currency Non-resident Account. FCNR, or Foreign Currency Non-Resident Account, is a term deposit account distinct from savings accounts. It permits the conversion of specific foreign currencies into Indian rupees. These accounts provide a means to deposit foreign-earned income. By keeping funds in their original currency, FCNR accounts shield against fluctuations in exchange rates. Additionally, the deposited funds can be freely transferred to foreign countries.
How to Convert Savings Account into NRO Account?
As an NRI, you can open either an NRE, NRO, and FCNR account. An NRE account allows you to park your foreign earnings, NRO account helps you manage the income earned in India, and if you hold different global currencies, you can open an FCNR account. Given below are the steps to convert a savings account into an NRO account -
- Step 1. Reach out to the customer service representative of your bank where you hold your current savings account. Request an application form for converting your account to an NRO account. You can also find and download the conversion form from the bank's official website.
- Step 2. Complete the form by filling in all the required information and submitting it to the bank. Ensure to mention any other accounts you hold with the bank, such as fixed deposits, recurring deposits, or trading accounts.
- Step 3. Attach the necessary documents to verify your NRI status. Your bank may require you to have the form attested by the Indian embassy in your new country.
- Step 4. Once submitted, collect the acknowledgment slip and await confirmation from the bank. Your resident savings account will be converted to an NRO account within a few working days, pending verification of your documents.
If you have recently attained the NRI status and need help with ITR filing for NRI, look no further and book a call with tax2win’s tax experts, who can help you maximize your tax savings as an NRI.
Documents Required to Convert Your Savings Account into an NRO Account?
NRO Conversion Form Requirements:
- Conversion Form: Complete the Resident to NRO Conversion form and have it signed by all account holders.
-
Identification:
- PAN Card: Provide a self-attested copy of your PAN card. If you don't have a PAN card, submit Form 60 instead.
- Passport and Visa: Submit self-attested copies of your passport and visa to verify your NRI status.
-
Address Information:
- Overseas Address: Provide your overseas address on the account conversion form. This is mandatory.
- Address Proof: Submit a self-attested copy of either an Indian or overseas address proof as per the acceptable proofs list.
- Important Note:
If the customer's status has changed to NRI and they are a joint or second holder in a Resident Account, they must also submit a declaration form along with the conversion forms and KYC documents.
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