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Many Indian residents choose to relocate abroad for reasons such as education, employment, or business opportunities. After residing in a foreign country for a certain duration, their status changes to NRI, which stands for Non-Resident Indian.
When living abroad as a Non-Resident Indian (NRI), you can still take advantage of many financial benefits and opportunities in India, such as managing a savings account, filing income tax returns, and investing in government securities, fixed deposits, stocks, and mutual funds. However, investment and taxation rules for NRIs are different from those for resident Indians.
For example, as an NRI, you cannot operate a regular savings account in India. Instead, you need to convert your savings account to a Non-Resident Ordinary (NRO) account. This change is crucial because it complies with regulations governing NRI finances and ensures you avoid potential legal and financial penalties. Let us discuss more about the benefits and drawbacks of not confirming the residential status.
A person who is of Indian origin but lives abroad 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 -
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 Foreign Exchange Management Act.
As per Section 6 of the Income Tax Act, an Indian resident is someone who -
These days can be in either a single visit or counted over multiple visits to India.
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.
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 -
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NRO Conversion Form Requirements:
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.
Your non-resident Indian (NRI) status transitions to a resident but not ordinarily resident (ROR) status for a period of 2-3 years upon your return to the country. Following this period, you will be treated as an ROR, subject to the same taxation rules applicable to all resident Indians.
An individual who has spent a cumulative total of 365 days or more outside India during the preceding four financial years and less than 60 days in the current financial year.
According to FEMA guidelines, there are no penalties for failing to declare your NRI status. However, it is imperative that you promptly either close your current savings account or convert it into a Non-Resident Ordinary (NRO) savings account.
Yes, NRIs have to declare their income and file an income tax return on the income earned in India. They are required to pay taxes on the income arising or accrued in India or deemed to accrue or arise in India. Need help filing NRI ITR? Get CA-assisted NRI filing services!
Documents like visas, OCI cards, PIO cards, foreign passports, continuous discharge certificates, resident permits, resident cards, or valid contract letters for seafarers act as proof of NRI status.
