Moment your residential status change to NRI, there are many rules & regulation in personal finance which get applicable to you or simply get changed. Right from your bank account to the properties you may hold, all of them have different status. Most of people tend to ignore some of them; unaware that these are illegal in laws and will attract penalties. The most basic of these is saving bank account which is the starting point and attractive investments like PPF.
Here’s what the laws says and what you should do when you attain the NRI status-
Resident Savings Account
Most individuals make a mistake of continuing a resident savings account even after becoming a NRI but the law does not allow it. Or in simple words it’s ILLEGAL to hold savings bank account for NRIs. As per FEMA regulation, when a status changes to NRI the resident savings account have to be converted to a NRO account.All income which is receivable in India such as rentals from property, investments, pension etc has to be deposited in this account and any payment towards insurance premiums or EMIs on loans which you availed while in India also has to be mandated from NRO account. For this you need to inform your bank on status change within a reasonable time period.(This period is not defined but you can consider maximum 3 months) The bank then will designate your existing resident account to NRO account and your payment will continue as it is. Alternatively, you have an option to close existing account and open a new account in case you choose to change your bank.Do remember that if you continue the resident savings account and it come to the notice you will be penalized for the same. Funds from NRO account are now repatriable upto $1millionnow but with a condition that you have obtained a certificate from Chartered Accountant for payment of taxes as applicable on your income in India. For depositing funds from abroad one will need an NRE account where there is no limit on repatriating funds back to the resident country.
All your investments and payments are linked to bank accounts. If your existing resident bank account is changed to NRO then only the status is changed. In such case you may not have to inform the respective institution. In case if you open a new account then you will have to give the fresh cheques or if it is being done through ECS then ECS mandate will have to be changed to the new NRO account. The same process will be applicable for any payout with regard to investments.
PPF is a very effective savings tool for long term planning which you would have availed as resident Indian. But NRIs are not eligible to open a PPF account.However, the most unclear rules are for existing accounts. From 2003 onwards, if you have open a PPF account while you are resident Indian and then your status changes to NRI, you are allowed to continue with your PPF account. You can make contributions from NRE or NRO account. On maturity the funds will have to be withdrawn as they are not allowed for extension and the proceeds will be deposited in NRO account. Not only this, Post 2004 RBI has allowed repatriation upto Rs 1 million USD from NRO account which makes even the PPF maturity repatriable now provided the necessary rules have been followed. However, if you do not take any action for maturity, the PPF account will be designated as “extension without contribution” and will be continued in block of five years for an indefinite period. You will keep earning the interest on it. The major difference can come in the taxability. Although in India the interest is tax free and one can also claim 80C benefit from investment if there is taxable income here, but the maturity or accrued interest may be taxable in respective country where you are residing as NRI.
What you should do when you become NRI
If you have recently obtained an NRI status then these should be the first step for you:
1. Inform your bank that you status has changed. Approach your branch which will help you in necessary paper work for your new accounts.
2. Redo your KYC in your investments and update your accounts.
3. Reissue the cheques from new account in all your investments and liabilities. If it an auto debit then change the bank mandate to NRO or NRE account.
I have heard from our NRI clients that few bankers suggest maintaining status quo on SB account but if any liability arises they will not be there to help you. (You don’t have to be present in India to do this & can be simply done by informing bank through letter) Similarly in case of PPF one of our clients clearly asked manager of Public Sector bank that he is an NRI so can he open PPF account – manager said YES. He opened that account but now I have suggested him to discontinue that.
If you are an NRI please share your practical experience with Saving Bank Account & PPF in comment section.