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How should an NRI handle investments and accounts in India before shifting?

Posted on 02 Feb 2022
Author: Sayan Sircar

Tags: NRI ; Tax

15 mins read

This article shows you the steps to follow to once you become an NRI regarding your accounts in India.

How should an NRI handle investments and accounts in India?

Disclaimer: Taxation and NRI related rules is a dynamic concept, and the content of this article is valid on the date of publication (02-Feb-2022, post budget 2022). The list here is meant to provide a checklist and is not meant to be exhaustive or handle all edge cases. Readers should perform their due diligence, specifically in the context of taxation laws in their respective countries.

📚 Topics covered:

Introduction
KYC update
Bank accounts - NRE and NRO
Investing in stocks
Investing in mutual funds
Public Provident Fund (PPF)
Sukanya Samriddhi Yojana (SSY)
National Pension System (NPS)
Employee Provident Fund (EPF)
Power of attorney (PoA)
Mobile phone number
Documents and id cards
Memberships
Bank lockers
Credit cards and loans
Insurance
- Life insurance
- Health insurance
Filing Income Tax return

Introduction

There are several steps to be followed when you become an NRI to ensure things run smoothly and you follow applicable laws. Also, you do not wish to waste time in banks and government offices every time you visit India, and so do these now before you shift. Once you shift abroad, follow these steps to take care of your elderly parents’ finances in India: How can NRIs easily manage their parents’ finances in India?.

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KYC update

First, you need to update the new KYC (resident > NRI) and FACTA status with the KYC Registration Agency (KRA). You can locate the form here.

Second, you need to inform each bank, Demat account, credit card, loan provider, AMC, insurer and NPS provider regarding your status change.

Bank accounts - NRE and NRO

To comply with Foreign Exchange Management Act (FEMA) rules, an NRI cannot have a regular savings accounts in India. Therefore, you must convert existing accounts to NRE or NRO accounts. Excess accounts must be closed.

Non Resident External (NRE) account

This account is used to send money to India. The features and uses are:

money deposited in this account must originate outside India
interest earned is tax free in India but may be taxable in the country where the NRI is residing
you can send both interest and principal out of India without limits
deposits can only be made in foreign currency, and withdrawals is in INR
joint accounts are allowed only with another NRI
you can transfer funds to other NRE or NRO accounts
may be used for stock investing but not recommended
best option for MF investing
cannot be used for investing in RBI/Gilt bonds

Non Resident Ordinary (NRO) account

This account is used for any income and investments in India. The features and uses are: The features and uses are:

interest earned is taxable in India at current slab rates. The benefit of the Double Taxation Avoidance Agreement (DTAA) is available with most countries so that you do not pay tax twice
you can send both interest and principal out of India, but the principal must be within $1 million. A CA must certify that you have paid taxes on this income
you can make deposits in foreign currency and INR, and withdrawals is in INR
joint accounts are allowed with another NRI or a resident
funds can be transferred to only another NRO account and not to an NRE account
this account is used to receive income from interest, FD, rent, stock and MF dividend, and proceeds from selling real estate, stocks and mutual funds
can be used for both stock and MF investing
only NRO account can be used for investing in and for receiving interest from RBI/Gilt bonds from the RBI Retail direct portal

Foreign Currency Non-Repatriable (FCNR) account

FCNR accounts come later and is not a step when emigrating.

This bank account, also called a FCNR(B) account, can be used to have tax-free FDs in India:

the FD is for 1-5 years and is tax-free. This is not a savings account
the money is not converted to INR but held as either USD, CAD, EUR, AUD, JPY, GBP, SGD and a few other currencies. This removes any exchange rate risk of that currency against the INR
these FDs offer higher interest rates than in countries with the above currencies
the amount can be repatriated without restrictions
you can take loans against an FCNR account
choose this account instead of NRE if you are planning to take the money out of India without any forex risk

Investing in stocks

NRI Demat account

As per FEMA rules, the resident demat account must be closed and a new NRI demat account must be opened and shares transferred the new account. Two types of accounts are available for stock trading:

Portfolio Investment Scheme (PIS) account

The PIS account is also known as Portfolio Investment (NRI) Scheme or PINS.

To open this account, you need to provide a permission letter from RBI via your bank. There are only a few banks that offer this like HDFC, Yes, IDFC, Indusind, ICICI, SBI, Kotak, Axis and a few others.
NRO/NRE accounts can fund this account for buying shares
fund transfers for trading has to go from bank account > PIS > trading account and can take up to a day
this is a more expensive option with charges to be paid per trade to the broker as well as to the bank

PIS account have restrictions like not being able to sell bonus shares (which have to be transferred to a non-PIS account for selling).

Non PIS account

If you are an NRI wishing to buy stocks in India, a Non PIS account is the recommended route:

You do not need RBI permission to open the account
this account can be funded only from an NRO account
fund transfers for trading goes from bank account to trading account immediately

While dividends can be credited to both NRE or NRO accounts, things might be complicated in case a transfer to the NRE account fails and a cheque needs to be sent to the registered address.

Due to these reasons, a NRO bank account and a non PIS account is the recommended combination for stock investment.

Investing in mutual funds

You need to inform the AMC of the KYC change. The rules here are a bit more complex depending on the country you are shifting to.

Due to the Fair and Accurate Credit Transactions Act (FACTA), there is a requirement of reporting of financial transactions of all US-linked citizens, including NRIs, to the US government. If you are shifting to the US or Canada, you can only invest in funds run by Aditya Birla, ICICI, Franklin Templeton, PPFAS, Reliance, SBI, Tata, and UTI. The list may change, so please check the latest rules. Investors shifting to other countries will not have such issues.

Do not mix and match folios and type of accounts to avoid problems:

if a folio is linked to an NRE account, do not invest from an NRO account and vice versa
ensure that existing MF investments are tagged to an NRO account
new folios are explicitly created to invest from NRE accounts

Taxation of mutual funds will be identical as residents, like this, but there will be TDS on the redemption amounts at the same rates. The proceeds of the sale will come to the NRE or NRO account. NRIs have an option of using DTAA to avoid paying tax again on the same income in their home countries.

Tax filing, compliance and investing for global income can be complicated for NRIs. Instead, assets held by the family in India, received as remittance and then invested, can be simpler to manage. LRS rules ($250,000/year) apply if you plan to remit that money out of India again.

It is important that the rules for creating PIS/non-PIS accounts and mapping folios to NRE/NRO accounts are done carefully to avoid delays and hassles. It will be easier to handle customer service

Public Provident Fund (PPF)

This section uses the amendments in the PPF act made in 2019.

A PPF account offers tax-free growth of capital and offers tax-free (no tax in India) withdrawals, even in the case of NRIs. The account stays active once you shift outside India and can accept further contributions on non-repatriable basis. NRIs, like Resident taxpayers, can also claim 80C deduction for PPF in case they are filing returns in India. The account will provide the same rate of interest that residents get.

The account will mature in the usual way after 15 years and the maturity amount will be deposited in the NRO account. This is not taxable in India but you should check, depending on your resident country, if you need to pay any tax on foreign income.

If the account has been operating for more than five years, NRIs can close it after producing a passport and visa copy or IT return.

Restrictions: Two restrictions exist for NRIs:

an NRI cannot open a new PPF account but existing accounts can be continued
NRIs cannot extend the PPF account post maturity after 15 years

Sukanya Samriddhi Yojana (SSY)

When the girl-child’s status changes from resident to NRI, then the status of the SSY account changes to closed and interest will not be paid further. New SSY accounts can only be opened by residents or NRIs once they come back to India and become residents. The girl child needs to be a resident Indian to either open a new SSY account or continue an existing account.

National Pension System (NPS)

Existing NPS investments can continue. The withdrawal rules are the same as residents:

before age 60: 20% withdrawable as a transfer to NRE/NRO account and 80% converted into an annuity that pays in INR into the NRO account
after age 60: 60% withdrawable as a transfer to NRE/NRO account and 40% converted into an annuity that pays in INR into the NRO account

There is no benefit in opening a new NPS account as NRI if an NPS account is already not present or investing large sums in NPS. However, an NRI can keep an existing account active by investing ₹1000/year NRO accounts.

Employee Provident Fund (EPF)

NRIs cannot contribute to the EPF account. However, the EPF account will continue to accrue interest up to age 58 and will then get paid out into the NRO account.

But given that you are shifting out now and are technically no longer employed in India, you can withdraw the EPF entirely without any restrictions or penalties. This is applicable to those shifting abroad for at least several years to deploy elsewhere or use for shifting.

Power of attorney (PoA)

If you are not in India to undertake tasks like signing lease documents (for a rented house) or similar activities, consider giving a Power of Attorney (PoA). PoA can be General (applicable to everything you want to do like banking, tax filing, real estate transactions) or Specific (applicable to a single task from the examples in the General PoA case). PoA should only be granted to trusted individuals and useful for real estate transactions. The PoA can also be done in an Indian embassy if you missed this before shifting.

For real estate transactions, it is helpful to register the PoA in the same state as the property and give PoA to a parent or close family member.

Mobile phone number

It makes sense to retain an Indian number to receive OTPs. Switch to yearly prepaid plans and leave the SIM in India with a trusted family member. It is possible that the operator may randomly disable the SIM if it is outside India for too long. There have been cases where the SIM stops working after a few months being abroad, even with payments made on time, and can be replaced only once you visit India thereby locking you out of your accounts.

Documents and id cards

ID cards like Aadhaar, PAN, voter id card and driving license can be kept as is. To prevent misuse, lock down biometrics using UIDAI website. Ensure that the SIM linked to Aadhaar stays active to receive OTP.

Memberships

Any ongoing membership plans in gyms, mobile/broadband postpaid, OTT platforms must be cancelled. Mobile phones should be converted to prepaid plans.

Bank lockers

Bank lockers should be closed unless you have someone in India who is a joint holder and will operate the locker by physically visiting the locker once a year. Banks have the option of breaking into inoperative lockers even if rent is being paid. Read more here.

Credit cards and loans

It is convenient to have an Indian card to pay for local expenses when visiting or gifting online. You need to have an NRO account to pay the bill and an Indian mobile number to receive OTPs. You can close an excess number of cards and keep only one to keep things simple. Ensure that you have family in India to receive new cards and PIN letters for that card and update that address in the card issuer’s records.

You can pay loans like home, car and personal loans out of either NRE or NRO accounts.

Insurance

Life insurance

Term insurance policies generally have global coverage and should be continued. You need to ensure that the payment goes from an active bank account in your name and is not linked to a credit card that you might cancel later. Contact the insurance company to change your premium to an annual payment mode to reduce operational issues like payment failures. If there is a payment failure or something else goes wrong in renewal, there will be a requirement of a medical test to reinstate the policy which will not be possible from outside India.

Endowment, whole life and ULIPs should either be surrendered or made paid up. Do not waste additional money in paying the premiums for their meagre returns. You do not need to inform the age. Instead, visit the nearest branch to get this done.

Health insurance

If your health insurance provides coverage outside India, it can be continued until you get settled in the new country and have your own health insurance. If you are planning to perform some procedures in India in the future or come back after a few years, then it will be good to keep the Indian policy active.

It is good practice to let the insurer know about your change in status from resident to NRI. If there is a geographical restriction clause in the policy, then you can let the current Indian policy lapse and take new policy abroad quickly.

You must have travel insurance to cover any gaps in the time you fly out and get a local health insurance policy.

Filing Income Tax return

You should file returns every year since your Indian income is taxable in India. Indian income includes:

salary and rental income
capital gains from shares, mutual funds, real estate and other capital assets -savings and FD interest in NRO account

Interest income in NRE and FCNR accounts is tax-free in India.

You must file a return compulsorily if the taxable income exceeds the current exemption threshold of ₹250,000. If there is no income, you may file a nil return.

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