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Penalty for Not Declaring NRI Status

As soon as your resident status changes to NRI, you need to convert your savings account into an NRO account. While there is no penalty for not declaring your NRI status, failure to convert your savings account can result in legal and financial complications.

Several resident Indians opt to move out of India for a variety of reasons, including education, employment, and business, among others. And after spending a specific period in a foreign country, their resident status changes to NRI.

The NRI full form is Non-Resident Indian. As an NRI, you can continue to enjoy several benefits available to resident Indians. For example, you can open and manage a savings account in India, file income tax* returns, and invest in government securities, fixed deposits, stocks, and mutual funds.
 

However, investment and taxation rules for NRIs are different than for resident Indians. For instance, NRIs are not allowed to operate a regular savings account in India. Instead, they need to convert their savings account into an NRO account.
 

That is why you must declare yourself as an NRI, and start complying with the respective rules and regulations as soon as your resident status changes. Not doing so can attract legal and financial penalties.
 

This article discusses NRI status rules, how NRIs can declare their resident status, and the penalties they need to pay in case they fail to do the same.

How to Determine NRI Status?

The two main laws that define the rules for determining NRI statuses include:
 

  1. Foreign Exchange and Management Act (FEMA) of 1999
  2. Income Tax Act (ITA) of 1961
     

According to the ITA, a person is considered a resident Indian if they can fulfil any of the following conditions:
 

  • If they spend 182 days or more during a financial year in India.
  • If they have spent at least 60 days in the previous financial year and at least 365 days during the four years immediately preceding the previous financial year in India.
     

On the other hand, according to FEMA, NRIs are defined as people who go outside India indefinitely for education, employment, business, etc. Additionally, a citizen of India or a PIO is also considered an NRI according to the act.
 

Anyone who does not fulfil any of the conditions mentioned above is considered an NRI and is required to comply with all ITA and FEMA rules for NRIs.

Is There a Penalty for Not Declaring Your NRI Status?

As per the FEMA guidelines, there is no penalty for not declaring your NRI status. However, you must either close your existing savings account or convert it into a Non-Resident Ordinary (NRO) savings account as soon as possible. Failure to do so may result in legal and financial penances.
 

Under the FEMA rules for NRIs, it is illegal for them to hold resident savings accounts, and doing so can attract hefty penalties. In case you are found to be holding a resident savings account after becoming an NRI, you may have to pay a fine of up to three times the amount in your savings account or ₹2 lakhs (if the amount is not quantifiable).
 

Additionally, you may have to pay a penalty of ₹5,000 per day from the first day of intervention until you change your savings account status.

How to Convert Your Savings Account into an NRO Account?

As an NRI, you can open two types of savings accounts in India – a Non-Resident External (NRE) savings account and a Non-Resident Ordinary (NRO) savings account. While an NRE account allows you to park your foreign earnings in India, an NRO account helps you manage the income earned in India. It can include rent, dividends, interest, pension, etc.
 

However, if you want to convert your existing savings account, you can only do so into an NRO account. The steps for the same are as follows:
 

Step 1: Contact the customer care executive of the bank with which you are holding your existing savings account and ask for an application form to convert your resident savings account into an NRO account. Alternatively, you can download the savings account conversion form from the bank’s website.
 

Step 2: Fill in the necessary details in the form and submit it to the bank. If you have any other account with the bank, such as a fixed deposit account, recurring deposit account, or trading account, make sure to mention them in the form.
 

Step 3: Attach the required documents to prove your NRI status. Your bank may also ask you to get the form attested by the Indian embassy in your new country.
 

Step 4: Collect the acknowledgement slip and wait for the bank’s intimation. Your resident savings account will be converted into an NRO account within a few working days, subject to the verification of your documents.

Documents Required to Convert Your Savings Account into an NRO Account

Below are the documents you may need to submit to your bank for the conversion of your existing savings account into an NRO account:
 

  • A copy of your PAN card
  • FEMA declaration form
  • Savings account conversion form
  • Proof of Indian Citizenship
  • A foreign address proof
  • A copy of your Passport
  • A copy of your Visa
  • Recent passport-sized photographs
     

Note that this list is indicative. Your bank may ask for some additional documents to process your savings account conversion application.

To Sum it Up

As an NRI, you can continue to enjoy several benefits available to resident Indians. However, you must declare yourself as an NRI and convert your resident savings account into an NRO account as soon as possible. Although there is no penalty for not declaring your NRI status, failure to convert your savings account may attract heavy sanctions.

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Tata AIA Life Insurance

A joint venture between Tata Sons Pvt. Ltd. and AIA Group Ltd. (AIA),  Tata AIA Life Insurance  is one of the leading life insurance providers in India. We post everything you need to know about life insurance, tax savings and a variety of lateral topics such as savings and investments in this space. You can access and read a host of different blogs, articles and pages at the Tata AIA Life Insurance Knowledge Center or get in touch with us with any queries or questions!

View all posts by Tata AIA Life Insurance

Frequently Asked Questions

Is it mandatory for NRIs to file income tax* returns (ITRs) in India?

All earnings made by NRIs in India are taxable as per the Income Tax Act of 1961. These may include rent, interest, dividends, pension, or capital gains. Hence, it is mandatory for NRIs with an income in India to file income tax returns.

Can NRIs open and operate a resident savings account?

No. NRIs are not allowed to open or operate a resident savings account. If they are found to be doing so, they may have to pay a penalty of up to three times the amount in their savings account or ₹2 lakhs (if the amount is not quantifiable).

Are NRIs allowed to invest in India?

Yes. NRIs can invest in specific investment instruments in India, such as fixed deposits, mutual funds, stocks2, government bonds and securities, and the National Pension Scheme (NPS). However, they need to fulfil certain FEMA guidelines for NRIs.

Disclaimers

  • Insurance cover is available under the product.
  • The products are underwritten by Tata AIA Life Insurance Company Ltd.
  • The plans are not guaranteed issuance plans, and they will be subject to the Company’s underwriting and acceptance.
  • For more details on risk factors, terms and conditions, please read the sales brochure carefully before concluding a sale.
  • This blog is for information and illustrative purposes only and does not purport to any financial or investment services and does not offer or form part of any offer or recommendation. The information is not and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.
  • Please know the associated risks and the applicable charges from your Insurance agent or the Intermediary or policy document issued by the insurance company.
  • Every effort is made to ensure that all information contained in this blog is accurate at the date of publication. However, the Tata AIA Life shall not have any liability for any damages of any kind (including but not limited to errors and omissions) whatsoever relating to this material.
  • Tax: *Income Tax benefits would be available as per the prevailing income tax laws, subject to fulfilment of conditions stipulated therein. Income Tax laws are subject to change from time to time. Tata AIA Life Insurance Company Ltd. does not assume responsibility on tax implications mentioned anywhere in this document. Please consult your own tax consultant to know the tax benefits available to you.