Whether you have been a Non-Resident Indian for some time now or have recently been granted the NRI status, one of the most important financial steps that you should consider is having the right bank account to save or investyour money. Unlike residents of India, an NRI cannot holda standard savings bank account in India. As per the Foreign Exchange Management Act (FEMA), it is illegal for an NRI to keep a regular savings bank account in the country and can attract hefty penalties. According to FEMA, an NRI is someone who is either an Indian citizen or a Person of Indian Origin (PIO), who resides outside of India. Here, PIO refers to citizens of other countries(not including Pakistan or Bangladesh) who either held an Indian passport in the past, have parents or grandparents who were citizens of India, or are the spouse of an Indian citizen or PIO. To manage your funds in India or to invest in Indian instruments, it is important to have the correct NRI bank account. As an NRI, you can open a Non-Resident Ordinary (NRO) account, Foreign Currency Non-Resident (FCNR) account, or a Non-Resident External (NRE) account.
Common Mistakes to Avoid While Opening an NRI Account
Many things plague the mind of people when they are planning to shift to another country. The moment your residential status changes to NRI, several new rules and regulations come into being for you, while many others are modified. While opening an NRI bank account is one of the most basic steps to be taken, there are several aspects you need to keep in mind.Some of the most common mistakes people make when opening an NRI bank account include:
- Continuing with Their Resident Accounts
Amidst all the work that goes into settling ata new place, manyNRIs tend to make the mistake of continuing with their existingsavings accounts, even after being declared an NRI. However, according toFEMA, it is illegal to do so and all NRIs should convert their resident savings account to NRO accounts or open NRE accounts if required.
- Choosing the Wrong NRI Account
NRO, FCNR, and NRE are the three types of accountsyou should know about when banking as an NRI. Each comes with its own regulations, advantages, and disadvantages, and dure thought is required before choosing which would be most suitable for you.
- Non-Resident Ordinary (NRO) Account
An NRO account is similar to a regular savings account but with several restrictions. The NRO account accepts deposits in rupees or in foreign currency. NRIs can deposit their earnings from India as well as foreign funds that are in the form of freely convertible foreign currency in this type of account. All funds are converted to INR. The NRO account is taxable and is primarily opened to deposit income from Indian sources.
- Foreign Currency Non-Resident (FCNR) Account
This type of account issimilar to a regular fixed deposit account. NRIs generally use FCNR accounts to protect their savings from fluctuations in foreign exchange rates. The account can be jointly opened with an NRI/Indian resident who is a close relative, and the deposits in this account are made for a fixed time period ranging from one to five years. The interest earned in the FCNR account is tax-free in India.
- Non-Resident External (NRE) Account
The main difference between NRO and NRE accounts is that deposits in NRE accounts can only be made using foreign earnings. An NRE bank account can be a fixed deposit account, recurring deposit, savings account, or current account.
- Forgetting to Follow Banking Protocols for NRIs
If you have recently receivedNRI status or are planning to get itsoon, thereare threebasic things you need todo:
- Inform the banks where you have accounts that your resident status has been/is being changed. The bank will then be able to help you with the necessary paperwork for your new NRI bank account.
- Update your KYC documents throughout your investment portfolio and update your new bank account details.
- In case there is a recurring investment or liability, reissue the cheques from the new account. If it is an auto-debit transaction, change the bank mandate from a standard savings account to the NRE or NRO account.
- Delaying Investments
It is a common misconception that NRIs cannot continue with their investmentsin India once they have settledabroad. Many others yet tend to discontinue thinking it would take too many efforts or will be complicated to continue investing in Indian instruments/ However, with Portfolio Investment Scheme (PIS) accounts, NRIs can invest in equity and mutual funds in India with complete ease and enjoy the benefits of a diversified portfolio. NRIs can invest in real estate, apply for Initial Public Offerings (IPOs), etc. through PIS accounts, which are used solely for trading in secondary markets.
- Not being Aware of Applicable Tax Laws
From time to time, there are amendments in the taxation policies of India. A common mistakeis not being aware of the latest regulations and missing out on opportunities to save on tax. While non-compliance with the rules or non-payment of taxes can result inpenalty charges, being aware can actually help you save some money.
- Not Having a Will in Place
Although it is not mandatory for an NRI to register their will in India, it can prove to be useful in many untoward situationslike the death of the NRI or other unforeseen circumstances. Over the years, an NRI mayhave builtassets in different countries that their family may beunaware of. Having awill in place helpsavoid unfavourable situations.
- The will isa database of all the assets across different countries that are in the possession of the NRI.
- The NRI’s family will getanaccurateidea about all the assets they own.
- The inheritance will not be tainted with fights and disputesabout the distribution of assets.
A little care and some knowledge can help you easily avoid the common mistakes that can spell financial trouble for NRIs.