What happens to NRI accounts when returning to India?

What happens to overseas accounts when an NRI returns to India? Can we continue with our NRE, NRO and FCNR accounts or must we align ourselves with the change of residential status? Indeed, residency status is an important criterion when determining a person’s tax liability in India, as it decides whether the person will be taxable as a resident or non-resident of India. (NRI).

“If you are an NRI, when you return to India, your residency status immediately changes to particular resident and you must change your status by notifying the bank. NRO NRE and FCNR accounts are decided in accordance with the provisions of the FEMA (Foreign Exchange Management Act),” said Dilshad Billimoria, board member of the Association of Registered Investment Advisors (ARIA).

NRO, NRE and FCNR accounts

Tarun Kumar, Head of Direct Taxation at Coherent Advisors, explains that a Non-Resident Indian or Person of Indian Origin (PIO) can open three types of accounts with an Authorized Reseller in India: Non-Resident Rupee Account ( ordinary) – NRO account, non- Resident (external) account in rupee – NRE account and non-resident (bank) account in foreign currency – FCNR (B) account

An NRE account is opened in India in the name of an NRI to park his foreign earnings, while an NRO account is opened to manage his earnings in India. Both NRE and NRO accounts are opened in Indian currency and the account type can be Savings, Current, Recurring or Fixed Deposit. The FCNR (B) account is opened in any permitted currency and the account type is Term Deposit only.

Income earned on NRE and FCNR(B) accounts are tax exempt, while income earned on NRO account is taxable.

Changing residential status from non-resident to resident will impact these accounts as follows:

NRO account

“The NRO Account shall be designated as a Resident Account upon the account holder’s return to India for any purpose indicating his intention to remain in India for an indefinite period. If a Resident Indian becomes an NRI, his existing Resident Account shall be designated as an NRO,” Kumar explained.

NRE account

If NRI returns to India for employment or changes residential status from non-resident to resident, he has two options:

One option is to have his NRE account designated as a resident account. The other option is that funds from the NRE account can be transferred to an RFC (Resident Foreign Currency) savings account. The RFC account is for NRIs who have returned to India and hold foreign currency funds, and one can transfer the funds to the NRE account by regaining NRI status. An account holder must do so immediately after returning to India to take up employment or upon a change in residence status.

“The NRE account should be renamed to Resident FD account and all NRE FD should be closed. Some banks allow you to hold the same until maturity, however, the interest will be fully taxable because according to FEMA regulations you become a resident on the day you return to India,” Billimoria pointed out.

FCNR account

If the account holder’s residency status changes, they can continue their deposits until maturity.

“When the FCNR(B) deposit matures, the account holder can convert it to a Resident Rupee Deposit Account or a Resident Foreign Currency (RFC) Savings Account,” Kumar said.

“For NRE deposits and FCNR deposits, one has the option to switch to a resident foreign currency account and keep the foreign currency in the same for a certain period of time or for travel purposes. You can hold an FCR or Foreign Currency account if you have had NRI status for more than a year. RFC accounts are freely transferable and fully repatriable, so there is no currency exchange risk,” Billimoria explained.

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