Many Indian residents choose to relocate abroad for reasons such as education, employment, or business opportunities. After residing in a foreign country for a certain duration, their status changes to NRI, which stands for Non-Resident Indian.
NRIs can avail of various benefits similar to those available to residents. These include the ability to maintain a savings account in India, file income tax returns, and engage in investment activities such as government securities, fixed deposits, stocks, and mutual funds. However, the tax rules are applicable to residents and NRIs. While NRIs are not required to declare their NRI status, they have to either close their savings account or convert it to an NRO account. Failing to do so can attract penalties. In this article, we will explore the penalties applicable for non-declaration of NRI status.
What is NRI Status?
A person who is of Indian origin but lives abroad is known as a non-resident Indian. As per the Income Tax Act of India, 1961, the tax rules for Indian residents and NRIs are different. In other words, Indian residents and non-resident Indians are taxed differently.
Indians can attain NRI status if they stay in India for less than 182 days during the preceding financial year or if people live outside India for business, employment, and profession for an indefinite amount of time. Therefore, the NRI status of an individual is determined by the amount of time he/she has spent in India in the previous year.
There are 2 main laws and regulations that determine the rules for the taxation of NRIs in India. These laws are as follows -
Income Tax Act - It governs the tax liabilities of NRIs
Foreign Exchange Management Act (FEMA) - It governs the opening of bank accounts, transactions, and investments of NRIs. The definition of NRIs under the Income Tax Act is different.
How to Determine NRI Status?
The determination of residential status involves understanding the specific criteria laid out by the Income Tax Department. The definition of an NRI is different from that specified in Foreign Exchange Management Act.
As per Section 6 of the Income Tax Act, an Indian resident is someone who -
Has stayed in India for 182 days or more during the previous financial year Or
He/she has stayed in India for at least 365 days during the 4 years preceding the current year and at least 60 days in the current year.
These days can be in either a single visit or counted over multiple visits to India.
What is the Taxable Income for NRIs?
Given below is the income that is taxable for NRIs -
Any income that has been earned in India is subject to tax in India.
Any income that is earned outside India is not subject to tax in India.
For NRI crew members of a ship who have stayed in India for less than 182 days and are serving on foreign ships, their salary is excluded from the total taxable income, even though the salary is deposited in an NRE account.
RNORs returning to India can retain their RNOR status for 3 years after the return. Similar to NRIs, for RNORs, income earned in India will be taxable, and that earned abroad will not be taxed for 3 years after returning to India.
Once an individual becomes an Indian resident, the income earned in India and outside India are both taxable.
What are the Tax Deductions Available for NRIs?
The following tax deductions are available to NRIs on their total income -
Payment made towards Life Insurance Premium.
Payment made towards tuition fees for kids.
Payment made towards Unit Linked Insurance Plan (ULIP).
Investment in ELSS.
Expenditure made towards repayment of the principal amount of the loan taken for constructing or purchasing a residential property.
NRIs can also claim tax deductions under sections 80D, 80G, 80TTA, Section 54EC, and 54.
Is there any Penalty for not Declaring NRI Status?
The FEMA Act governs the penalties and fees for NRI taxation. As per the rules and regulations laid out by FEMA, individuals are not required to pay any penalty for not declaring their NRI status. However, as soon as you attain the status of an NRI, you need to either close your resident savings account or convert it into an NRI account such as NRE (Non-Resident External), NRO (Non-resident Ordinary), and FCNR (Foreign Currency Non-Resident Account) Savings account immediately. If you fail to do so, it might result in legal consequences.
It is illegal for NRIs to hold resident savings accounts, and can lead to severe consequences and heavy penalties. If you continue to hold a savings account even after attaining the NRI status, you might have to pay a penalty of upto 3 times of the amount in your savings account or Rs.2 lakh. You may also have to pay Rs.5,000 per day from the day when you attained NRI status to the day when the savings account was closed or converted.
How to Convert Savings Account into NRO Account?
As an NRI, you can open either an NRE, NRO, and FCNR account. An NRE account allows you to park your foreign earnings, NRO account helps you manage the income earned in India, and if you hold different global currencies, you can open an FCNR account. Given below are the steps to convert a savings account into an NRO account -
Step 1. Reach out to the customer service representative of your bank where you hold your current savings account. Request an application form for converting your account to an NRO account. You can also find and download the conversion form from the bank's official website.
Step 2. Complete the form by filling in all the required information and submitting it to the bank. Ensure to mention any other accounts you hold with the bank, such as fixed deposits, recurring deposits, or trading accounts.
Step 3. Attach the necessary documents to verify your NRI status. Your bank may require you to have the form attested by the Indian embassy in your new country.
Step 4. Once submitted, collect the acknowledgment slip and await confirmation from the bank. Your resident savings account will be converted to an NRO account within a few working days, pending verification of your documents.
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