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What will happen if you fail to declare NRI status?

Khush Trivedi , Last updated: 03 May 2024  

As we are all aware, the first step in computing the tax liability of an assessee is the determination of their residential status, which can be either resident or non-resident, according to which one can find their taxable income. It is important to declare residential status.

NRI's Rules in India?

There are two laws that play a crucial role in governing the NRI's rule in India.

The Income Tax Act governs the tax liabilities of NRIs, which helps in outlining how their income earned in India and abroad is to be taxed.

Foreign Exchange and Management Act (FEMA): FEMA governs various aspects of transactions, investments, and financial activities of NRIs, like the opening of bank accounts in India, etc.

What will happen if you fail to declare NRI status

How to determine the residential status

Under Section 6 of the Income Tax Act of 1961, an assessee, by fulfilling one of the following basic conditions,

  • If he or she is in India for a period of 182 days or more during the relevant financial year or
  • If he or she is in India for a period of 60 days or more during the previous year and 365 days or more during the 4 years immediately preceding the previous year,.

An individual who does not satisfy both of the conditions mentioned above will be treated as a non-resident in the previous year.

Is there any penalty for not declaring NRI status? 

According to the FEMA (Foreign Exchange Management Act), there is no penalty for not declaring NRI status. But you must close your existing savings account or have it converted to an NRO account. An NRI continuing to hold his or her resident savings account after gaining NRI status is considered illegal under the FEMA guidelines, and doing so may attract hefty penalties.

What are NRE, NRO, and FCNR accounts?

If you are an NRI, you can open an account (NRE, NRO, or FCNR) for transaction purposes. Let's go through why you should open this account.

  • NRE Account: NRE stands for Non-Resident External Account, which allows NRIs to park their foreign earnings in India. Funds in this account can be converted back to foreign currency and transferred abroad without any restrictions.
  • NRO Account: NRO stands for Non-Resident Ordinary Account, which helps NRIs manage income earned in India, such as rent, dividends, interest, pension, etc. Funds in this account have some restrictions, which means they can only be transferred abroad subject to certain conditions.
  • FCNR Account: FCNR stands for Foreign Currency Non-Resident Account. It allows NRIs to hold their funds in foreign currencies. For NRIs who earn income in different global currencies, this type of account is very suitable for them. FCNR accounts offer protection against currency fluctuations and provide higher interest rates compared to NRE and NRO accounts.

How to Convert a Savings Account into an NRO Account

With the following steps, you can convert your resident savings account into an NRO account:

  • First, contact your bank's customer care and take the applicable form for converting into an NRO account, or you can download the conversion form from their website.
  • Fill out the form, mentioning any other accounts you hold with the bank.
  • Attach the necessary documents proving your NRI status, like your PAN card, FEMA declaration, foreign address proof, passport, visa, and recent photos.
  • Submit the form and documents to the bank, with them attested by the Indian Embassy.
  • Once you have submitted the form, collect the acknowledgment slip and wait for the bank's confirmation, usually within a few working days.

What are the documents required to convert your savings account into an NRO account?

The following documents are required to convert your savings account into an NRO account: 

  • Self-attested copy of the PAN card. If you do not have one PAN card, then you can submit Form 60.
  • Self-attested copies of your passport and visa to verify your NRI status.
  • You should provide your overseas address on the conversion form and a self-attested copy of either an Indian or overseas address proof as per the acceptable proofs list.
  • If you're a joint holder in a Resident Account and your status has been changed to NRI, then you have to submit a declaration form along with the conversion forms and KYC documents.

Are any deductions available for NRIs?

Yes, NRIs can claim the following deductions:

Section 80C: Deductions can be claimed for:

  • Payment made against the life insurance premium
  • Tuition fees are paid for children.
  • Payment towards the Unit-Linked Insurance Plan (ULIP)
  • Amount spent to repay the principal amount of the loan taken for purchasing or constructing a residential property
  • Investment in an equity-linked savings scheme.

Section 80G: Deductions for donations made to specified funds and charitable institutions.

Section 80D: Deductions can be claimed for health insurance premiums paid for oneself, a spouse, children, and parents.

Section 80TTA: NRIs can claim deductions on interest earned from savings accounts.

Section 54: Deductions can be claimed on capital gains that arise from the sale of residential property if reinvested in another residential property.

Section 54EC: Deductions are available on capital gains if invested in specified bonds within six months of the sale of a residential property.

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Khush Trivedi
Category Income Tax   Report

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