My cousin was leaving to US for the first time. He is working with TCS and has recently been selected to work on a project based on H1B visa in California.
It is a common phenomenon with growth of Indian talent being recognized worldwide. When you move out for long periods on such job opportunity, you become an NRI. There are certain action items especially financial to do things before becoming an NRI – A checklist.
Many do not have an understanding of the things that require instant attention before they leave the country and become NRI. Some tasks become really difficult to accomplish when you have moved abroad as NRI. But these could have been done easily before becoming NRI.
Here the intention is to help people like my cousin who are moving out of India and soon will become NRIs. It will give brief idea of the most important things that require completion before becoming an NRI.
Financial steps before becoming NRI – Checklist
An NRI is a person who stays out of India for more than 182 days in the financial year. This is just a broad definition.
But it is bit more complicated to find out about your residential status and if you’re NRI or not. You can check out our previous post for more details. It will give you better idea to decide your residential status.
Now assuming you’ll be becoming an NRI as per your job offer, we shall see what you must do before you take it up and move out of India and become NRI.
Step 1: Convert existing savings bank account to an NRO account
According to the guidelines provided by the RBI, it is mandatory for any individual to convert their Indian savings bank account to an NRO account when they leave the country and plan to become NRI.
This can also be done once you move out but the process is bit tiresome. So it is better to do it before you leave India.
An NRO account is similar to savings account except for residential status of the primary holder ie., you. Banking institutions are required to provide complete details about the transactions done by the individual under such accounts to RBI.
NRO account provides easy access to deposit rupee earnings in India such as rent, interests, and dividends directly. The applicant also receives the authority to deposit funds from abroad, after converting the foreign currency. The account is also eligible for all local payments including EMIs and investments made through this account.
There is also the possibility to transfer funds to another banking account inside India. The repatriation process allows you to transfer rent, interests, and dividends in India to a foreign account. On the sale of a property, the amount that proceeds to the NRO account is eligible for a maximum of $1 million per annum.
Nonetheless, it is needed to submit a certificate from a charted accountant stating that taxes liable on the repatriated funds are paid. Upon filing the certificate, the banker permits the process of repatriation.
The interest rates on the banking account are similar to a regular savings bank account, which is around 4-6%. The earnings through the interest attract tax and deduction is at source, which is at the rate of 30.9%.
If you have already left the country without fulfilling the requirement, you are eligible to send the required documents to the banking branch in India after attesting them with a Notary of resident or the Indian Embassy or signing authority of a scheduled commercial bank branch registered in India. That is why it is preferable to do it before leaving India if you expect to have earnings in India.
Must Read: Difference between NRE and NRO account
Step 2: Open an NRE account
It is advisable to choose the NRE account over NRO to enjoy the repatriation benefits and when you won’t have Indian income. This is beneficial for those who have repatriation requirements as NRE account does not have $1 million restriction or the need to submit tax paid certificate before repatriation.
Although you can open an NRE account even in the foreign country, submitting documents/approvals becomes difficult due to new place. Therefore, it is preferable to open the account before leaving the country.
The NRE account is available in three formats – savings, current, and fixed deposit accounts. With the NRE account operation, you gain the chance to transfer funds to/from it on the income earned in foreign country. You can also utilize the funds to purchase a property or invest in the stock market and take it back to your resident country if needed.
The interest earnings on the NRE account are tax-free. You cannot make Indian Rupees cash deposits in NRE account but can accept funds from other NRI accounts.
Step 3: Re-designate resident deposits to NRO deposits
Indians are more savers than investors and Fixed Deposits are their favorite. Nothing gives them more peace than putting money in fixed deposits and knowing it is safe.
However, NRIs cannot hold fixed deposits. Usually banks like ICICI and HDFC automatically convert your fixed deposits to NRO deposits when you change savings bank account status.
But some banks still need you to do it separately. So check with your banker and change your fixed deposit to NRO deposit. The rate of interest will be same but the interest earned will be taxed at 30.9% TDS.
Step 4: Close existing demat account and open PINS account
Non-resident Indians have restrictions when it comes to equity investments in India. For example, it is not possible for an NRI to invest more than 5% in the paid-up capital of an Indian company.
Therefore, RBI instructs becoming NRIs to close their existing resident Demat account and open an NRO/NRE linked PINS account to track the changes and the transactions.
For existing shares, which you purchased when residing in India, requires a closure/re-designation of the Demat account and transferring the shares to the NRO/NRE PINS account. As an NRI, you cannot operate in share market until you open the PINS account. It is illegal to even hold shares under existing demat account which has resident status after becoming NRI.
After completion of the transfer, you can choose to continue trading or sell the shares. The choice here is entirely up to the account holder. If you choose to sell the shares, remember that the earnings from the sale will proceed to the NRO/NRE savings account and usually capital gains tax will be deducted as TDS.
Furthermore, there are restrictions applicable to such a transaction and repatriation as applicable to NRE/NRO account.
Tip: Link your PINS account to NRE account so that you don’t have restriction on sale of share proceeds/profits after becoming NRI.
It is advisable that you maintain two separate accounts – NRO and NRE and channel your money based on repatriation requirements.
The demat provider will collect the necessary documents for submitting your application for opening NRO and NRE account, getting RBI approval and opening PINS account through which you can begin purchasing shares, sell and transfer money.
Related Read: Best 3 in 1 demat trading accounts in India
Step 5: Create a Power of Attorney
Before becoming NRI, transfer/Authorize the power of attorney to a trusted person who is helpful in the management of the financial transactions in India. With the power of attorney authorized, the concerned person will receive authority to perform all the transactions related to banking and the stock market.
The person also receives the power to operate your savings account, buy or sell shares, rent your property, sign tax returns, and issue cheques from your account. Decide if you want to give General Power of Attorney or Specific Power of Attorney.
Regardless of the authority, there are a few restrictions on the power of attorney holder. Note that the PoA holder cannot open an account on your behalf. They are only eligible to operate existing accounts in your name. Additionally, they are only eligible to repatriate the amount from the savings account in India to your foreign bank account.
Once PoA is registered , submit copies to banks and other institutions before leaving India.
Note: Remember PoA is very important. So give it to only whom you trust absolutely. Seek a legal consultant if required in drafting a Power of Attorney.
Step 6: Open a PPF account before becoming NRI
NRIs cannot open new PPF accounts. They can only continue existing active PPF accounts.
According to the notification released in the year 2003, NRIs are now eligible to continue their investment in their PPF accounts.Prior to 2003, NRIs did not enjoy the benefit of investing in PPF and had to close the account before leaving the country.
However, the continuation of the investment is possible only if the operating account is in function prior to becoming an NRI. You can use the funds available in the NRO or NRE account to make an investment in the PPF account.
So it is advisable to open a PPF account before becoming NRI.
Detailed post: All about PPF – Complete Guide
Step 7: Update KYC for mutual funds and insurance
According to the KYC (Know your client) norms issued by the RBI, it is mandatory to inform the transfer of residence to service providers such as insurance companies and mutual fund houses.This is because your savings account will be converted and ECS debit instructions for SIP will be rejected unless you link them to NRE/NRO account.
Even you are in abroad, selling/buying the funds that you are holding is still possible if you have single folio and transaction PIN .So make sure you get online transaction PIN before leaving India.
Step 8: Term Insurance for NRIs
I also learned just few months ago that my term insurance is not fully valid in first 2 years of my status change if the change is not intimated to insurance ie., misstatement.
After becoming NRI, if you din’t update residence status change to insurer, it is illegal to renew your term insurance online which was taken when you were resident. Check the reference post here and I confirmed it with an experienced insurance veteran who has knowledge of Exchange Control manual.
The case of repatriation is also different when it is with the term insurance policy. The repatriation depends on the account from which you make the premium payment, in which currency the policy is denominated and extent to which it forms part of premium payment.
Claim settlement will be done to this account from which premium received. Insurance policy can be denominated in both foreign currency and Indian currency.
According to the instructions of RBI, repatriating the claim amount is possible proportionate to premium paid as foreign currency or from NRE account(since policy will be foreign currency denominated). If premium is paid in Indian Rupees from NRO account, then claim proceeds or maturity are not repatriable.
You can decide on the premium payment process for your insurance depending on the length of stay in the foreign country when you become NRI.
Step 9: Activate international roaming to your mobile
We have added this based on personal experience. You’ll be amazed how much you’ll spend in 1st week abroad if you don’t do this. Also all your One Time Passwords(OTP) cannot be received if you don’t activate international roaming.
So it will be really handy not just to inform your family that you’ve reached safe and emergency calling but also for all OTP purposes. Also install some VOIP applications before leaving India.
Hope this checklist of things to do before becoming NRI was helpful. Let us know your experience or if you think something must be added to help those who’ll be becoming NRI in near future.
If you receive the opportunity to work and stay outside India, apart from planning and packing, do not forget to tie the financial loose ends before leaving the country.