Becoming a non-resident: Essential checklist for income tax and FEMA compliance

The status of being a non-resident in India is determined under two different laws: income tax laws and the Foreign Exchange Management Act (FEMA).

The first law impacts the taxability of income earned in India and outside India. The second one regulates investments and banking transactions in India.

In this article, we will discuss what you need to do when you become a non-resident.

Under the income tax laws

An individual's non-resident status under the income tax laws. It depends on their physical stay in India during the financial year. Generally, this status is determined after the end of the year.

As a non-resident, you should update your income tax e-filing website profile and state your residential status when filing your income tax return (ITR). You must also file an income tax return if your Indian income exceeds the basic exemption limit.

Under FEMA laws

Under FEMA, non-residency is based on intention rather than physical stay. You become non-resident when you leave India for employment, business or an indefinite period. Technically, you become a non-resident as soon as your flight departs. Although it is impossible to comply immediately, you should complete the following steps quickly.

1. Notify your bankers about your non-resident status. Your existing bank accounts will be designated as Non-Resident Ordinary (NRO) accounts. This applies to all existing bank accounts, including savings, fixed deposits and recurring deposits. Once bank accounts have been designated as NRO accounts, the bank will deduct tax at source on interest at the applicable non-resident rates (currently 30 per cent). TDS will be deducted from savings accounts even if the interest is credited to your NRO savings bank account without a basic threshold.
2. An NRI is not allowed to open a new PPF account but can continue subscribing to an existing one for up to 15 years. If you hold a PPF account before becoming an NRI, inform your bank to ensure it does not extend beyond the initial 15-year term or after the end of a 5-year extension block.
3. Once you become an NRI, separate your Indian earnings from foreign income by opening a Non-Resident External (NRE) account. Funds deposited into this account can be freely transferred abroad. If you use your NRO account for foreign income, you must follow procedures to transfer it abroad within prescribed limits. So, in case you have your NRE account, the money lying to the credit of this account can freely be transferred back aboard.
4. For investments in shares, bonds, etc., you must either redesignate your existing demat account as a non-resident or open a new demat account with non-resident status and transfer all your existing investments to the non-resident demat account. There is no restriction as to the limit upto which you can invest in Indian companies, but once you become an NRI, the specific limits become applicable. The sale proceeds from such accounts cannot be fully repatriated outside India, so opening an NRE demat account for repatriable investments is advisable.
5. Inform mutual fund houses and insurance companies of your new status and update your Know Your Customer (KYC) records. If you have systematic investment plans (SIPs), you may need to discontinue some if your new country of residence restricts investments in these schemes.
6. Consider appointing a power of attorney holder in India to operate your bank accounts and certain transactions on your behalf in your absence.

You do not require any RBI permission to earn income outside India.

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Balwant Jain is a tax and investment expert and can be reached on jainbalwant@gmail.com and @jainbalwant on his X handle.

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