It is illegal for NRIs to hold normal Resident bank accounts

A N Shanbhag, the highly respected investment guru, and his son Sandeep Shanbhag, answer your questions on NRI investment.

A Rediff India Abroad feature:

I have the following queries relating to NRI investment in Mutual Funds in India. At present I have invested in some funds directly. All three funds have entry loads.

Now the questions are:

(a) Is it true that I can avoid these entry loads if I invest in one of the debt funds (fixed income funds) and keep invested for more than a year and later  shift/transfer from the debt fund  to equity funds.

(b) If there is any TDS at all, shall I get back the tax if claimed while filing?

-- S R Sukhi

There would be no benefit in terms of avoidance of loads even if you adopt this approach. In terms of tax on mutual funds in India the following is the gist.

The dividends are tax-free in the hands of the recipient. TDS is applicable for both long and short-term capital gains form non-equity scheme. The provisions of tax on capital gains are applicable for switch between schemes and even for a switch within the same scheme from one option to another option.

However, this is not applicable for switch from 'dividend' option to 'reinvestment of dividend' option and vice versa.

I have begun the process of immigration to Canada with family. I have got permanent resident visa for Canada and am leaving India on July 2,  2007. I have the following queries---

1. On which date will I become NRI

2. On which date will I become NRI under income tax laws. Assume that I will not be coming to India in near future.

3. Should I convert my savings account to NRO account, and when should I do this?

4. I have my capital invested in different means like PPF, bank fixed deposits, LIC, NSC, and bank balances. I am carrying part of my capital in bank accounts to Canada in form of demand draft and Traveler's cheques. Rest of the capital will remain here. After going to Canada can I transfer the remaining capital to Canada?  

5. What amount can one transfer to the country that I am immigrating to? Is there any restriction/limit that the transfer should be done in one stroke or can it be staggered through out the financial year, after reaching the destination country?

6. Canada has a double tax treaty with India. I am enjoying tax free incomes from PPF account, RBI tax free bonds etc. Should the taxable income exceeds Rs 1,00,000, I can invest in PPF account under section 80C. Will I have to pay tax in Canada for the tax free income I receive in India. Your advice will be very helpful to me for financial planning.

-- Welingkar

1 & 2:  The Residential status for FEMA as well as ITA is for the financial year and not from any particular date. You will be an NRI for the FY 07-08 on both counts.

3. On becoming an NRI, legally you are required to inform all your banks and also all the companies where you have investments about the change in your status within a reasonable time. The banks will redesignate your accounts as NRO. You can use this account the same way as you used it before becoming an NRI.

It is illegal for an NRI to continue to hold their normal Resident bank accounts.

It is also necessary to inform all the companies of whose shares you hold, and UTI/MFs about change in your status. If you have a demat account, it is not necessary to inform the companies but informing the DP is a must.

When you inform a company about your changed status, it will inform the RBI to enable RBI keep a track of the percentage investment of individual NRIs and also all the NRIs put together in a company. There are some specified limits, beyond which the investments are not permitted.

You will also start filing your tax returns in your new NRI status. True, if the Indian income is below the taxable threshold of Rs. 1.10 lakh, there is no need to file the returns but it is prudent to do so for maintaining the continuity.

Even after you become an NRI, you are free to deal with all your investments and assets you held prior to becoming an NRI any which way you desire. The only restriction is that the original corpus is non-repatriable.

It would be advisable to give a power of attorney or letter of authority to anyone of your choice to operate your NRE bank account. Withdrawals can be effected from this account for local disbursements, investment in units of UTI, some MF schemes, government securities etc. In the case of NRO you can have a Resident as a joint holder. The maturity proceeds can be credited freely to your NRO account by the joint holder.

4. Strictly speaking, the funds in your NRO account are non-repatriable. However, at on opportune occasions you may take recourse to ---

Master Circular /0402006-07 dt 1.7.06 makes it possible for an NRI or a PIO to remit as much as US$ 1 million per calendar year for bona fide purposes out of the sale proceeds of assets held in NRO accounts. He should have acquired the assets in question, out of rupee resources when he was in India or by way of legacy/inheritance from a person who was a resident in India.

You are not allowed to open new accounts of PPF, NSC, etc. You cannot extend the PPF account after maturity.

5. Residents going abroad are allowed forex up to $1,00,000 for the following purposes :

• Employment abroad.
• Emigration.
• Maintenance of close relatives abroad.
• Education abroad.
• Medical Treatment abroad.

6. Just as global income of a Resident Indian is taxable in India (with DTAA relief), the global income of an NRI may be taxable in his host country. Kindly get this information from a consultant specialising in tax laws of Canada

We presume you have a PAN.

The authors may be contacted at wonderlandconsultants@yahoo.com