Conversion of Savings Accounts to NRO/NRE Upon Living Outside India
The need to convert your savings account to a Non-Resident Ordinary (NRO) or Non-Resident External (NRE) account when living outside India primarily depends on your residential status as defined by the Reserve Bank of India (RBI). Understanding this requirement and the proper timeline for conversion can help you avoid potential complications such as tax implications and restrictions on transactions.
Residential Status and the NRI/NRO/NRE Classification
According to the Reserve Bank of India, a Non-Resident Indian (NRI) is someone who has not resided in India for more than 182 days in the preceding financial year. Once you meet this criterion, you should consider converting your savings account to either an NRO or NRE account. However, it is not strictly mandatory to do this immediately upon leaving India.
Timeline for Conversion
Although there is no legal requirement to convert your account immediately upon moving outside India, it is advisable to do so within 182 days of establishing your NRI status. Holding a regular savings account as an NRI can lead to complications, including tax implications and transaction restrictions.
Types of Accounts
NRO Account
The NRO account is designed for managing income earned in India, such as rent and dividends. The funds in this account can be repatriated after tax deductions. This type of account is ideal for managing income that is derived from within the country.
NRE Account
The NRE account is used for managing income earned outside India. Funds in this account are fully repatriable and are exempt from Indian taxes. This makes the NRE account preferable for income from sources outside the country, ensuring greater tax benefits.
Important Considerations
While you do not need to convert your savings bank account to an NRO account immediately upon living outside India (you can keep it as a regular saving account), you should be aware of the restrictions you will face. For instance, you cannot invest money sent from abroad into certain investment classes, such as Public Provident Fund (PPF), National Savings Certificate (NSC), Senior Citizens' Savings Account (SCSA), and other resident-specific investment classes.
It is also important to ensure that you have the appropriate visa type that meets the requirements for an NRO/NRI account. For example, you cannot open an NRO account on a student visa.
Lastly, since your resident status is defined based on the number of days spent outside India, your resident saving bank account must be changed to an NRO account. Your bank will open a new NRE account based on the necessary KYC (Know Your Customer) documents provided by you.
Understanding these rules and complying with them can help you manage your finances more effectively and avoid any legal and tax challenges that may arise.