Managing FCNR (B) accounts when transitioning from NRI to resident

By understanding regulations, NRIs transitioning to residents can effectively manage their FCNR accounts and optimize their financial planning.

PRAVASISAMWAD.COM

When a Non-Resident Indian (NRI) transitions to resident status under the Foreign Exchange Management Act (FEMA), managing foreign currency non-resident (FCNR) accounts requires careful adherence to regulatory guidelines, livemint.com reported.

Here’s what you need to know about repatriating funds and converting accounts during this process.

Recharacterizing FCNR (B) Accounts

As per FEMA regulations, when an NRI becomes a resident, the FCNR (B) account must be converted into a resident account. This account transformation means that any remittance from the recharacterized account is subject to the Liberalised Remittance Scheme (LRS), which permits outward remittances up to an annual limit of $250,000.

Retaining Foreign Currency in India

NRIs returning to India have the option to credit their FCNR funds into a Resident Foreign Currency (RFC) account. Unlike LRS-governed accounts, RFC accounts allow unrestricted remittance of foreign currency without conversion. Transferring funds to an RFC account before returning to India ensures greater flexibility in managing overseas financial needs.

Tax Implications

Interest earned on an FCNR (B) account is tax-exempt under Section 10(15) of the Income Tax Act for non-residents. Returning NRIs can also claim this exemption for RFC accounts, but only if their residential status remains “non-resident” or “not ordinarily resident” under the Income Tax Act.

Key Considerations

1. Premature Withdrawals: Premature withdrawal of FCNR deposits may incur penalties, so plan accordingly.
2. Residential Status Discrepancy: The determination of residential status under FEMA differs from that for tax purposes. NRIs must promptly notify their banks of any change in status to ensure compliance.
3. Funds Abroad: Transferring funds from the FCNR account to an RFC account or retaining them abroad before returning to India can provide additional benefits and minimize regulatory challenges.

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