According to the FEMA guidelines imposed by the government of India, there is no penalty provision for failing to declare your NRI status. However, the government made it mandatory for the NRI(Non-resident Indians) to convert their savings accounts into Non-resident ordinary(NRO) savings accounts upon becoming an NRI. But in case you fail to convert your savings accounts into an NRO account, it can result in legal and financial complications.
This is because if the Indian resident opts to move out of India for a variety of reasons and spends more than 182 days or a specific period in a foreign country then their resident status changes to NRI and they need to convert their residential status to avoid the case of penalty. However, its conversion doesn’t restrict the NRI from enjoying the benefits available to resident Indians. For example, You as an NRI can open and manage your savings account in India by filing income tax returns, and investing in government securities, fixed deposits, stocks, and mutual funds.
Moreover, the investment and taxation rules are different for NRIs and resident Indians. As discussed above they can’t operate and manage a regular savings account in India but they can convert a savings account into an NRO account.
So, to avoid any further financial complications, it is necessary to declare yourself as an NRI to comply with the rules and regulations of status changes. Delving into the article, you will get to know more information about the NRI status rules and the penalties in case of a declaration failure.
The government of India has imposed two main laws for determining the residential status. These laws further define the NRI status, the laws are highlighted below.
1. Foreign Exchange and Management Act(FEMA) 1999
2. Income Tax Act(ITA) of 1961
• According to the Foreign Exchange Management Act, of 1999, NRI are the people who visit outside India indefinitely for education, employment, business, etc. Furthermore, the Indian citizen or a PIO is also considered an NRI, according to the FEMA rules.
• According to the Income Tax Axt rule of 1961, a person is considered an Indian resident if they spend 182 days or more during a financial year. Additionally, if anybody has spent at least 60 days in the financial years and at least 365 days in the preceding four years is considered an Indian resident entity
FEMA guidelines clarify no penalty for not declaring the NRI status. However, the NRI individual should either close their existing savings account into a Non-resident Ordinary(NRO) savings account as soon as possible. Additionally, in case if the NRI resident fails to do so, it may result in legal and financial complexes.
As per the FEMA guidelines, it is illegal for Non-resident Indians to hold savings accounts and may result in heavy penalties. In case a person is found to be holding a resident savings account even after becoming an NRI, the fine will be three times the amount in the savings account or upto 2 lakhs, in case of a non-quantifiable amount.
Generally, NRIs are not required to fill income tax returns based on the non-resident status but they need to fill the income tax returns if they meet the certain income thresholds highlighted below.
• Old Tax Regime(Optional): In this NRIs have the file ITR if their total income in India is 2.5 lakhs or more in a financial year.
• New Tax Regime(introduced in 2020): NRIs falling under the new tax regime must file ITR if their total income in India exceeds 3 lakhs in a financial year.
Under the Indian Income Tax law failure to file income tax returns leads to serious consequences. The authorities may question you on the non-filing of taxes as an attempt to evade tax. It includes imprisonment of 6 months to 7 years with monetary fines under the section 276CC.
Being an NRI, you can continue to avail several benefits available for the resident Indians but before that, you must declare yourself as an NRI and convert your savings account into an NRO account. However, there is no penalty for declaring NRI status but failing to convert accounts may impose heavy sanctions. If you want to get the latest updates on the penalty for not declaring NRI status in India, consult Manoj K Pahwa, a top FEMA consultant in Delhi with years of experience who can clear and assist you with every tax query.