Home / Money / Personal Finance /  When should you open an NRO account?

We are planning to move to Canada soon, depending on the processing of our application for permanent residence (PR) there. Meanwhile, we had moved out some of our investments in fixed deposits, provident funds, mutual funds (MFs), shares and liquid funds to  savings accounts to comply with the PR process. However, given the uncertainty around PR processing now, we want to invest these savings accounts funds in other instruments. 

Do we need to close all these accounts and put  the funds in a new Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account after we move to Canada? Or can we let these investments continue till their maturity? What will be the impact on taxation in such a case?

—Name withheld on request

Under the exchange control law, when an individual leaves India for employment or for business or for vocation outside India or for any other purpose indicating his intention to stay abroad for an uncertain period, his existing bank accounts should be designated as  NRO account. An NRE account may be opened afresh.

Interest income from NRE accounts (savings and fixed deposits) is exempt from income tax in India, provided the individual qualifies as a “person resident outside India" or is a person who has been permitted by the Reserve Bank of India to maintain NRE account. Any interest income earned from NRO account will be taxable in India—but subject to lower tax rate, if Double Taxation Avoidance Agreement (‘DTAA’) benefit is available. Thus, you are required to convert your existing bank accounts to NRO (saving and fixed deposits) account. Public Provident Fund Account may be continued till its maturity on non-repatriation basis i.e. funds cannot be remitted outside India and the account will not be allowed to be extended or continued beyond maturity.

For MFs and shares, you need to inform the change of residential status to the mutual fund house and broker to update the records. 

You do not need to break the above-mentioned instruments but can continue till maturity provided a change in residential status is duly informed to the bank, MF house and a broker.

Sonu Iyer is tax partner and people advisory services leader, EY India.

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