Prabhat, who recently converted status from resident to NRI, asked me if it is ok to continue Mutual Funds investments & SIPs from domestic accounts. The NRI Investing Using Domestic Bank Accounts like savings or current is not allowed. So what to do if NRI invests using domestic bank accounts? Why this is so?

Many NRIs face these issues while making a transition from Resident to NRI. Why take the hassle of converting bank accounts, informing MFs on KYC, and getting status changed?

It is important if you want to be on the right side of the law.

Some NRIs keep investing from their resident accounts unaware of the regulations around NRI taxation and investments. Your tax status changes to NRI whenever you spend more than 182 days living outside India in a financial year.

When you are an NRI, you need to convert your existing bank accounts in India to NRO accounts. NRI Investing Using Domestic Bank Accounts is not allowed as per the FEMA Act.

For an NRI investing using domestic bank accounts, Investing in mutual funds can cause issues. These include legal, tax, and regulatory problems.

NRI Investing Using Domestic Bank Accounts – Issues

1. Regulatory Non-Compliance:

   • Foreign Exchange Management Act (FEMA) Violations: NRIs must follow FEMA regulations. These rules govern investments and remittances. NRI Investing Using Domestic Bank Accounts can breach these regulations and lead to penalties. FEMA has mandated which account to use and when. It clearly says when you are NRI you need to close all domestic bank accounts. You need to open or convert an NRO account for INR or money usage of Indian funds. Your out-of-country income & affairs should be managed using an NRE account.

2. KYC Compliance & Change in Status: Mutual funds in India require Know Your Customer (KYC) procedures. NRIs have different KYC requirements compared to resident Indians. You need to submit specific documents like a passport and proof of overseas address. Once you are AN NRI you must change your status in KYC. You also need to inform MFs of this change.
3. Existing Investments Issues: When you submit a KYC change, you must provide your new NRO bank details to existing folios in MFs. These folios will be converted to NRE-NRO status. You will now conduct all future transactions in the folio using the new bank.. So if you want to continue investment you can do so by using the new bank.
4. Tax Implications/ Tax Residency: Your tax obligations in India depend on your residential status. As an NRI, you face different tax treatments for your income, including gains from mutual funds. Using a domestic account might lead to incorrect tax filings and potential penalties. In most cases, changes are just TDS as NRIs are subject to TDS while withdrawing or switching funds.
5. Double Taxation Avoidance Agreement (DTAA): NRIs can benefit from DTAA between India and their country of residence. This helps avoid double taxation. However, NRI Investing Using Domestic Bank Accounts might complicate applying for DTAA benefits.

6. Repatriation Issues: NRIs typically use Non-Resident External (NRE), Non-Resident Ordinary (NRO), or Foreign Currency Non-Resident (FCNR) accounts. These accounts are for repatriable investments. NRI Investing Using Domestic Bank Accounts may create challenges when you try to repatriate funds back to your country of residence.

7. Mutual Fund Company Policies: Mutual fund companies have specific policies for NRIs. Failing to disclose your NRI status can lead to complications. This can include suspending/blocking your investment account or facing redemption issues.

Correct Procedure for NRI Investing Using Domestic Bank Accounts

To invest in mutual funds as an NRI, follow these steps:

1. Open Appropriate Bank Accounts: Open NRE, NRO, or FCNR accounts with an Indian bank. These accounts comply with FEMA regulations and cater to NRIs.
2. Complete NRI KYC: Submit the necessary documents to fulfill NRI KYC requirements. Typically, this includes proof of NRI status, an overseas address, and other identification documents.
3. Invest Through NRI Accounts: Use your NRE or NRO accounts to invest in mutual funds. This ensures compliance with FEMA and other regulatory requirements.

NRI Investing Using Domestic Bank Accounts as an NRI is inadvisable. This is due to potential regulatory, tax, and legal issues. Follow the correct procedures and use NRI-specific accounts to ensure compliance and avoid complications.