We plan to move to Canada soon based on the process of our application for Permanent Residence (PR) there. Meanwhile, we had transferred some of our investments to savings accounts in fixed deposits, provident funds, mutual funds (MFs), shares and liquid funds to follow the PR process. However, now considering the uncertainty regarding PR processing, we want to invest the funds from these savings account in other instruments.
After moving to Canada do we need to close all these accounts and transfer the funds to a new Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account? Or can we allow these investments to continue till maturity? What will be the impact on taxation in such a case?
—Name withheld on request
Under the Exchange Control Act, when a person leaves India for employment outside India or for business or for business or for any other purpose indicating an intention to stay abroad for an indefinite period, his existing bank accounts should be designated as NRO account. An NRE account can 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 permitted by the Reserve Bank of India to maintain an NRE account has been given. Any interest income earned from an NRO account will be taxable in India—but subject to a lower tax rate, if the Double Taxation Avoidance Agreement (‘DTAA’) benefit is available. Thus, you need to convert your existing bank accounts into an NRO (Savings and Fixed Deposit) account. Public Provident Fund Account can be continued till 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 in residential status to the mutual fund house and broker to update the record.
You are not required to break the above instruments, but can continue till maturity, provided the change in residential status is communicated to the bank, MF house and broker.
Sonu Iyer is EY India’s Tax Partner and People Advisory Services Leader.