Resident Account Conversion Alarm

FEMA's residence test is about purpose, not day-counting: a person who leaves India for employment abroad, for business abroad, or for any purpose indicating an intention to stay abroad for an uncertain period stops being a person resident in India from departure. The 182-day arithmetic in the definition serves other cases — it does not delay this one. The income-tax day-count test is a different law answering a different question: your bank accounts follow FEMA, not your tax return.

When a resident leaves India for employment, business or vocation abroad, or intending to stay abroad for an uncertain period, the RBI's direction to banks is that the existing account should be designated as a Non-Resident (Ordinary) account. The account itself survives — balance, branch, even the number — but its status must change, and the obligation to tell the bank sits with the account holder: banks do not do this for you.

Continuing to operate a resident account after becoming a person resident outside India is a contravention of FEMA. The Act deals with contraventions through penalties (up to three times the sum involved where quantifiable) and a compounding process run by the Reserve Bank — an administrative settlement, not a criminal matter. In practice the remedy is straightforward: re-designate now, and where the history is tangled, regularise it through the bank and an Indian chartered accountant. Waiting does not improve it.

Fixed deposits opened while you were resident are re-designated as NRO deposits when your status changes, and from re-designation they are NRO for all purposes — repatriation and tax treatment included. Banks commonly let the deposit run to its original maturity date after re-designation, but that continuation is the bank's practice under the direction, not a right to keep a resident deposit: the status change itself is not optional, and the bank must be told.

A PPF account opened while resident may be continued until its 15-year maturity after you become an NRI, with deposits permitted on a non-repatriation basis — but it cannot be extended beyond maturity once you are non-resident (the extension form carries a declaration that you are not one), and a new account cannot be opened. Tell the bank or post office of the status change, and diarise the maturity date: the proceeds belong in your NRO account.

A resident demat account should be converted to non-resident status through the depositories' resident-to-NRI conversion process (fresh KYC with a residency and FATCA declaration; brokers additionally require closing the resident trading account and opening an NRI one), and mutual fund folios need KYC updated to non-resident with the bank mandate moved to an NRO or NRE account. Fresh investments made as a 'resident' after you have left are the same status problem in a different wrapper.

The Income-tax Act decides residency by counting days (the 182-day test and its variants, including the deemed-residency overlay for certain high-income citizens). FEMA decides it by purpose of departure, effective immediately. It is entirely normal to be tax-resident in India for the year you leave while already being a person resident outside India under FEMA from the day of departure — your bank account status follows the second test, not the first.

On returning to India for employment, business or an uncertain period, the mirror obligation applies: NRE accounts should be designated as resident accounts — or the funds transferred to an RFC (Resident Foreign Currency) account at your option — immediately upon return, while FCNR(B) deposits may run to maturity at the contracted rate before conversion. The direction changes; the duty to tell the bank does not.