Loan amount advanced by PIOs cannot be remitted outside India


What are the pros and cons of sending Rs1 crore by PIO to my Indian parents for business as unsecured loan?

—Sanjib Chakraborty

A PIO can advance a loan to a “person resident in India” (not a business) from their NRO account after meeting the following conditions:

a) The loan must be on a non-repatriation basis (no payment possible outside India);

b) The loan amount must be received by the borrower either by inbound installment from outside India or by debit to the NRO / NRE / FCNR (B) account of the lender;

c) the duration of the loan should not exceed 3 years;

d) The interest rate on the loan may not be more than 2% higher than the bank rate in effect on the date the loan was used;

e) The repayment by the borrower should be made to the NRO account only.

There are general restrictions on the use of borrowed funds. The person residing in India who has borrowed the rupee funds from a PIO should ensure that:

1. The borrowed funds are only used for own business, with the exception of: chit fund; Nidhi company; agricultural activities, plantations, real estate or construction of farm houses; or trading of transferable development rights (TDR)

2. Borrowed funds are not used for any investment, whether in the form of capital or otherwise, in a corporation or partnership, sole proprietorship or entity, whether incorporated or not, or for a new loan.

As a result, a PIO can advance a loan to their parent who is a person residing in India from their NRO account subject to the aforementioned conditions being met. The loan amount cannot be disbursed outside of India and the repayment should only be made to the NRO account.

I was NRI from June 2, 2012 to October 22, 2017. Do I have to convert my NRE account to a normal savings account immediately or can I wait a few months? What happens to my term deposits (NRE)? Should I buy them back can I let them mature? All my SIPs are debited from my NRE account. If I ask CAMS to change my tax status, what will happen to my SIPs?

—Name hidden

Resident status under foreign exchange control laws is different from income tax law. Under the Foreign Exchange Control Act, you may be considered a “person residing in India” in the year of your return to India with the intention of remaining in India for an uncertain period.

Under the Income Tax Act, residency status is determined based on your physical presence in India during the current fiscal year (FY) (April 1 to March 3) and the previous 10 fiscal years .

The answer to your specific questions is as follows:

Under the Foreign Exchange Control Act, the Non-Resident (External) Account (NRE) must be designated as a Resident Account or funds can be transferred to a Resident Foreign Currency Account (RFC), at the option of the holder of the account, immediately after the change. in a residence situation.

If you return to India with the intention of staying in India for an uncertain period, you will be referred to as a “person resident in India” under the Foreign Exchange Control Act. As a result, you are required to notify the bank of the change in residential status, designate the NRE account as a resident account or transfer the funds to an RFC account.

Upon subsequent change of resident status from “person residing in India” to “person residing outside India”, you can re-name the resident account to non-resident (ordinary) account (NRO).

In the event of a change of residential status, the NRE deposit account must be designated as a resident deposit account or transferred to an RFC account.

Interest earned on the NRE deposit account is exempt until the person qualifies as a “person residing outside India” in accordance with the exchange control laws. Once the individual is qualified as a “person resident in India” according to the exchange control laws, the interest income from the NRE deposit account is taxable in India.

When changing residential status, a new mat account with “resident” status will be opened and all securities in the non-resident mat account will be transferred to the resident mat account.

Queries and views at [email protected]

Sonu Iyer is Tax Partner and Leader in Personal Advisory Services, EY India.

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