This is the most widely ignored obligation in NRI banking, usually because nothing visibly goes wrong for years. The account keeps working, the standing instructions keep running, and nobody at the branch asks. That is not the same as compliance, and the point at which it surfaces is always inconvenient: a large credit, a property sale, a remittance request, or an account holder's death.
What the rule says
The Reserve Bank's Master Direction on Deposits and Accounts deals with this in one sentence. Non-resident ordinary accounts may be designated as resident accounts on the return of the account holder to India for any purpose indicating an intention to stay for an uncertain period, and likewise, when a resident Indian becomes a person resident outside India, his existing resident account should be designated as a non-resident ordinary account.
Notice what it does not say. It does not say close the account and open another. Redesignation is an internal change of the account's character, and in most banks the account number and the standing instructions survive it. The reason it matters is that the two categories of account carry different permissions about what may be credited to them, what may be debited, and what may leave the country.
Why it is not a formality
The Foreign Exchange Management Act, 1999 prohibits, save as provided in the Act, rules or regulations or with the general or special permission of the Reserve Bank, making any payment to or for the credit of a person resident outside India in any manner, and receiving otherwise than through an authorised person any payment by order or on behalf of such a person. Contraventions carry a penalty regime under the Act. Operating a resident account while resident outside India is not a paperwork slip. It puts every credit into that account into a category the Act regulates.
When a family later tries to release the balance to heirs abroad, or to remit sale proceeds, the bank goes back through the account history. Years of an unredesignated resident account, with credits that should have gone through a non-resident ordinary account, turn a straightforward remittance into a compliance exercise. The cost of fixing it then is many times the cost of a form signed on the way out.
What the non-resident ordinary account gives you
- Who may hold one. Any person resident outside India may open and maintain such an account with an authorised dealer or authorised bank for bona fide transactions in rupees, and it may be maintained as savings, current, recurring or fixed deposit.
- Joint holding. It may be held jointly with residents on a former or survivor basis, and non-resident Indians and persons of Indian origin may hold one jointly with each other.
- What may be credited. Inward remittances from outside India, legitimate dues in India, and transfers from other non-resident ordinary accounts. A rupee gift or loan made by a resident to a non-resident relative within the limits of the liberalised remittance scheme may also be credited.
- What may be debited. Local payments, transfers to other such accounts, and remittance of current income abroad. Beyond that, balances may be repatriated by non-resident Indians and persons of Indian origin up to one million US dollars per financial year on the conditions in the remittance of assets regulations, and funds may be moved to a non-resident external account within that same facility.
- Operation by someone in India. The bank may allow a resident attorney to operate within the RBI conditions and the authority granted. Confirm permitted local payments and remittances before using the mandate. It is not unrestricted authority to transfer money to any non-resident.
Five things to do at the same time
- Open a non-resident external account as well. That is the account for money you bring in from abroad, and interest on balances in it is exempt from income tax. Only the categories of credit the rules permit may go into it, which is why it does not replace the ordinary account.
- Move the standing instructions deliberately. Insurance premiums, utility payments and systematic investments all have to be pointed at the right account, and a failed instruction after a redesignation is a common annoyance.
- Review every nomination. Nominations survive the redesignation but are usually years out of date, and a nominee is a person to whom the bank may pay, not the person entitled to keep the money.
- Deal with the will while you are at it. Emigration is the natural moment to make an Indian will confined to Indian assets, and our guide on the Indian will an NRI should make sets out what it should cover and how it must be executed.
- Plan the return too. On coming back to India for an uncertain period, the reverse applies: the ordinary account is redesignated resident, and balances in non-resident external or foreign currency accounts may be redesignated or transferred to a resident foreign currency account at your option.
The point of doing it properly
Clean account records are what make a remittance straightforward later. Every question a bank asks before sending money abroad comes back to where the rupees came from and whether the account was the right one to hold them, and our guide on repatriating money from India as an NRI sets out that process. Confirm the current requirements and the forms with your authorised dealer bank, since the branch will apply its own procedure within the Reserve Bank's directions.