What happens to your demat account after you become an NRI?

If you are moving abroad for employment, education, or any other long-term purpose, your residency status will change to a Non-Resident Indian (NRI). As an NRI, you are required to update your banking and investment accounts in compliance with regulations. One such critical financial asset is your demat account, which allows you to hold and trade securities electronically. While your Resident savings account can be converted into an NRO Savings Account, in the similar way your resident Demat can also be converted to NRO Demat Account. This article explores how a change in residency affects your demat account and what steps you must take.

What is a demat account?
 

A demat (dematerialised) account is an electronic account that holds shares, bonds, exchange-traded funds (ETFs), and other securities in digital form. It eliminates the need for physical certificates, making trading and investment transactions seamless.

The key functions of a demat account include:

• Safeguarding financial securities electronically.
• Facilitating the easy transfer and trading of shares.
• Enabling participation in stock market investments.

However, when your residency status changes, the regulations governing your demat account also change, requiring necessary modifications.

Definition of Residency  
 

As per the Income Tax Act, 1961, an individual is considered a resident if they spend:

• 182 days or more in India during the financial year, or
• 60 days or more in India in the financial year and 365 days or more in the preceding four financial years.

If an individual does not meet these criteria, they are classified as an NRI. A Resident Indian can hold standard bank accounts, investments, and a Resident Demat Account, while an NRI must operate accounts under specific NRI banking and investment guidelines.

Effect of residency change from Resident to NRI
 

When your residency changes to NRI, the Foreign Exchange Management Act (FEMA) requires you to:

• Close/Convert your existing resident demat account to NRO Demat account
• Open a new NRO demat account (for non-repatriable shares) or an NRE demat account under the Portfolio Investment Scheme a.k.a. PIS (for repatriable investments).

Securities in the demat account
 

• Shares held in a resident demat account are advised to be converted in NRO Demat Account.
• Investments made through an NRE demat account are freely repatriable.

TDS on capital gains for NRI demat accounts

For NRIs, tax deduction at source (TDS) is applicable on capital gains arising from the sale of securities in India. The TDS rates vary based on the type of investment:

• Long-term capital gains from equity-oriented investments attract a 10% TDS.
• Long-term capital gains from non-equity investments, such as debt funds, are subject to 20% TDS after indexation benefits.
• Short-term capital gains from equity-oriented investments are taxed at 15% plus applicable cess.
• Short-term capital gains from non-equity investments, including debt funds, are subject to 30% TDS.

Proceeds from the sales of securities in an IDFC FIRST Bank NRO demat account can easily be credited to an NRO settlement account, but the repatriation is subject to RBI limits.

Options for managing the account post-residency change
 

• Open an NRO demat account for non-repatriable holdings.
• Open an NRE demat account through Portfolio Investment Scheme (PIS) route for repatriable investments.
• Ensure compliance with SEBI’s latest framework for updating residency details, ensuring a smooth transition.

Key points to remember when transitioning to NRI status
 

1. Notify your bank/broker–

  Inform your Depository Participant (DP) and update your residency status.

2. Update KYC and documentation–

  Submit the required NRI KYC forms, passport copy, visa, and overseas address proof.

3. Possible trading restrictions–

  NRIs are required to follow RBI guidelines for investment through NRO and NRE demat accounts.

4. Impact on account access–

  Certain stocks and securities may not be accessible for trading as per RBI’s PIS norms.

Can NRIs open a new demat account?
 

Yes, NRIs can open an NRO Demat Account or/and NRE Demat Account to invest in Indian Stock Market.

Differences between resident and NRI demat accounts
 

Conclusion
 

When transitioning to NRI status, your demat account cannot remain as a resident demat account. You must either close it or convert it into an NRO demat account. Understanding the implications of your residency change ensures compliance with RBI and SEBI regulations while allowing you to continue investing in India. To simplify this process, IDFC FIRST Bank’s NRI banking services offer expert assistance in managing your financial transition seamlessly.