What Is the Penalty for Not Declaring NRI Status or Not Converting Your Account?

The penalty for not converting your account after becoming an NRI is set by Section 13 of the Foreign Exchange Management Act, 1999: up to three times the sum involved in the contravention where that sum is quantifiable, or up to ₹2,00,000 where it is not, and, for a continuing default, a further penalty of up to ₹5,000 for every day after the first day that the contravention continues. There is no distinct fine for the mere failure to "declare" your status; FEMA penalises the underlying act, such as holding or operating an account inconsistent with your residential status, not the omission of a declaration. The penalty is civil, adjudicated by the Directorate of Enforcement, and is separate from anything you owe under income-tax law.

Leaving India and returning to it are both part of the same returning to India transition of banking and tax; the table below maps each violation to its FEMA provision and the consequences that follow.

Here, "sum involved" means the amount adjudged to be involved in the contravention, not automatically your full account balance.

Yes. An NRI cannot lawfully continue to hold an ordinary resident savings account, because the Foreign Exchange Management (Deposit) Regulations, 2016 require a resident account to be redesignated as an NRO account once the holder becomes a person resident outside India. Continuing to operate the resident account after that point is a contravention of FEMA, 1999 exposing you to the Section 13 penalty, even if no other rule was broken and no money was moved abroad. The reverse mistake is identical in law: a returning NRI who keeps operating an NRE account after becoming resident again is committing the same class of FEMA breach. The account does not become illegal because of any transaction in it; it becomes non-compliant the day your residential status changes.

Here, "illegal" means a civil FEMA contravention, not a criminal offence. The trigger is a change of your FEMA residential status, which turns on the purpose and expected duration of your stay abroad, not on the income-tax day-count; once informed, your bank is obliged to redesignate the account.

You must redesignate your accounts at the moment your FEMA residential status changes, in whichever direction you are moving.

• When you leave India to take up employment, business or an indefinite stay abroad, the FEMA (Deposit) Regulations, 2016 require you to redesignate your resident savings account as an NRO account, and failing to do so is the Section 13 contravention described above.
• When you return to India permanently, the same regulations require you to convert your NRE and NRO accounts to resident accounts (or move NRE funds to an RFC account), and continuing to run an NRE account as a resident is that same FEMA contravention.

In both cases the obligation applies from the date your status changes, not from when the bank happens to process the paperwork. The redesignation duty comes from the FEMA (Deposit) Regulations, 2016 read with the RBI Master Direction on Deposits and Accounts. For the account-by-account mechanics, see how to redesignate your NRE, NRO and FCNR accounts.

The Section 13 penalty is a foreign-exchange penalty, not an income-tax penalty: it punishes the FEMA contravention of holding the wrong account or routing money incorrectly, and is decided by the Directorate of Enforcement, not the Income-tax Department. It is entirely separate from your income-tax residential status under Section 6 of the Income-tax Act, 1961, which is a day-count test used to decide what income India can tax; FEMA instead classifies you by the purpose and duration of your stay abroad, so the two can diverge. It is also separate from tax-side exposure such as the Black Money Act, 2015, under which undisclosed foreign assets attract a flat 30% tax plus a 90% penalty (120% of asset value) once you become Ordinarily Resident. The same event can breach both laws: FEMA for the account, income tax for undisclosed income or assets, under different authorities.

Each regime has its own residency test. For the full test, see how your tax residency is decided under the day-count rules.

A FEMA account contravention can be voluntarily regularised by compounding it with the Reserve Bank of India, under Section 15 of FEMA, 1999 read with the Foreign Exchange (Compounding Proceedings) Rules, 2024. Compounding lets you admit the contravention, pay a compounding amount fixed by the RBI, and close the matter without prolonged adjudication or prosecution risk, typically after you have first redesignated the account to make yourself compliant. Because the continuing-day penalty accrues while the wrong account stays open, acting promptly both stops the clock and weighs in your favour when the RBI fixes the compounding amount.

Compounding is discretionary: the RBI or the Directorate of Enforcement can still adjudicate serious or repeated cases, and the compounding amount is separate from any tax you owe. The steps are:

1. Redesignate the account so you are compliant.
2. Apply to the RBI to compound, disclosing the period and the sum involved.
3. Pay the compounding amount the RBI fixes.