How to Manage Your NRI Child’s Finances: Why Having a Power of Attorney is Crucial

Without a valid power of attorney, parents risk serious financial penalties and legal problems. A power of attorney can help you manage your children’s finances legally, offering protection and peace of mind while ensuring compliance with FEMA regulations. Avoid shortcuts, get a power of attorney, and keep your family’s finances safe.

Avoidable mistakes: legal risks

Managing the finances of a child living abroad often seems straightforward, but many parents unwittingly violate FEMA guidelines. A typical example is paying property taxes or maintaining real estate from their personal accounts instead of using the child’s NRO account. While this may seem harmless, it is a clear violation of FEMA guidelines.

According to the law, a resident cannot make any financial transactions for a non-resident without a legally binding power of attorney. Gautam Nayak, a chartered accountant and partner at CNK and Associates LLP, said, “A parent cannot make any financial transaction that is not permitted under FEMA without a power of attorney. However, the parent can transfer money to the child as a gift to his NRO account. Otherwise, it is a clear violation of the rules and can lead to a fine of up to three times the amount involved.”

Consequences of managing without power of attorney

FEMA violations can result in substantial fines, ranging from one to three times the transaction amount, especially for tasks such as paying property taxes or managing investments.

For example, CA Harshal Bhuta addressed a query where a Mint A reader asked him if he could pay the municipal taxes for his son, who lives in the US and owns a property in Pune. Bhuta replied, “Payments made by a resident on behalf of a non-resident are prohibited by FEMA unless specifically permitted. Therefore, such a tax payment on behalf of your son would not be permitted by FEMA.”

The only legal option is to gift the funds to the child’s NRO account and use a power of attorney to make the payments. Without a power of attorney, every financial decision made on your child’s behalf can lead to legal issues, putting both of your finances at risk and exposing you to penalties.

Why PoA is important

A power of attorney is essential for managing your child’s financial affairs legally and efficiently. It allows you to handle tasks such as property management, tax payments and investment oversight. You can also manage your child’s NRO account with a power of attorney and ensure that payments such as council tax and property management are compliant with the law.

“Ideally, you should have a power of attorney that allows the parent to legally conduct transactions. Without it, the consequences can be significant,” Nayak said.

Obtaining a power of attorney is cost effective compared to the possible penalties for not having one. In Maharashtra, stamp duty is ₹500. The power of attorney must be registered with the office of the deputy registrar. Registration costs and requirements may vary by state.

Formalization of a PoA

The process for obtaining a power of attorney is simple. Once your child gives you the authorization, you must register the power of attorney with the sub-registrar. As mentioned, the stamp duty varies from state to state, but it is a one-time cost to ensure the legal validity of the document.

Once the power of attorney is ready, initiate communication with the bank to ensure that it is properly acknowledged. First, send a copy to the bank where your NRI child has an account. This can usually be done in person, although some banks may accept it online or by mail, depending on their policies.

Additionally, you may be required to provide additional documentation such as proof of identity and address of both the PoA holder and the NRI.

The bank will verify the authenticity of the PoA by checking whether it is notarized and registered in accordance with the requirements of the state where it was registered.

Once verified, you can start handling banking transactions on behalf of your NRI child. Any changes in the power of attorney or execution of a new power of attorney must be immediately reported to the bank.

Mandate holders

In addition to using a power of attorney, NRIs can also appoint a nominee or open a joint account with an Indian resident. Both options offer flexibility in managing daily financial needs, ensuring compliance with Indian laws and allowing NRIs to control their finances from abroad.

According to FEMA, once a person’s status changes to NRI, he or she must close or convert his or her resident savings account into an NRO account. NRIs can also open Non-Resident External (NRE), NRO or Foreign Currency Non-Resident External (FCNR) B accounts.

To manage urgent financial matters, NRIs can appoint an Indian resident as the mandate holder. This person can manage the NRE or NRO account, on behalf of the NRI, to make local payments, issue cheques and manage daily transactions. Registering a mandate is a simple process that offers financial flexibility to NRIs and their families.

Joint tenancy

The other alternative is to open a joint NRE or FCNR B account with a resident relative such as a parent, sibling or spouse, or a joint NRO account with any resident Indian.

These accounts can be set up on an “old holder or survivor” basis, meaning that the resident joint holder can only operate the account in case of the NRI’s death. During the life of the NRI, the joint account holder can access and manage the account if he is given a power of attorney or appointed as the mandamus holder.

These options ensure that NRIs have multiple options to manage their accounts efficiently while complying with FEMA regulations and addressing the financial requirements of their family in India.

POA for MF investments

According to Praveen Shankaran, COO, National Fund Services, KFin Tech, mutual fund investors can register a POA for both existing and new investments.

“In case of existing investment, investors must first submit a request letter to the AMC in which the details of the folio, the investor and the POA acceptor must be indicated, among other information depending on the AMC.”

This should be accompanied by the investor’s Permanent Account Number (PAN) card, a copy of the KYC and that of the POA holder, along with the notarized POA, Shankaran added.

To add a power of attorney to an existing mutual fund portfolio, an NRI investor needs to send a formal letter to the asset management company (AMC). The letter should include the details of the power of attorney holder and request his/her addition to the scheme.

You may be required to submit supporting documents such as a certified copy of the power of attorney, PAN details of the power of attorney holder and KYC documents. Signatures of all mutual fund folio holders are also required to register the power of attorney.

Once registered, the power of attorney holder can start transacting on behalf of the NRI investor. However, the power of attorney holder cannot modify or update the designation details in the mutual fund scheme as his authority is limited to the powers specified in the power of attorney.

Note: The power of attorney must be notarized to be legally valid, ensuring that it is recognized for conducting transactions.

This legal tool not only helps you avoid penalties, but also provides peace of mind knowing that your child’s finances are being properly managed. You’ll have the authority to oversee their financial affairs, from paying bills to managing investment portfolios, without legal concerns.

Conclusion

As parents, your role is to support your child, even from a distance. While shortcuts may seem convenient, mismanaging your NRI child’s finances can lead to significant legal risks. By obtaining a power of attorney or using other compliant methods, you can manage your child’s finances legally and ensure that all actions are done within the law. Avoid penalties and protect your family’s financial future by doing things the right way.