NRI DEMAT Rules: Why You Must Convert Your Resident Account
Neha Navaneeth
Marketing and Content Associate
Sep 8, 2025
Moving overseas brings many changes, but one detail NRIs often overlook is their resident DEMAT account. Keeping it active after your status changes is a direct FEMA violation, even if you rarely trade. The law requires you to convert it into an NRI DEMAT (NRO or NRE) account to ensure compliance with foreign exchange rules. Ignoring this can trigger steep penalties and put your entire portfolio at risk.
This guide explains the key NRI DEMAT account rules, the steps to convert, and how the mandatory Portfolio Investment Scheme (PIS) fits into the process.
Understanding FEMA Rules for NRI DEMAT Account
As soon as your status shifts from Resident to Non-Resident Indian (NRI), you enter a different regulatory environment regulated by the Foreign Exchange Management Act (FEMA).
The main objective of FEMA, implemented by the Reserve Bank of India (RBI), is to oversee and monitor the movement of funds, particularly foreign currency, into and out of India.
Your resident DEMAT account is not equipped for this. It operates under a different set of assumptions where funds are purely domestic. As an NRI, the RBI needs to distinguish between funds earned in India (non-repatriable) and funds earned abroad (repatriable).
That’s why both RBI and SEBI require you to close or convert your resident DEMAT account to an NRI DEMAT account. This separation ensures every transaction is recorded under the right category, preventing foreign exchange violations.
The Role of Portfolio Investment Scheme (PIS) for NRI
If you're investing in listed Indian shares through an NRE account, you must route your transactions through the Portfolio Investment Scheme (PIS) for NRI.
Think of PIS not as a separate account, but as a permission framework that connects your NRE bank account to your DEMAT and trading accounts. Your bank issues a PIS permission letter from the RBI, and every trade you place is reported to the central bank for monitoring. When you want to trade, you must first get a PIS permission letter from a designated bank.
Key points to remember:
PIS is mandatory only for NRE-based share trading in the secondary market.
It is not required for NRO DEMAT accounts or for investing in mutual funds, IPOs, or bonds.
You can only have one PIS-designated bank at a time.
NRE vs. NRO DEMAT Account: Choosing the Right Path
When you convert or open a DEMAT account as an NRI, you must choose between NRE and NRO depending on the source of funds. Understanding the NRE vs NRO demat account difference is crucial for managing your finances effectively.
NRO (Non-Resident Ordinary) DEMAT Account:
When you convert your resident DEMAT account, it becomes an NRO (Non-Resident Ordinary) DEMAT account. This is the default account for all the shares and mutual funds you bought as a resident.
Holds Prior Holdings: This account is where all your existing shares and mutual funds, purchased while you were a resident, will be held.
Indian Income Investment: You can also use this account to invest further using your Indian income, such as rent or dividends.
Repatriation Rules: Funds in this account are generally non-repatriable. However, current income can be sent abroad up to a limit of USD 1 million per financial year after tax.
No PIS Required: Unlike an NRE account, an NRO DEMAT account does not require PIS permission for trading in the secondary market.
NRE (Non-Resident External) DEMAT Account:
This account is specifically for investing your foreign earnings in India. The main advantage is that all the funds, including the original investment and any profits, can be freely moved back to your foreign bank account.
For Foreign Earnings: You must fund this account by remitting money from abroad into a linked NRE bank account.
Fully Repatriable: The key feature is that both your principal investment and any capital gains are fully and freely repatriable back to your foreign account, without any limits.
PIS is Mandatory: When using an NRE DEMAT account to invest in listed shares, you must route all transactions through the Portfolio Investment Scheme (PIS).
Convert Resident DEMAT to NRI
Inform Your Broker: The first step is to formally notify your broker (Depository Participant) of your change in status to NRI.
Open NRE/NRO Bank Accounts: Before anything else, open NRO and/or NRE bank accounts with a bank that is authorized to issue a PIS letter.
Apply for PIS Permission: Your chosen bank will help you apply to the RBI for the PIS permission letter (not mandatory for NRO DEMAT)
Submit Conversion Forms: Fill out the DEMAT and trading account conversion forms provided by your broker.
Provide KYC Documents: Submit copies of your PAN card, passport, visa, overseas address proof, and the PIS permission letter.
Link Accounts: Your broker will link your new NRO/NRE DEMAT and trading accounts to your corresponding PIS-enabled bank accounts.
Can I Open a New DEMAT Account Instead of Converting My Existing One?
Yes, if you prefer, you can open a new NRO DEMAT account with a different broker instead of converting your existing resident DEMAT account.
Here’s how:
Step 1: Open a New NRO DEMAT & Trading Account
Choose a broker and open a new NRO DEMAT account. PIS permission is not required for NRO accounts.
Step 2: Fill the Closure-cum-Transfer Request Form
Submit this form to your existing broker to transfer your holdings from your resident DEMAT account to the new NRO DEMAT account.
Step 3: Close Your Resident DEMAT Account
Once the transfer is complete, ensure the old resident DEMAT account is formally closed to stay compliant with FEMA rules.
Penalty for Not Converting DEMAT to NRO
The FEMA Act gives regulators the power to impose a penalty of up to three times the amount involved in the transaction. If the amount is not ascertainable, the penalty can be up to ₹2,00,000, with an additional fine that can extend to ₹5,000 for every day the non-compliance continues. Beyond the monetary loss, it can lead to your account being frozen and prolonged legal complications.
Key Points to Remember
Understanding the rules for NRI DEMAT accounts is an essential process. To ensure your Indian investments are compliant and secure, remember these key takeaways:
Conversion is Mandatory: As an NRI, you cannot continue using a resident DEMAT account. The law requires you to convert it to an NRO DEMAT account to comply with FEMA regulations.
PIS is for NRE Accounts: The Portfolio Investment Scheme (PIS) is a mandatory framework for investing in listed shares, but only if you are using an NRE DEMAT account. It is not required for NRO accounts.
NRO vs. NRE: The main difference is repatriability. An NRE account is for foreign earnings and allows for full repatriation of funds. An NRO account holds your prior Indian investments, and its funds are generally non-repatriable.
Avoid Penalties: Failing to convert your account can lead to severe penalties from regulators like the RBI and SEBI, including heavy fines and the freezing of your accounts.
Compliance is Key: By correctly converting your account and using the right channels, you ensure your investments are not only growing but are also fully compliant and secure.
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Converting an old resident DEMAT account to NRO, or
Opening a brand new NRE PIS-enabled DEMAT account,
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Frequently Asked Questions (FAQs)
Is a PIS letter mandatory for all NRI investments?
No. A PIS letter is only required if you invest in listed shares through an NRE DEMAT account in the Indian secondary market.
It is not needed for:
NRO DEMAT accounts
Mutual funds, IPOs, or bonds (through either NRE or NRO accounts)
I only have shares I bought as a resident and don't plan to buy more. Do I still need to convert my account?
Yes. Even if you never trade, you must convert your resident DEMAT to an NRO DEMAT account. Holding securities in the wrong account type violates FEMA rules, and selling later will be smoother from a compliant account.
What is the main difference in the NRE vs NRO demat account debate?
The core difference is repatriability. NRE is for foreign funds, and both the investment and gains are fully repatriable. NRO is for Indian funds and prior holdings, and repatriation is restricted.
Can I choose any bank for the PIS permission?
No, you must choose a bank that has been specifically designated by the RBI to manage the Portfolio Investment Scheme (PIS) for NRI. Most major public and private sector banks in India have designated branches for this purpose.
Can I convert my resident DEMAT account to an NRE PIS DEMAT account?
No, this is not possible. Shares held in your resident DEMAT account were purchased using income earned in India, and must therefore be transferred to an NRO DEMAT account. However, you can open a new, separate NRE PIS DEMAT account for any new investments you make using your foreign income. The capital and gains from this separate NRE account are fully repatriable.
