Children abroad? Why parents need a power of attorney

Without a valid Power of Attorney (PoA), parents risk severe financial penalties and legal trouble. A PoA can help them manage their child’s finances legally, offering protection and peace of mind while ensuring compliance with FEMA regulations. Avoid shortcuts, secure a PoA, and keep your family’s finances safe.

Avoidable mistakes: Legal risks

Managing finances for a child living abroad often seems straightforward, but many parents unknowingly break FEMA rules. 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 appear harmless, it is a clear violation of FEMA guidelines.

According to the act, a resident cannot conduct financial transactions for a non-resident without a legally binding PoA. Gautam Nayak, a chartered accountant (CA) and partner at CNK and Associates LLP, said: “A parent cannot do any financial transactions that are not permissible under FEMA without a PoA. The parent can, however, transfer money to the child as a gift to their NRO account. Otherwise, it is a clear violation of rules and can lead to a penalty of up to three times the amount involved.”

Consequences of managing without PoA

FEMA violations can lead to substantial fines, ranging from one to three times the transaction amount, especially for tasks like paying property taxes or handling investments.

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

The only legal option is to gift the funds to the son’s NRO account and use a PoA to make the payments. Without a PoA, every financial decision on behalf of your child risks legal trouble, jeopardising both their finances, and exposing you to penalties.

Why PoA matters

A PoA is essential for managing your child’s financial affairs legally and efficiently. It enables you to handle tasks such as managing real estate, paying taxes and overseeing investments. You can also operate your child’s NRO account with a PoA, and ensure that payments like municipal taxes and property management are compliant with the law.

“Ideally, it’s advisable to have a PoA which allows the parent to carry out transactions in a legal way. Without it, the consequences can be significant.” Nayak said.

Obtaining a PoA is cost-effective compared to the potential penalties for not having one. In Maharashtra, the stamp duty is ₹500. The PoA must be registered with the sub-registrar’s office. Costs and registration requirements may vary by state.

Formalising a PoA

The process of obtaining a PoA is straightforward. Once your child grants you the authority, you must register the PoA with the sub-registrar. As mentioned, stamp duty varies from one state to another, but it is a one-time cost to ensure the document’s legal validity.

Once the PoA is ready, initiate communication with the bank to ensure it is properly recognised. First submit a copy to the bank where your NRI child has an account. This can usually be done in person, though some banks may accept it online or via mail, depending on their policies.

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

The bank will verify the PoA’s authenticity, checking if it is notarised and registered according to requirements of the state where it was registered.

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

Mandate holders

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

Under FEMA, once an individual’s status changes to NRI, they must close or convert their resident savings account to an NRO account. NRIs can also open non-resident external (NRE), NRO, or foreign currency non-resident (FCNR) B accounts.

To handle time-sensitive financial matters, NRIs can appoint a resident Indian as a mandate holder. This person can operate the NRE or NRO account, on behalf of the NRI, to make local payments, issue cheques and manage day-to-day transactions. Registering a mandate is a straightforward process that offers financial flexibility for NRIs and their families.

Joint holding

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 a “former or survivor” basis, meaning the resident joint holder can only operate the account in the event of the NRI’s death. During the NRI’s lifetime, the joint account holder can access and manage the account if granted a PoA, or designated as a mandate holder.

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

POA for MF investments

According to Praveen Shankaran, chief operating officer, domestic fund services, KFin Tech, mutual fund investors can register a POA for both existing investments, as well as new investments.

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

This has to be accompanied by investor’s permanent account number (PAN) card, KYC copy and that of the POA holder, along with the notarised POA, Shankaran added.

To add a PoA to an existing MF folio, an NRI investor must submit a formal letter to the asset management company (AMC). The letter should include details of the PoA holder and request her addition to the scheme.

You may have to submit supporting documents such as a notarised copy of the PoA, the PoA holder’s PAN details, and KYC documents. Signatures from all mutual fund folio holders are also required to register the PoA.

Once registered, the PoA holder can start transacting on behalf of the NRI investor. However, the PoA holder cannot alter or update the nomination details in the mutual fund scheme, as her authority is limited to the powers specified in the PoA.

Note: The PoA must be notarised to be legally valid, ensuring it is recognised for conducting transactions.

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

Conclusion

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